2017
ANNUAL
REPORT
MISTRAS GROUP, INC.
KEY FIN ANCIA L HI GH LIGHTS
Historical Revenues*
($ in millions)
Revenues by End Market*
(CY Ending Dec 31)
58% Oil & Gas
5YR CAGR: 6%
1
1
7
$
9
1
7
$
1
0
7
$
5
8
6
$
3
2
6
$
9
2
5
$
FY13
FY14
FY15
FY16
CY16
CY17
21% Downstream
16% Upstream
18% Midstream
03% Petrochemical
13% Aerospace & Defense
10% Industrial
7% Power Generation
& Transmission
5% Other Process Industries
4% Infrastructure, Research
& Engineering
3% All Other
Cash Flows From Operating Activities*
($ in millions)
Revenues by Region*
(CY Ending Dec 31)
5YR CAGR: 5%
8
6
$
3
6
$
5
5
$
0
5
$
4
4
$
7
3
$
FY13
FY14
FY15
FY16
CY16
CY17
67%
United States
19%
Europe
12%
Other Americas
2%
Asia-Pacifi c
*FY represents the fi scal years ended May 31st. CY represents the fi scal years ended December 31st. Fiscal year changed to December 31st from May 31st on January 3rd 2017, eff ective December 31st 2016. The CY16 results are unaudited.
S HAR EHO LD ER L ET TER
Dear Fellow Shareholders,
2018 marks our Company’s 40th year. We are proud of our long and successful
history, and we’re looking forward to what comes next, including celebrating
our 10th anniversary as a publicly-traded Company next year.
2017 was certainly a busy and productive time at Mistras. We remain committed
to maintaining and improving our focus on safely delivering top-quality results
with superior economic value to our customers, and are constantly investing in
and innovating technologies and processes to limit risk. We believe this is being
embraced by customers as evidenced by our strong level of repeat business as well
as the new contracts we win. We maintained strong performance throughout 2017,
in spite of a challenging, but at the same time improving, industrial marketplace.
We are evolving a new vision for 2018 and beyond. We envision maturing into a
true partner with our clients, operating in tandem with them to solve their asset
protection problems with an integrated portfolio of solutions. We’ll do this by
remaining dedicated to our mission to improve safety for all stakeholders and to
help our clients achieve operational excellence. Over time, the process of finding
newer and better ways to integrate our solutions will guide our evolution.
Our new vision will be initially guided by a tactical three-point plan,
comprised of the following:
I)
II)
III)
structural Repositioning;
making smart Investments and
driving Cost Efficiencies.
REPOSITIONING
We plan to benefit in 2018 from the important repositioning steps we took
in 2017, building a stronger team within our executive group in 2018.
From a corporate perspective, we completed our executive leadership transition with Dr.
Sotirios Vahaviolos assuming the Executive Chairman role and Dennis Bertolotti assuming
the President and Chief Executive Officer role, combined with Jon Wolk assuming the
Chief Operating Officer role and Ed Prajzner joining the Company as Chief Financial Officer.
In our Services segment, our four key regional executives are driving the business
forward both tactically as well as strategically. We continue to broaden and
strengthen the breadth of services we provide, differentiating the value that we
deliver to our customers. This shift is also reflected in our acquisition pipeline.
In our International segment, we have strong momentum and leadership in France,
and have commenced operations servicing Safran aerospace. We expect this
business will generate impressive growth in 2018. We are very encouraged with our
leadership transition and market position in Germany. In the UK, we repositioned the
business to improve and focus operations and improve margins going into 2018.
Finally, in our Products and Systems segment, we repositioned the focus and core
business under a new leader, and are actively marketing a subsidiary of this segment. Our
Products and Systems segment entered 2018 with a good backlog in its core business.
INVESTMENT
We are proud of the three acquisitions that we completed in 2017: Semiray Inspection
Services, RAC Group and West Penn Non-Destructive Testing. We have added terrific new
management teams who have become an integral part of our company, and we have
worked hard to successfully integrate them commercially and across all of our functions.
At Semiray, we are in the process of investing to expand the capabilities of our
in-house provider of mechanical services, primarily within the aerospace industry.
RAC Group, who provides mechanical services at height in Canada, has already
doubled its revenue run rate in less than one year under our ownership. And at
West Penn Non-Destructive Testing, an in-house inspection company focused on
aerospace business acquired in December 2017, we are leveraging their market
position and growth potential in the vitally-important aerospace sector.
We completed an expanded credit facility in 2017, that when combined with our
strong cash flow, provides ample financial resources to achieve our growth vision.
COST EFFICIENCIES
We have implemented $5 million of annual run rate cost reductions during 2017 in
our legacy cost structure and expect to fully realize the savings during 2018.
CONCLUSION
In last year’s shareholder letter, we expressed optimism entering 2017, given
our powerful culture, driving Mistras to provide customers with tremendous
value and exceed their expectations. We are very pleased to report that
we delivered on our promise in 2017 with positive top-line growth as we
ended this year, despite some headwinds in the marketplace causing most
of our competitors to suffer single-digit if not double-digit declines.
We believe that we are expanding the Mistras brand, and we are very optimistic
about its future. Our reputation for delivering evolving, value-added services is
growing, as we capably add service lines and broaden our offerings. Our acquisition
pipeline is active and provides avenues for both healthy diversification and growth.
We are confident in our new vision and strategy for improvement, and have strong
conviction in our path and our ability to manage in both up and down economic
cycles. We believe macro-level economic drivers will be positive during 2018.
On behalf of our Board of Directors and management team, we extend a
sincere thank you to our customers, our partners, our nearly 6,000 employees
and our loyal shareholders, for their continued support and trust.
Sincerely,
Dr. Sotirios J. Vahaviolos
Executive Chairman
Dennis M. Bertolotti
President and Chief Executive Officer
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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
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.
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 June
30, 2017, based upon the closing price of the common stock as reported by New York Stock Exchange on such date was
approximately $377.7 million.
As of March 5, 2018, the Registrant had 28,301,598 shares of common stock 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 2018 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 December 31, 2017. 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.
ITEM 16.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
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Table of Contents
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Annual 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.”
Transition Period
On January 3, 2017, the Company's Board of Directors approved a change in the Company's fiscal year end from May 31 to
December 31, effective December 31, 2016. In connection with this change, we previously filed a Transition Report on Form
10-K to report the results of the seven-month transition period from June 1, 2016 to December 31, 2016. In this Annual
Report, the periods presented are the year ended December 31, 2017, the seven-month transition period from June 1, 2016 to
December 31, 2016 (which we sometimes refer to as the "transition period ended December 31, 2016") and the years ended
May 31, 2016 and 2015 (which we sometimes refer to as "fiscal 2016 and fiscal 2015", respectively). For comparison
purposes, we have also included unaudited data for the year ended December 31, 2016 and for the seven months ended
December 31, 2015.
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 deliver value through a comprehensive “OneSource” portfolio of customized solutions, utilizing a proven systematic
method that creates a closed-loop lifecycle for addressing continuous asset protection and improvement. 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 solutions to our customers on a regular, recurring basis. We perform these services largely at our customers’
facilities, while primarily servicing our aerospace customers at our growing network of state-of-the-art, in-house laboratories.
These solutions typically include Non-Destructive Testing (NDT) and inspection services, and can also include a wide range of
mechanical services, including engineering assessments, heat tracing, pre-inspection insulation stripping, inspections, coating
applications, re-insulation, and long-term condition-monitoring. Under this business model, many customers outsource their
inspection to us on a “run and maintain” basis. We have established long-term relationships as a critical solutions provider to
many of the leading companies with asset-intensive infrastructure in our target markets. These markets include oil and gas
(downstream, midstream, upstream and petrochemical), commercial aerospace and defense, power generation (natural gas,
fossil, nuclear, alternative, renewable, and transmission and distribution), public infrastructure, chemicals, transportation,
primary metals and metalworking and research and engineering institutions.
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As a global asset protection leader, we provide a comprehensive range of solutions that includes:
•
Traditional NDT Field Inspections: The foundation of our business, NDT 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. These services include, for example, mechanical integrity (MI) assessments, aboveground storage tank inspection,
pipeline inspection, American Petroleum Institute (API) visual inspections and predictive maintenance (PdM)
programs.
• Advanced NDT Field Inspections: In most cases, these involve proprietary acoustic emission (AE), digital
radiography, infrared, wireless and/or automated ultrasonic inspections and sensors, which are operated by our highly-
trained technicians.
• Mechanical and Maintenance Services: We perform mechanical services to prepare assets for inspection and to return
them to working condition. These services include insulation, electrical, coating and heat tracing services; corrosion
assessment and mitigation services, including water blasting, sand blasting, and ultra-high pressure water (UHP)
blasting, used for both offshore oil and gas platforms and land-based refinery and chemical fixed equipment; and wind
turbine repairs and maintenance. NDT inspection services are offered while in post-cleaning mode. Mechanical
services are still a small part of our business, and we are careful to try and avoid providing any such services that
conflict with our inspection services.
• Destructive Testing (DT): A definitive discipline in material testing, which takes 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 performed by our German and select U.S. labs, 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.
•
In-House Lab Testing Services: Our 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, we provide 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., Canada and Europe.
• Proprietary Products & Systems: 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.
• Data Management & Analysis Software: Our world-class enterprise inspection database management and analysis
software (IDMS), Plant Condition Management Software (PCMS®), stores and analyzes inspection data. It compares
data to prior operations and testing of similar assets, industrial standards and specific risk conditions, such as use with
highly-flammable or corrosive materials. It also develops asset integrity management plans based on Risk-Based
Inspections (RBI) that specify an optimal schedule for the testing, maintenance and retirement of assets.
• On-Line Monitoring and Trending Systems: Condition-monitoring systems provide secure, web-based, remote or on-
site asset inspection, real-time reports and analysis of plant or enterprise structural integrity data, comparison of
integrity data to our library of historical inspection data and analysis to better assess structural integrity. They also
provide alerts for and prioritize future inspections and maintenance.
• Engineering Consulting Services: These services include plant operations support covering both process and
equipment technologies; project planning, management and execution; expert testimony; and technical training. Our
Mechanical Integrity (MI) services help improve plant safety, asset reliability and regulatory compliance through a
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systematic, engineering-based approach to ensure the on-going integrity and safety of equipment and industrial
facilities. MI services can include conducting an inventory of infrastructure assets; developing, implementing, and
training personnel in executing inspection and maintenance procedures; and managing inspections, testing, and
assessments of customer assets. We enable customers to identify gaps between existing and desired practices, identify
deficiencies and degradations, and establish quality assurance standards for fabrication, engineering and installation of
infrastructure assets. Our MI solutions incorporate comprehensive (RBI) data analysis from our proprietary IDMS,
providing detailed, integrated, cost-effective solutions that rate the risks of alternative maintenance approaches,
recommend actions in accordance with consensus industry standards, and help establish and support key performance
indicators (KPIs) to ensure continued safe and economic operations.
• Access Solutions: Much of our work is conducted in hard-to-access or confined locations. We perform NDT and
mechanical services both on the ground and at height, using specialized technicians who work safely while suspended
on ropes rather than using scaffolding. We employ trained and certified divers for subsea inspection and maintenance,
and we utilize unmanned aerial, land-based and subsea systems for a wide range of inspection applications.
Most of our revenues are generated by deploying technicians at our customers' locations, where NDT and mechanical services
are performed on-site. However, the majority of our aerospace revenues are generated at our various in-house laboratories that
have Nadcap and numerous other customer accreditations. We have special machinery and equipment and specialized
technicians at these labs to perform various forms of NDT inspection and mechanical services, which can include chemical
cleaning, coating application, painting, and pressure testing techniques. 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 manufacturers 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 advanced and proprietary software and other products
as stand-alone offerings; instead, we embed them in our comprehensive service offerings to protect our investment in
intellectual property while providing our customers an added value which generates a substantial source of recurring revenues.
As of December 31, 2017, we had approximately 6,000 employees, in approximately 120 offices across 14 countries. We
generated revenues of $701.0 million and $404.2 million, respectively, and net loss of $2.2 million and net income of $9.6
million, respectively, for the year ended December 31, 2017 and the transition period ended December 31, 2016. We generated
revenues of $719.2 million and $711.3 million and net income of $24.7 million and $16.1 million for fiscal 2016 and 2015,
respectively. For the year ended December 31, 2017, the transition period ended December 31, 2016, and fiscal 2016 and 2015,
we generated approximately 78%, 73%, 77% and 76% respectively, of our revenues from our Services segment. Our revenues
are diversified, with our top ten customers accounting for approximately 38%, 37%, 36% and 33% of our revenues during the
year ended December 31, 2017, the transition period ended December 31, 2016 and fiscal 2016 and 2015, respectively.
Asset Protection Industry Overview
The asset protection industry consists of NDT inspection, DT, 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, includes the desire by owners 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. The industry has progressed such that end users are actively seeking firms that can provide asset protection solutions
to both in and out of service issues.
Historically, NDT solutions used qualitative testing methods aimed primarily at detecting defects in the tested materials, also
referred to as traditional NDT. The traditional NDT market had 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 has progressed over the past several years, however, for
customers to engage a select few vendors capable of providing a wider spectrum of asset protection solutions for global
infrastructure. 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
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Table of Contents
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 and the technology becomes more and more
reliable, 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, leading to
the opportunity to further 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, only one new refinery has 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 continue to
spend 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
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 has experienced high usage, causing
increased stress and fatigue that accelerates deterioration. These dynamic 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), U.S. DOT Pipeline and Hazardous
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Materials Safety Administration (PHMSA) 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 Pipeline Operators, and coupled with concern
by owners, led OSHA/PHMSA 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.
• Expanding Addressable Geographies. We believe that incremental demand will continue to come from international
markets, including Western and Eastern Canada, Europe, Asia 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.
• Expanding Aerospace Industry. We believe that increased demand will continue to come from the aerospace industry
due to the approximately decade-long backlog for next generation commercial aircraft to be built, driving the need for
enhanced levels of inspections.
• Offering Complementary Mechanical Services. We believe that owners of capital assets will increasingly look for a
single vendor who can provide mechanical services that are complementary to inspection services, such as removing
insulation in order to inspect piping, then reinstalling insulation.
We believe that the market available to us will continue to grow as these macro-market trends continue to develop.
Our Target Markets
Overview
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. We view energy-
related infrastructure and commercial aerospace as the Company's largest market opportunities. We perform inspection and
mechanical services for customers in both industries.
In the energy market there are various economic indicators that drive our business, especially in the U.S. domestic markets.
These factors are excerpted below from various Energy Information Administration (EIA) outlook reports;
Natural gas prices are expected to remain less expensive than electric prices for commercial, industrial and residential
customers. The use of natural gas as an energy source is projected to grow the most on an absolute basis. Natural gas
production will grow at a faster rate through 2020, and thereafter grow at a slower pace. Natural gas used for power generation
will generally increase over the time period due to the scheduled expiration of renewable tax credits. The industrial sector
accounts for the most growth in natural gas consumption, with expanding use in the chemical industries; for industrial heat and
power; and for liquefied natural gas production. Natural gas consumption also increases significantly in the power sector as a
result of the scheduled expiration of renewables tax credits in the mid-2020s. In its monthly short-term energy outlook dated
December 12, 2017, the agency forecast that U.S. crude oil output will rise by 780,000 barrels per day (bpd) to 10.02 million
bpd in 2018, which would be the highest level for any year on record in the United States.
There are a number of economic factors which drive the aerospace market, including:
• The approximately decade-long backlog for next generation commercial aircraft to be built, including several large
and mid-sized aircraft built by Boeing, Airbus, Bombardier and Embraer, among other manufacturers;
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• The backlog of next generation aircraft engines which operate with greater fuel efficiency, including the LEAP engine
and the geared-turbo fan engine;
• The continuing regulatory scrutiny to ensure public safety associated with these new technologically advanced
aircraft, which serves to ensure continued need for inspection and mechanical services to be performed, as well as to
limit the number of participants who can meet the demanding requirements associated with performing these services.
Revenue by Target Market
The following chart represents the percentage of consolidated revenues we generated from our various markets for the year
ended December 31, 2017:
Mistras Revenues by Target Market
(Year ended December 31, 2017)
Oil and Gas
Recently crude oil prices have begun to rebound which should lead to increase spending on maintenance shutdowns in 2018
and 2019. This increased demand will be balanced against the continued focus on process efficiencies and cost savings
initiatives. On-line monitoring and permanently mounted sensors, as well as the use of drones and other alternative delivery
devices, are all being considered as the Oil and Gas owners look to “smart” technologies that reduce human intervention while
delivering highly accurate data to aid in their operational decisions. This helps to drive demand for our integrated approach to
asset protection. 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 anticipate this practice will decrease as owners utilize non-invasive, or
on-stream inspections, of critical assets. Non-invasive inspections enables companies to minimize the costs associated with
shutdowns during testing while enabling the economic and safety advantages of advanced planning and/or predictive
maintenance.
Aerospace and Defense
The aerospace industry is enjoying unprecedented growth with many original equipment manufacturers (OEMs) reporting
record backlogs of up to ten years. We serve this rapidly growing target market by providing our state of the art fully integrated
inspection systems to 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 and maintain numerous accreditations and
certifications required to meet the stringent inspection criteria that the aerospace industry demands.
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The operational safety, reliability, structural integrity and maintenance of aircraft and associated products is critical to the
aerospace and defense industries. Many of the OEM’s are positioning themselves to use sensor technology to deliver data that
may aid in driving decisions regarding structural and operational integrity of the aircraft as opposed to performing maintenance
on time based intervals. Industry participants 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 gear and other critical components. We expect increased demand for our
solutions to result from wider use of advanced composites and distributed on-line sensor networks and other embedded
analytical applications built into the structure of assets that enable real-time performance monitoring and condition-based
maintenance.
Power Generation and Transmission
The growing availability of cheap natural gas, along with environmental concerns with coal has stimulated the construction of
new natural gas fired power plants across North America. Our Asset Integrity Management approach offers many tools that aid
in the establishment of integrity programs during plant construction using software model. In addition, actual construction
drives traditional and Advanced NDT services. We anticipate sharp growth in the plants as natural gas pricing remains low, and
the environmental impacts of coal remain unattractive to the public. 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 in this industry due to the aging of critical power generation and transmission infrastructure.
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 bridges are being monitored
continuously and 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.
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:
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• 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, mechanical 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 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. In the field of asset protection, we have long and
extensive experience and have accumulated vasts amount of data and knowledge. We have gained this through our
industry leadership 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
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
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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.
• Expand our Service Offerings to Existing Customers. By branching into adjacent mechanical services, we believe we
are providing customers with greater value, which increases our value proposition and our ability to capture additional
business. 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. We believe our expanded services offerings, coupled with our products and systems, and
combined with the trend of outsourcing asset protection solutions to a small number of trusted service providers,
positions 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.
• Expand our Focus in the Aerospace Industry. We believe that the recent introduction of next generation airframes and
aircraft engines has created an inherent demand for inspection and mechanical services required for the production of
parts that support their build for years to come. Mistras Group has been an active participant in this market for several
years. The Company consummated two acquisitions of aerospace inspection companies in 2017 and won a key
European contract in 2016. These recent actions are driven by our increased focus in this growing area.
• Continue to 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. 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 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 service offerings, add new customers, 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 new
or supplemented existing services that have added to our revenues and profitability.
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, consisting primarily of non-destructive testing, inspection, mechanical 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 select markets within 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 Annual Report.
Our Solutions
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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, mechanical 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, inspection and mechanical services to a diversified customer base across
energy-related, aerospace, 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. We are also
looking to expand our capabilities to offer mechanical services that are complementary to our inspection services. Examples of
our services are discussed below.
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 highly 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, in many instances, also have 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
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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 in select locations. Hardness, stiffness and strength are a few key
indicators drawn from destructive tests per customer specifications. DT is performed for 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
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 structures 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 newer 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.
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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.
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 their 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
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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 are our Centers of Excellence (COEs), which focus on specific aspects 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 11%, 12% and 10% of our total revenues for the year ended December 31,
2017, the transition period ended December 31, 2016 and fiscal 2016, respectively. No customer accounted for more than 10%
of our revenues in fiscal 2015.
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 Annual 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. U.S. refineries’ non-peak periods are
generally in the fall, when they are retooling to produce more heating oil for winter, and in the spring, when they are retooling
to produce more gasoline for summer. The peak periods for these customers are the summer and winter months, when they run
at peak capacity and are not retooling or performing turnarounds or shut downs. As a result, our revenues in the summer and
winter months are typically lower than our revenues in the fall and spring 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.
Because we are increasing our work in the fall and spring, our cash flows are lower in those quarters than in the summer and
winter, as collections of receivables lag behind revenues. 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. 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,
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(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 CRM systems to collect, manage and collaborate customer information with our teams
globally. Our CRM's also provide 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. 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 December 31, 2017, we held 4 patents (by direct ownership or exclusive licensing), all in the United States, which will
expire at various times between 2021 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.
As of December 31, 2017, 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
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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 $2.3 million $1.6 million, $2.5 million and $2.5 million for the year ended
December 31, 2017, the transition period ended December 31, 2016 and fiscal 2016 and 2015, 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 December 31,
2017, we had approximately 6,000 employees worldwide, of which approximately 63% 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 conducted an
investigation of the site. 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 December 31, 2017 and their background and
experience:
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Name
Dr. Sotirios J. Vahaviolos
Dennis Bertolotti
Michael C. Keefe
Michael J. Lange
Jonathan H. Wolk
Age
71
58
60
57
56
Position
Executive Chairman and Director
President, Chief Executive Officer and Director
Executive Vice President, General Counsel and Secretary
Vice Chairman, Senior Executive Vice President of Global Business
Development, Marketing & Strategic Planning, and Director
Senior Executive Vice President, Chief Financial Officer and Chief
Operating Officer
Dr. Sotirios J. Vahaviolos was named Executive Chairman on August 10, 2017. Prior to being named Executive Chairman, Dr.
Vahaviolos had been our Chairman and Chief Executive Officer since he founded Mistras in 1978 under the name Physical
Acoustics Corporation and was also our President until June 1, 2016. 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. Since then, Mr. Bertolotti has had increasing levels of responsibility with Mistras, and
became our President and Chief Executive Officer and Director, effective August 10, 2017. From June 1, 2016 to August 9,
2017, Mr. Bertolotti was our President and Chief Operating Officer. 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.
Michael C. Keefe joined Mistras in December 2009. Prior to joining 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 has held various executive level positions with Mistras, becoming Vice Chairman in July 2015 and
Senior Executive Vice President, effective June 1, 2016. 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.
Jonathan H. Wolk joined Mistras in November 2013 as Executive Vice President, Chief Financial Officer and Treasurer until
August 10, 2017, when Mr. Wolk became Senior Executive Vice President and Chief Operating Officer. Mr. Wolk was also
acting Chief Financial Officer from August 10, 2017 until the appointment of Mr. Prajzner on January 5, 2018. Prior to joining
Mistras, Mr. Wolk 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.
On January 5, 2018, Edward J. Prajzner, joined Mistras as Senior Vice President, Chief Financial Officer and Treasurer. Prior
to joining Mistras, Mr. Prajzner worked at CECO Environmental Corp., a global service provider to environmental, energy and
filtration industries, and served as Chief Financial Officer and Secretary from 2014 to 2017, Vice President of Finance and
Chief Accounting Officer from 2013 until his appointment as CFO in 2014, and Corporate Controller and Chief Accounting
Officer from 2012 to 2013. Mr. Prajzner also served in senior finance roles at CDI Corporation (now AE Industrial Partners),
and American Infrastructure (now Allan Myers). Mr. Prajzner began his career in public accounting at Ernst & Young, received
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his B.S. in accountancy from Villanova University, his MBA in finance from Temple University 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 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 do not have significant experience or presence;
• 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;
• whether an acquired business is compatible with our culture and philosophy of doing business;
•
•
•
•
the 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;
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; and
the use of significant funds, including those borrowed under our bank credit agreement, and the opportunity cost
associated with the funds spent on the acquisition and integration of other businesses (some of which acquisition
funding may be substantial), as well as the impact of the acquisition and borrowing on our continued compliance with
our bank covenants.
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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 from 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 or acquire in the future.
Our international operations are subject to risks relating to non-U.S. operations.
For the year ended December 31, 2017, the transition period ended December 31, 2016 and fiscal 2016 and 2015, we generated
approximately 33%, 36%, 28% and 31% of our revenues outside the United States, respectively. In addition, our international
operations as a percentage of our business may increase over time. Our primary operations outside the United States are in
Canada, Germany, France, the United Kingdom and Brazil. We also have operations in the Netherlands, Belgium and India.
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, or tax consequences on the non-repatriation of overseas
operationally generated funds; and
•
other 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 58%, 55%, 56% and 52% of our revenues for the year ended
December 31, 2017, the transition period ended December 31, 2016 and fiscal 2016 and 2015, respectively. Although we have
expanded our customer base into industries other than the oil and gas industry, we still receive approximately half of our
revenues from this industry. Our services are vital to the operators of plants and refineries and we have expanded our services
offerings, such as expanding our mechnical services capabilities. However, economic slowdowns or low oil prices have, and
could continue to, result in cutbacks in contracts for our services. In addition, low oil prices could depress the level of new
exploration and construction, which would adversely affect our market opportunities. If the oil and gas industry were to
continue to operate in a market with low oil prices, 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.
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We expect to continue expanding and our success depends on how effectively we manage our growth.
We expect to continue experiencing growth, including through acquisitions, in the number of employees and the scope of our
operations over the long-term. 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 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, the 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 11% of our revenues for 2017. Taken as a group, our top ten customers
were responsible for approximately 38%, 37%, 36% and 33% of our revenues for the year ended December 31, 2017, the
transition period ended December 31, 2016 and fiscal 2016 and 2015, respectively. This concentration pertains almost
exclusively to our Services segment, which accounted for more than 70% of our revenues for the year ended December 31,
2017, the transition period ended December 31, 2016 and fiscal 2016 and 2015. These customers 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. During 2017, we have noted a challenged region within our Services segment ("the Challenged Region") which
includes a large customer contract. During the first quarter of 2018, the large contract in the Challenged Region was awarded
to another contractor. Accordingly, our 2018 results will be impacted by the loss of this contract.
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
required by our customers, or compares unfavorably to our competitors, we could lose business, be prevented from working at
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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 currently 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.
Certain of our operations are unionized, and as a result, we or our subsidiaries are required to contribute to multi-employer
pension plans. A significant reduction in our union work force could result in withdrawal liability to these mutli-employer
pension plans, which could be significant.
Some of our workforce is unionized and the terms of employment for these workers are governed by collective bargaining
agreements, or CBAs. Under these CBAs, we are required to contribute to the national pension funds for the unions
representing these employees, which are multi-employer pension plans. If we experience a significant reduction in the
employees covered by the CBAs, including as a result of lost business in the Challenged Region, a complete or partial
withdrawal liability to these multi-employer pension plans could result under ERISA. Depending on the circumstances, this
liability could be significant and adversely impact our earnings and cash flow.
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. 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
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hurricanes. 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 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.
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 numerous 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 December 31, 2017, the carrying amount of our goodwill was approximately $203 million, of which approximately $38
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.
During 2017, the Products and Systems segment had contract bids which management assessed as having a reasonable chance
of success and were not awarded to the Company. As a result of this missed opportunity, the annual forecasting process was
accelerated, resulting in a goodwill impairment test for the Products and Systems reporting unit and a $13.2 million impairment
charge during the third quarter of 2017.
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
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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.
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 the winter and summer.
Our business, primarily in our Services segment, is seasonal. The fall and spring revenues for our Services segment are
typically higher than our revenues in the winter and summer 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 the fall, when they are retooling to produce more heating oil for winter, and in the
spring, when they are retooling to produce more gasoline for summer. As a result of these trends, we generally have reduced
cash flows in the fall and spring, 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), over 20 state regulatory
agencies and the Canadian Nuclear Safety Commission. 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, 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 of providing
these solutions and have a corresponding adverse effect on our margins.
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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
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 certifications 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 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, including through
acquisitions, 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.
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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
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 Executive Chairman, owns approximately 37% of our outstanding common stock. As a result,
Dr. Vahaviolos exhibits significant control over 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 certificate of incorporation,
we are authorized to issue up to 200,000,000 shares of common stock, of which approximately 28,302,000 shares of common
stock were outstanding as of March 5, 2018. In addition, we have approximately 3,093,000 shares of common stock reserved
for issuance related to stock options and restricted stock units that were outstanding as of March 5, 2018. 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.
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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 certificate of incorporation and 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;
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 December 31, 2017, 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 December 31, 2017, we
owned properties located in Monroe, North Carolina; Trainer, Pennsylvania; LaPorte, Texas; Burlington, Washington; Gillette,
Wyoming, Ellabell, Georgia; 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 Annual Report for a description of legal proceedings involving us and our business, which is incorporated herein by
reference.
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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, based on closing stock price, of our common
stock.
Quarter ended March 31, 2017
Quarter ended June 30, 2017
Quarter ended September 30, 2017
Quarter ended December 31, 2017
Transition period:
Quarter ended June 30, 2016 (1)
Quarter ended September 30, 2016
Quarter ended December 31, 2016
Year ended December 31, 2017
High
Low
26.33
22.78
22.51
23.47
$
$
$
$
20.00
20.54
17.12
20.38
Transition period ended December 31, 2016
High
Low
25.32
25.86
26.07
$
$
$
23.01
22.81
20.04
$
$
$
$
$
$
$
(1) The first quarter of the transition period ended December 31, 2016 (7-months) included only one month (June 1 - June 30,
2016) as a result of the change in our fiscal year-end.
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 March 5, 2018, there were 8 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 2017 pursuant to the
surrender of shares by employees to satisfy minimum tax withholding obligations in connection with the vesting of restricted
stock units.
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Month Ending
October 31, 2017
November 30,
2017
December 31,
2017
Total Number of
Shares (or Units)
Purchased
Average Price
Paid
per Share (or
Unit)
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs (1)
Approximate dollar Value
of Shares that May Yet Be
Purchased Under the Plans
or Programs (2)
1,233
2,741
2,918
$
$
$
20.69
21.33
23.47
— $
— $
— $
25,081,657
25,081,657
25,081,657
(1) On August 17, 2016, the Company entered into an agreement with its founder, Chairman and then Chief Executive Officer,
Dr. Sotirios Vahaviolos, which provided for the Company to repurchase up to 1 million shares of its common stock from Dr.
Vahaviolos. The plan with Dr. Vahaviolos is included in the $50.0 million of purchases authorized by our Board of Directors
described in footnote 2 below. The repurchasing of Dr. Vahaviolos shares were completed during the third quarter of 2017. (See
Note 20 in the notes to consolidated financial statements in Item 8 of this Annual Report for further details).
(2) - On October 7, 2015, the Company announced that its Board of Directors approved a share repurchase plan, which
authorizes the expenditure of up to $50.0 million for the purchase of the Company's common stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for the year ended December 31, 2017, the transition period ended
December 31, 2016 as well as each of the last four fiscal years. This selected financial data should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and the audited
consolidated financial statements and the notes thereto in Item 8 in this Annual Report.
For the year
ended
For the
Transition
period ended
For the year ended May 31,
December 31,
2017 (1)
December 31,
2016 (2)
2016 (3)
2015 (3)
2014 (3)
2013 (4)
($ in thousands, except per share data)
$ 700,970
$
404,161
$719,181
$711,252
$623,447
$529,282
187,712
4,160
117,004
203,008
184,733
172,943
148,371
17,533
43,177
30,353
38,295
27,554
$
(2,175) $
9,568
$ 24,654
$ 16,081
$ 22,518
$ 11,646
28,422
28,422
28,989
30,125
28,856
29,891
28,613
29,590
28,365
29,324
28,141
29,106
$
$
(0.08) $
(0.08) $
0.33
0.32
$
$
0.85
0.82
$
$
0.56
0.54
$
$
0.79
0.77
$
$
0.41
0.40
Statement of Income Data:
Revenues
Gross profit
Income from operations
Net (loss) income attributable to
Mistras Group, Inc.
Per Share Information:
Weighted average common shares
outstanding:
Basic
Diluted
(Loss) earnings per common share:
Basic
Diluted
Balance Sheet Data:
Cash and cash equivalents
$
27,541
$
19,154
$ 21,188
$ 10,555
$ 10,020
$
7,802
Total assets
Total long-term debt and obligations
under capital leases, including current
portion
Total Mistras Group, Inc.
stockholders’ equity
Cash Flow Data:
Net cash provided by operating
activities
Net cash used in investing activities
Net cash (used in) provided by
financing activities
554,441
469,427
482,675
471,727
443,972
377,997
181,491
103,466
104,776
132,822
97,563
77,956
$ 270,619
$
270,582
$276,163
$244,819
$242,104
$210,053
$
55,239
$
30,259
$ 68,124
$ 49,840
$ 36,873
$ 43,503
(102,797)
(17,374)
(16,752)
(49,651)
(38,005)
(45,479)
53,605
(12,869)
(40,378)
2,066
3,262
1,144
1- Includes pre-tax charges of $21.0 million relating to special items. See the Income from Operations table in Item 7 for a
description of these items. The impact of these items, net of taxes, on net income and diluted earnings per share was $14.9
million and $0.51, respectively, including a $2.0 million tax charge related to the Tax Act.
2- Includes pre-tax charges of $2.2 million relating to special items. The impact of these items, net of taxes, on net income and
diluted earnings per share was ($1.6) million and ($0.05), respectively.
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3 - 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.
4 - 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.
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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 year
ended December 31, 2017 and the comparable period ended December 31, 2016, the transition period ended December 31,
2016 and the comparable period ended December 31, 2015 (which is referred to as "transition period 2015") and the fiscal
years ended May 31, 2016 and 2015, respectively, and our financial position as of December 31, 2017 and December 31, 2016,
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. 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
• Liquidity and Capital Resources
• Critical Accounting Estimates
• Recent Accounting Pronouncements
Forward-Looking Statements
This annual 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 Annual
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), mechanical 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, followed by Canada, consisting primarily of NDT, inspection, mechanical 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 select markets within
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),
commercial aerospace and defense, power generation (natural gas, fossil, nuclear, alternative, renewable, and transmission and
distribution), public infrastructure, chemicals, transportation, primary metals and metalworking, pharmaceutical/biotechnology
and food processing industries and research and engineering institutions. As of December 31, 2017, we had approximately
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6,000 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.
Note about Non-GAAP Measures
In this MD&A under the heading "Income from Operations", the non-GAAP financial performance measure "Income before
special items" is used for each of our three segments, the Corporate segment 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, (c) impairment charges and (d) other special
items. These special 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.
We believe investors and other users of our financial statements benefit from the presentation of "Income before special items”
for each of our three segments, the Corporate segment and the Total Company in evaluating our performance. Income before
special items excludes the identified special items, which provides additional tools to compare our core business operating
performance on a consistent basis and measure underlying trends and results in our business. Income before special items is
not used to determine incentive compensation for executives or employees, nor is it a replacement for GAAP and/or
comparable to other companies non-GAAP financial measures.
Consolidated Results of Operations
On January 3, 2017, the Company's Board of Directors approved a change in the Company's fiscal year end from May 31 to
December 31, effective December 31, 2016. In connection with this change, we previously filed a Transition Report on Form
10-K to report the results of the seven-month transition period from June 1, 2016 to December 31, 2016. In this report, the
periods presented are the year ended December 31, 2017, the seven-month transition period from June 1, 2016 to December 31,
2016 and the years ended May 31, 2016 and 2015. For comparison purposes, we have also included unaudited data for the
year ended December 31, 2016 and for the seven months ended December 31, 2015.
Year ended December 31, 2017 vs. Year ended December 31, 2016
The following table summarizes our consolidated statements of operations for the years ended December 31, 2017 and 2016:
33
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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
(Loss) income before provision for income taxes
Provision for income taxes
Net (loss) income
For the year ended December 31,
2017
2016
(unaudited)
($ in thousands)
$
700,970
$
684,762
187,712
194,134
27%
28%
183,552
168,588
26%
4,160
1%
4,386
(226)
1,942
(2,168)
7
(2,175)
25%
25,546
4%
3,075
22,471
8,008
14,463
54
$
14,409
Less: net income attributable to noncontrolling interests, net of taxes
Net (loss) income attributable to Mistras Group, Inc.
$
Revenues
Revenues by segment for the years ended December 31, 2017 and 2016 were as follows:
Revenues
Services
International
Products and Systems
Corporate and eliminations
For the year ended December 31,
2017
2016
(unaudited)
($ in thousands)
$
543,565
$
144,265
23,297
(10,157)
700,970
$
$
519,378
148,761
26,049
(9,426)
684,762
Revenue was $701.0 million for the year ended December 31, 2017, an increase of $16.2 million, or 2%, compared with the
year ended December 31, 2016. The increase was driven by the Services segment, which increased by $24.2 million, or 5%,
partially offset by a decrease of $4.5 million, or 3% from the International segment and the Products and Systems segment,
which decreased $2.8 million, or 11%. The Services segment increase was driven by mid-single digit acquisition growth. The
International segment decrease was driven by a mid-single digit organic decline, offset by low single digit favorable impact of
foreign exchange rates. The Products and Systems segment decrease was driven by lower sales volume.
Revenues from oil and gas customers comprised 58% for the year ended December 31, 2017, compared to 57% for the year
ended December 31, 2016. Revenues from aerospace customers comprised 13% for the years ended December 31, 2017 and
2016.
Gross Profit
Gross profit by segment for the years ended December 31, 2017 and December 31, 2016 was as follows:
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Gross profit
Services
% of segment revenue
International
% of segment revenue
Products and Systems
% of segment revenue
Corporate and eliminations
% of total revenue
For the year ended December 31,
2017
2016
(unaudited)
($ in thousands)
$
139,160
$
133,532
25.6%
38,974
27.0%
9,798
42.1%
(220)
187,712
26.8%
$
25.7%
48,372
32.5%
11,956
45.9%
274
$
194,134
28.4%
Gross profit decreased $6.4 million, or 3%, for the year ended December 31, 2017 compared to the year ended December 31,
2016, despite a sales increase of 2%. Gross profit margin was 26.8% and 28.4% for the years ended December 31, 2017 and
2016, respectively. International segment gross margins had a year-on-year decline of 550 basis points to 27.0% for the year
ended December 31, 2017. This decline was primarily driven by lower revenues in the Company's German subsidiary, as well
as poor margins on a large contract and lower utilization of technical labor in the United Kingdom. Products and Systems
segment gross margins declined by 380 basis points for the year ended December 31, 2017 to 42.1%, driven by lower sales
volumes and a less favorable sales mix. Services segment gross profit margins were consistent with the prior year.
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Income from Operations. The following table shows a reconciliation of segment income (loss) from operations to income
(loss) before special items for the years ended December 31, 2017 and 2016:
Services:
Income from operations (GAAP)
Litigation charges
Bad debt provision for a customer bankruptcy
Severance costs
Asset write-offs and lease terminations
Acquisition-related (benefit) expense, net
Income before special items (non-GAAP)
International:
Income from operations (GAAP)
Severance costs
Asset write-offs and lease terminations
Acquisition-related (benefit) expense, net
Income before special items (non-GAAP)
Products and Systems:
Loss from operations (GAAP)
Impairment charges
Severance costs
Loss before special items (non-GAAP)
Corporate and Eliminations:
Loss from operations (GAAP)
Litigation charges
Severance costs
Acquisition-related expense (benefit), net
Loss before special items (non-GAAP)
Total Company:
Income from operations (GAAP)
Litigation charges
Impairment charges
Bad debt provision for a customer bankruptcy
Severance costs
Asset write-offs and lease terminations
Acquisition-related (benefit) expense, net
Income before special items (non-GAAP)
For the year ended December 31,
2017
2016
(unaudited)
($ in thousands)
$
46,677
$
—
1,200
561
123
392
48,953
3,537
1,055
—
(501)
4,091
(16,991)
15,810
18
(1,163)
(29,063)
1,600
184
591
(26,688)
$
$
$
$
$
$
$
$
4,160
1,600
15,810
1,200
1,818
123
482
25,193
$
$
$
$
$
$
$
$
37,788
6,320
—
77
—
(232)
43,953
12,908
1,184
1,042
(42)
15,092
(180)
—
31
(149)
(24,970)
—
133
269
(24,568)
25,546
6,320
—
—
1,425
1,042
(5)
34,328
Total Company income from operations (GAAP) decreased by $21.4 million, or 84% compared to the year ended December
31, 2016. Total Company income before special items (non-GAAP) decreased by $9.1 million or 27% compared with the year
36
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ended December 31, 2016. Income before special items declined by 140 basis points to 3.6% for the year ended December 31,
2017 from 5.0% for the year ended December 31, 2016.
Total operating expenses increased by $15.0 million, or 9% for the year ended December 31, 2017, driven primarily by the
$15.8 million impairment charges for the Products and Systems segment (See Notes 8 and 9 in the notes to consolidated
financial statements in Item 8 of this Annual Report).
Interest Expense
Interest expense was $4.4 million and $3.1 million for the years ended December 31, 2017 and December 31, 2016. The
increase was primarily related to increased borrowings on the Company's revolving line of credit.
Income Taxes
Our effective income tax rate was approximately (858)% for the year ended December 31, 2017, compared to 36% for the year
ended December 31, 2016. The change in effective tax rate was driven by tax reform in the United States.
On December 22, 2017, the United States enacted fundamental changes to federal tax law following the passage of the Tax
Cuts and Jobs Act (the “Tax Act”). The Tax Act is complex and significantly changes the U.S. corporate tax system. Our
financial statements for the year ended December 31, 2017 reflect certain effects of the Tax Act which includes a reduction in
the corporate tax rate from 35% to 21%, imposition of a tax on unrepatriated foreign earnings (“the transition tax”), and a
reduction to deferred tax assets attributable to changes made to executive compensation rules. As a result of the changes to tax
laws and tax rates under the Tax Act, we incurred an increase in income tax expense of $1.9 million during the year ended
December 31, 2017, which consisted primarily of a $2.3 million decrease in our net deferred tax liabilities due to the reduction
in the federal corporate tax rate from 35% to 21%, an increase of $3.9 million in tax expense attributable to the transition tax,
and a decrease in the realizability of deferred tax assets of $0.3 million due to changes made to executive compensation rules
pursuant to the Tax Act.
Income tax expense varies as a function of pre-tax income and the level of non-deductible expenses, such as certain amounts of
meals and entertainment expense, valuation allowances, and other permanent differences. It is also affected by discrete items
that may occur in any given year, but are not consistent from year to year. Our effective income tax rate may fluctuate over the
next few years due to many variables including the amount and future geographic distribution of our pre-tax income, changes
resulting from our acquisition strategy, increases or decreases in our permanent differences, and the effects of the Tax Act.
Transition period ended December 31, 2016 vs. Transition period ended December 31, 2015
The following table summarizes our consolidated statements of operations for the transition periods ended December 31, 2016
and 2015:
37
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Revenues
Gross profit
Gross profit as a % of Revenue
Total operating expenses
Operating expenses as a % of Revenue
Income from operations
Income from operations as a % of Revenue
Interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Less: net income (loss) attributable to noncontrolling interests, net of taxes
Net income attributable to Mistras Group, Inc.
For the Transition period ended
December 31,
2016
2015
(unaudited)
($ in thousands)
$
404,161
$
427,913
117,004
123,190
29%
29%
99,471
88,092
25%
21%
17,533
35,098
4%
8%
2,052
15,481
5,870
9,611
43
$
9,568
$
3,672
31,426
11,627
19,799
(15)
19,814
Revenues by segment for the transition periods ended December 31, 2016 and 2015 were as follows:
Revenues
Services
International
Products and Systems
Corporate and eliminations
For the Transition period
ended December 31,
2016
2015
(unaudited)
($ in thousands)
$
293,218
$
327,118
104,013
14,541
(7,611)
404,161
$
87,411
18,786
(5,402)
427,913
$
Revenue was $404.2 million for the transition period ended December 31, 2016, a decrease of $23.8 million, or 6% compared
with the transition period ended December 31, 2015. The decrease was driven by the Services segment, which decreased by
$33.9 million, or 10% and the Products and Systems segment, which decreased by $4.2 million, or 23%, partially offset by an
increase of $16.6 million, or 19% from the International segment. The Services segment decrease was driven by low double
digit organic decline, offset by a small amount of acquisition growth. The Products and Systems segment decrease was driven
by lower sales volume. The International segment increase was driven by organic growth, offset partially by an unfavorable
impact of foreign exchange rates.
Revenues from oil and gas customers comprised 55% for the transition period ended December 31, 2016.
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Gross profit by segment for the transition periods ended December 31, 2016 and December 31, 2015 was as follows:
Gross profit
Services
% of segment revenue
International
% of segment revenue
Products and Systems
% of segment revenue
Corporate and eliminations
% of total revenue
For the Transition period
ended December 31,
2016
2015
(unaudited)
($ in thousands)
$
75,784
$
87,514
25.8%
34,210
32.9%
6,920
47.6%
90
$
117,004
28.9%
26.8%
26,762
30.6%
8,986
47.8%
(72)
123,190
28.8%
39
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Gross profit decreased $6.2 million, or 5% for the transition period ended December 31, 2016 compared to the transition period
ended December 31, 2015. As a percentage of revenues, gross profit improved by 10 basis points compared with the prior year
to 28.9%.
The decrease in gross profit was primarily attributable to revenue declines in the Services segment of $11.7 million or 13% and
in the Products and Systems segment of $2.1 million or 23%, offset in part by the International segment's improvement of $7.4
million or 28%. International gross profit margins improved to 32.9% of revenues in the transition period ended December 31,
2016 compared with 30.6% of revenues in the transition period ended December 31, 2015. The 230 basis point increase was
due to improvement across the Company's largest country locations, driven by organic growth, improvements in technical labor
utilization, sales mix and overhead utilization. Services segment gross profit margins decreased to 25.8% of revenues in the
transition period ended December 31, 2016 compared with 26.8% of revenues in the transition period ended December 31,
2015. The 100 basis point decrease was primarily driven by lower sales volume and a less favorable sales mix. Products and
Systems segment gross margins decreased by 20 basis points to 47.6% of revenues.
Income from Operations. The following table shows a reconciliation of the segment income from operations to income before
for the transition periods ended December 31, 2016 and 2015:
40
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Services:
Income from operations (GAAP)
Severance costs
Acquisition-related expense (benefit), net
Income before special items (non-GAAP)
International:
Income from operations (GAAP)
Severance costs
Asset write-offs and lease terminations
Acquisition-related expense (benefit), net
Income before special items (non-GAAP)
Products and Systems:
(Loss) income from operations (GAAP)
Severance costs
(Loss) income before special items (non-GAAP)
Corporate and Eliminations:
Loss from operations (GAAP)
Severance costs
Acquisition-related expense (benefit), net
Loss before special items (non-GAAP)
Total Company:
Income from operations (GAAP)
Severance costs
Asset write-offs and lease terminations
Acquisition-related expense (benefit), net
Income before special items (non-GAAP)
For the transition period ended
December 31,
2016
2015
(unaudited)
($ in thousands)
$
22,411
$
77
236
22,724
10,597
474
1,042
29
12,142
(254)
14
(240)
37,175
188
(593)
36,770
6,888
175
—
(457)
6,606
2,613
17
2,630
(15,221)
133
231
(14,857)
(11,578)
—
91
(11,487)
$
$
$
$
$
17,533
698
1,042
496
19,769
$
$
$
$
$
35,098
380
—
(959)
34,519
Total Company income from operations (GAAP) decreased by $17.6 million, or 50% compared to the transition period ended
December 31, 2015. Total Company income before special items (non-GAAP) decreased by $14.8 million or 43% compared
with the transition period ended December 31, 2015. Income before special items declined by 320 basis points to 4.9% of
revenues for the transition period ended December 31, 2016.
Total operating expenses increased by $11.4 million, or 13% in the transition period ended December 31, 2016 compared to the
transition period ended December 31, 2015. The increase included approximately $5 million of expenses that were primarily
associated with the acceleration of certain costs to align with our new fiscal year, and other charges which included severance
and the write-off of an intangible asset.
Interest Expense
Interest expense was $2.1 million and $3.7 million for the transition periods ended December 31, 2016 and December 31, 2015,
respectively. The decrease was primarily related to the repayment of seller notes related to acquisitions.
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Income Taxes
Our effective income tax rate was 38% for the transition period ended December 31, 2016 compared to 37% for the transition
period ended December 31, 2015. The higher effective tax rate was driven by the impact of permanent items.
Fiscal 2016 vs. 2015
The following table summarizes our consolidated statements of operations for fiscal 2016 and 2015:
Revenues
Gross profit
Gross profit as a % of Revenue
Total operating expenses
Operating expenses as a % of Revenue
Income from operations
Income from operations as a % of Revenue
Interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Less: net (loss) income attributable to noncontrolling interests, net of taxes
Net income attributable to Mistras Group, Inc.
Revenues by segment for fiscal 2016 and 2015 were as follows:
Revenues
Services
International
Products and Systems
Corporate and eliminations
For the year ended May 31,
2016
2015
($ in thousands)
$
719,181
$
711,252
203,008
184,733
28%
26%
159,831
154,380
22%
22%
43,177
30,353
6%
4%
4,762
38,415
13,765
24,650
(4)
24,654
$
4,622
25,731
9,740
15,991
(90)
16,081
For the year ended May 31,
2016
2015
($ in thousands)
553,279
143,025
30,293
(7,416)
719,181
$
$
540,224
146,953
31,255
(7,180)
711,252
$
$
$
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 $1.0 million or 3%. The Services segment increase was driven by low single digit organic growth, plus a
lesser amount of acquisition-driven growth, offset in part by low single digit unfavorable impact of foreign exchange rates. The
decline in International Segment revenues was driven by a combination of high single digit organic growth, which had positive
contributions from each of the segment's four largest subsidiaries, that was more than offset by the low double digit unfavorable
impact of foreign exchange rates. Products and Systems segment revenues declined due to lower sales volume.
Management believes that revenues generally declined in the inspection industry during fiscal 2016, as evidenced by several of
the Company's competitors who reported revenue declines that have been driven by customers spending less on inspection due
to pressures stemming from low commodities prices. Despite these difficult market conditions, the Company had modest
growth in fiscal 2016, as noted above, driven by market share gains in both the Services and International segments. Revenues
42
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from oil and gas customers comprised 56% and 52% of revenues in fiscal 2016 and 2015, respectively. The International
segment’s largest revenue concentration in fiscal 2016 was aerospace and defense, which comprised 39% of segment revenues.
One customer accounted for 10% of fiscal 2016 revenues.
Gross profit by segment for fiscal 2016 and 2015 was as follows:
Gross profit
Services
% of segment revenue
International
% of segment revenue
Products and Systems
% of segment revenue
Corporate and eliminations
% of total revenue
For the year ended May 31,
2016
2015
($ in thousands)
$
145,262
$
135,201
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%
$
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.
The 2016 improvement in gross profit margin was primarily attributable to the International and Services segments.
International segment gross margins improved to 30.5% of revenues in fiscal 2016 compared with 23.5% of revenues in the
prior year. The 700 basis point increase was driven by improvement in the Company's four largest countries, driven by organic
revenue growth, prior year management changes and staffing actions that improved technical labor utilization and improved
sales mix. Services segment gross profit margin was 26.3% and 25.0% in fiscal 2016 and fiscal 2015, respectively. The 130
basis point improvement was driven by 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 a more favorable sales
mix which included fewer customized solutions.
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Table of Contents
Income from Operations. The following table shows a reconciliation of the segment income from operations to income before
special items for fiscal 2016 and 2015:
Services:
Income from operations (GAAP)
Legal settlement
Severance costs
Acquisition-related expense (benefit), net
Income before special items (non-GAAP)
International:
Income (loss) from operations (GAAP)
Severance costs
Asset write-offs and lease terminations
Acquisition-related expense (benefit), net
Income (loss) before special items (non-GAAP)
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)
Legal settlement
Severance costs
Asset write-offs and lease terminations
Charges related to sale of foreign operations
Acquisition-related expense (benefit), net
Income before special items (non-GAAP)
For the year ended May 31,
2016
2015
($ in thousands)
$
52,552
$
49,142
6,320
188
(1,061)
57,999
$
9,293
$
885
—
(520)
9,658
—
—
(639)
48,503
(575)
1,082
872
(2,926)
(1,547)
$
2,688
$
2,461
34
—
—
99
157
—
2,722
2,717
$
(21,356) $
—
—
128
(21,228)
(20,675)
542
2,516
(1,602)
(19,219)
$
$
$
$
$
$
$
43,177
6,320
1,107
$
$
$
— $
— $
(1,453) $
$
49,151
30,353
—
1,723
1,029
2,516
(5,167)
30,454
Total Company income from operations (GAAP) improved by $12.8 million, or 42% compared to fiscal 2015. Total Company
income before special items (non-GAAP) improved by $18.7 million or 61% compared with fiscal 2015. Income before special
items improved by 250 basis points to 6.8% of revenues in fiscal 2016. This improvement was driven by the Services and
International segments. Services segment income from operations (GAAP) improved in fiscal 2016 by $3.4 million, or 7%,
while income before special items (non-GAAP) improved by $9.5 million, or 20%. Services operating profit margin before
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special items improved by 150 basis points to 10.5% in fiscal 2016, driven by the 130 basis point improvement in gross profit
margin for the segment. International segment income before special charges improved by approximately 800 basis points to
7% in fiscal 2016, driven by the 700 basis point improvement in segment gross profit margin. Products and Systems fiscal
2016 operating margins before special charges of 9.0% improved by 30 basis points over 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.
Interest Expense
Interest expense was $4.8 million and $4.6 million in fiscal 2016 and fiscal 2015, respectively.
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.
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 operating cash flow of $55.2 million for the year ended December 31, 2017, $63.2 million
for the year ended December 31, 2016 and $30.3 million for the transition period ended December 31, 2016. The Company
generated operating cash flow of $68.1 million in fiscal 2016 and $49.8 million in fiscal 2015. Capital expenditures for the
purchase of property, plant and equipment and of intangible assets was $20.6 million $15.9 million, $9.8 million, $16.2 million
and $16.0 million for the years ended December 31, 2017 and 2016, the transition period ended December 31, 2016 and for
fiscal 2016 and 2015, respectively.
Cash Flows Table
The following table summarizes our cash flows for the years ended December 31, 2017 and 2016, the transition period ended
December 31, 2016 and fiscal 2016 and 2015:
($ in thousands)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
For the year ended December 31,
2017
2016
(unaudited)
For the
Transition
period ended
2016
For the year ended May 31,
2016
2015
$
$
55,239
(102,797)
53,605
$
63,211
(22,408)
(30,031)
$
30,259
(17,374)
(12,869)
$
68,124
(16,752)
(40,378)
49,840
(49,651)
2,066
Effect of exchange rate changes on cash
2,340
(1,217)
(2,050)
(361)
(1,720)
Net change in cash and cash equivalents
$
8,387
$
9,555
$
(2,034) $
10,633
$
535
Cash Flows from Operating Activities
Cash provided by operating activities for the year ended December 31, 2017 was $55.2 million, a decline of $8 million from
the prior year. The decrease was primarily attributable to a lower level of net income, exclusive of the $15.8 million
impairment charge during 2017.
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Cash provided by operating activities for the transition period ended December 31, 2016 was $30.3 million.
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.
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 for the year ended December 31, 2017 was $102.8 million, principally due to $83.4 million
of acquisitions and $20.6 million purchases of property, plant and equipment and intangible assets. Net cash used in investing
activities for the year ended December 31, 2016 was $22.4 million, principally due to $15.9 million purchases of property, plant
and equipment and intangible assets as well as $8.3 million of acquisitions.
Net cash used in investing activities for the transition period ended December 31, 2016 was $17.4 million, principally due to
$9.8 million purchases of property, plant and equipment and intangible assets and $8.3 million of acquisitions.
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, and
purchases of property, plant and equipment of $16.0 million.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2017 was $53.6 million, derived from our net
borrowings for the year of $71.5 million, which were primarily used to fund acquisitions, offset principally by $15.9 million of
treasury stock purchases. Net cash used in financing activities for the year ended December 31, 2016 was $30.0 million,
driven primarily by $17.3 million of net repayments of debt and $9.0 million of treasury stock purchases.
Net cash used in financing activities for the transition period ended December 31, 2016 was $12.9 million, driven primarily by
$9 million of treasury stock purchases and $2 million of net repayments of debt.
Net cash used in financing activities in fiscal 2016 of $40 million consisted primarily of net repayments of debt totaling $36
million.
Net cash provided by financing activities in fiscal 2015 was $2 million.
Cash Balance and Credit Facility Borrowings
As of December 31, 2017, the Company had cash and cash equivalents totaling $27.5 million, of which $27.3 million is outside
of the United States, and available borrowing capacity of up to $88.2 million under its credit agreement (as defined below).
Borrowings of $156.9 million and letters of credit of $4.9 million were outstanding under the credit agreement at December 31,
2017. 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 December 8, 2017, the Company entered into a Fourth Amended and Restated Credit Agreement (“Credit Agreement”). The
Credit Agreement increased the Company’s revolving line of credit from $175.0 million to $250.0 million and provides that
under certain circumstances the line of credit can be increased to $300.0 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 maturity date of the Credit Agreement is December 7, 2022.
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Loans under the Credit Agreement bear interest at LIBOR plus an applicable LIBOR margin ranging from 1% to 2%, 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 (h) certain amounts of EBITDA of acquired business for the prior twelve months, plus (i)
certain expenses related to the closing of the Credit Agreement, plus (j) non-cash expenses which do not (in the current or any
future period) represent a cash item (excluding non-cash gains which increase net income), plus (k) non-recurring charges (not
to exceed $5 million in the four consecutive quarters immediately preceding the date of determination) for items such as
severance, lease termination charges, asset write-offs and litigation settlements paid during the period, all determined 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 2.75 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 and is guaranteed by some of our subsidiaries.
The Credit Agreement contains financial covenants requiring that we maintain a Funded Debt Leverage Ratio of no greater
than 3.50 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 Company can elect to increase the Funded Debt Leverage Ratio to 3.75 to 1 temporarily for four fiscal quarters
immediately following the fiscal quarter in which the Company acquires another business. The Company can make this
election twice during the term of the Credit Agreement.
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 or
repurchase our stock, 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 December 31, 2017, 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, stock repurchases, 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 the year ended December 31, 2017, the transition period ended December 31,
2016 and for fiscal 2016 and 2015 were approximately 3%, 2%, 2% and 2% of revenues, respectively.
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Our future acquisitions may also require capital. We acquired three companies during the year ended December 31, 2017 and,
three companies during the transition period ended December 31, 2016, with an aggregate cash outlay of $92.3 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
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 December 31, 2017:
($ in thousands)
Long-term debt (1)
Capital lease obligations (2)
Operating lease obligations
Contingent consideration
obligations (3)
Total
Total
$ 166,878
15,344
49,432
5,508
$ 237,162
________________________________
December 31,
2018
December 31,
2019
December 31,
2020
December 31,
2021
$
$
2,358
5,899
11,542
3,430
23,229
$
$
1,664
3,788
8,888
1,279
15,619
$
$
1,243
2,485
6,902
799
11,429
$
$
December 31,
2022
$ 157,728
634
4,304
Thereafter
2,993
$
760
12,915
892
1,778
4,881
—
7,551
—
$ 162,666
—
16,668
$
(1) Consists primarily of the principal portion 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 the year ended December 31, 2017, the transition period ended December 31, 2016 as well as fiscal 2016 and 2015, 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, long-
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lived assets and goodwill. 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
Most of our projects are short-term in nature and 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, earned revenue is accrued for services that have been provided 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. 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.
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Long-Lived Assets
We perform a review of long-lived assets (or asset groups) 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 (or asset group) to its carrying amount. If the undiscounted future
cash flows are less than the carrying amount of the asset (or asset group), 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 December 31, 2017 and December 31, 2016, we had $87.1
million and $73.1 million in net property, plant and equipment, respectively, and $63.7 million and $40.0 million in intangible
assets, net, respectively. During the third quarter of 2017, there was a triggering event in the Products and Systems segment
that resulted in a $2.6 million impairment charge of long-lived assets. (See Note 9 in the notes to consolidated financial
statements in Item 8 of this Annual Report for further details) During the transition period ended December 31, 2016, $0.8
million of specifically identified assets were written off.
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 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). Our annual impairment test is conducted on the first day of our fourth
quarter. In connection with the change in our fiscal year to December 31, our annual test date is October 1. For the transition
period ended December 31, 2016, a December 1 date was used and historically, prior to the fiscal year end change, the
Company tested for impairment annually as of March 1. Goodwill is also tested for impairment 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.
During the third quarter of 2017, there was a triggering event in the Products and Systems segment that resulted in a $13.2
million goodwill impairment charge. See Note 8 in the notes to consolidated financial statements in Item 8 of this Annual
Report for further details.
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. As a result of the Company adopting ASU 2017-04, impairment will be recorded in the amount that fair
value is less than carrying value, as the ASU eliminated step two of goodwill impairment process. 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.
Recent Accounting Pronouncements
For information about recent accounting pronouncements, see Note 2 to the consolidated financial statements.
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 $250.0 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, $156.9 million at December 31, 2017, an increase in interest rates by one hundred basis points from our current rate
would increase annual interest expense by approximately $1.6 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.
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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. Translation adjustments for these movements are
recorded as a separate component of Accumulated Other Comprehensive Income in Shareholder Equity. We do not currently
enter into forward exchange contracts to hedge exposures denominated in foreign currencies. An unfavorable 10% change
(strengthening) in the average U.S. Dollar exchange rates for the year ended December 31, 2017 would cause a decrease in
consolidated operating income of approximately $0.8 million and a favorable 10% change (weakening) would cause an
increase of approximately $0.9 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Mistras Group, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Mistras Group, Inc. and subsidiaries (the “Company”) as of
December 31, 2017 and 2016, the related consolidated statements of (loss) income, comprehensive income (loss), equity, and cash
flows for the year ended December 31, 2017, the seven month transition period ended December 31, 2016, and each of the years in
the two-year period ended May 31, 2016, and the related notes (collectively, the “consolidated financial statements”). We also have
audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the year ended December 31,
2017, the seven month transition period ended December 31, 2016, and each of the years in the two-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 December 31, 2017, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired three entities during 2017, and management excluded from its assessment of the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2017, these entities’ internal control over financial
reporting associated with total assets of 4.0% and total revenues of 2.6% included in the consolidated financial statements of
the Company as of and for the year ended December 31, 2017. Our audit of internal control over financial reporting of the
Company also excluded an evaluation of the internal control over financial reporting of these entities.
Basis for Opinions
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 the
Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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
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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.
/s/ KPMG LLP
We have served as the Company’s auditor since 2013.
Short Hills, New Jersey
March 14, 2018
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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, 28,294,968 and 29,216,745
shares issued
Additional paid-in capital
Treasury stock at cost, 0 and 420,258 shares
Retained earnings
Accumulated other comprehensive loss
Total Mistras Group, Inc. stockholders’ equity
Non-controlling interests
Total Equity
Total Liabilities and Equity
December 31,
2017
2016
$
$
$
27,541
138,080
10,503
—
18,884
195,008
87,143
63,739
203,438
1,606
3,507
554,441
10,362
65,561
2,358
5,875
6,069
90,225
164,520
8,738
8,803
11,363
283,649
19,154
130,852
10,017
6,230
16,399
182,652
73,149
40,007
169,940
1,086
2,593
469,427
6,805
58,697
1,379
6,488
4,342
77,711
85,917
9,682
17,584
7,789
198,683
—
—
282
222,425
—
64,717
(16,805)
270,619
173
270,792
554,441
$
292
217,211
(9,000)
91,803
(29,724)
270,582
162
270,744
469,427
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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Mistras Group, Inc. and Subsidiaries
Consolidated Statements of (Loss) Income
(in thousands, except per share data)
For the year ended
December 31,
For the transition
period ended
December 31,
For the year ended May 31,
2017
2016
2016
2015
Revenue
Cost of revenue
Depreciation
Gross profit
Selling, general and administrative expenses
Impairment charges
Research and engineering
Depreciation and amortization
Acquisition-related expense (benefit), net
Litigation charges
Income from operations
Interest expense
(Loss) income before provision for income taxes
Provision for income taxes
Net (loss) income
Less: net income (loss) attributable to noncontrolling
interests, net of taxes
Net (loss) income attributable to Mistras Group, Inc.
(Loss) earnings per common share
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
$
$
$
$
$
700,970
492,238
21,020
187,712
153,025
$
404,161
274,298
12,859
117,004
91,058
$
719,181
494,911
21,262
203,008
141,229
711,252
506,281
20,238
184,733
143,978
15,810
2,272
10,363
482
1,600
4,160
4,386
(226)
1,942
(2,168)
7
(2,175) $
(0.08) $
(0.08) $
28,422
28,422
—
1,577
6,340
496
—
17,533
2,052
15,481
5,870
9,611
43
9,568
0.33
0.32
28,989
30,125
$
$
$
—
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
The accompanying notes are an integral part of these consolidated financial statements.
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Mistras Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
For the year ended
December 31,
For the transition
period ended
December 31,
For the year ended May
31,
2017
2016
2016
2015
Net (loss) income
$
(2,168) $
9,611
$ 24,650
$ 15,991
Other comprehensive income (loss):
Foreign currency translation adjustments
Comprehensive income (loss)
Less: net income (loss) attributable to
noncontrolling interests
Foreign currency translation adjustments
attributable to noncontrolling interests
Comprehensive income (loss)
attributable to Mistras Group, Inc.
12,919
10,751
7
4
(9,625)
(14)
1,014
25,664
(19,602)
(3,611)
43
6
(4)
1
(90)
5
$
10,748
$
(51) $ 25,669
$ (3,516)
The accompanying notes are an integral part of these consolidated financial statements.
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Mistras Group, Inc. and Subsidiaries
Consolidated Statements of Equity
(in thousands)
Common Stock
Treasury Stock
Shares
Amount
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, 2014
28,456
$
284
— $
— $
201,831
$ 41,500
$
(1,511)
$
242,104
$
288
$
242,392
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
—
—
21
161
—
65
—
—
—
2
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,579
(1,483)
388
749
16,081
—
—
—
—
—
—
(19,602)
—
—
—
—
16,081
(19,602)
6,579
(1,481)
388
750
(90)
15,991
(5)
—
—
—
—
(19,607)
6,579
(1,481)
388
750
Balance at May 31, 2015
28,703
$
287
— $
— $
208,064
$ 57,581
$
(21,113)
$
244,819
$
193
$
245,012
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
—
—
—
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
Balance at May 31, 2016
28,940
$
290
— $
— $
213,737
$ 82,235
$
(20,099)
$
276,163
$
125
$
276,288
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
Purchase of treasury stock
Exercise of stock options
Balance at December 31,
2016
Net loss
Other comprehensive
income, net of tax
Share-based payments
Net settlement on vesting
of restricted stock units
Retirement of treasury
stock
Purchase of treasury stock
Exercise of stock options
Balance at December 31,
2017
—
—
—
212
—
65
—
—
—
2
—
—
—
—
—
—
—
—
—
—
—
—
—
(420)
(9,000)
—
—
—
—
4,627
(2,325)
568
—
604
9,568
—
—
—
—
—
—
—
(9,625)
—
—
—
—
—
9,568
(9,625)
4,627
(2,323)
568
(9,000)
604
43
(6)
—
—
—
—
—
9,611
(9,631)
4,627
(2,323)
568
(9,000)
604
29,217
$
292
(420)
$ (9,000)
$
217,211
$ 91,803
$
(29,724)
$
270,582
$
162
$
270,744
—
—
—
187
—
—
—
2
—
—
—
—
—
—
—
—
(1,146)
(12)
1,146
24,923
—
37
—
—
(726)
(15,923)
—
—
—
—
6,588
(1,649)
(2,175)
—
—
—
—
—
275
(24,911)
—
—
—
12,919
—
—
—
—
—
(2,175)
12,919
6,588
(1,647)
—
(15,923)
275
7
4
—
—
—
—
—
(2,168)
12,923
6,588
(1,647)
—
(15,923)
275
28,295
$
282
— $
— $
222,425
$ 64,717
$
(16,805)
$
270,619
$
173
$
270,792
The accompanying notes are an integral part of these consolidated financial statements.
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Mistras Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net (loss) income
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization
Deferred income taxes
Share-based compensation expense
Impairment charges
Bad debt provision for unexpected customer bankruptcy
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
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
Purchases of treasury stock
Taxes paid related to net share settlement of share-based awards
Excess tax benefit from share-based compensation
Proceeds from the exercise of stock options
Net cash provided by (used in) 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
December 31,
For the transition
period ended
December 31,
For the year ended May 31,
2017
2016
2016
2015
$
(2,168)
$
9,611
$
24,650
$
15,991
31,383
(4,854)
6,574
15,810
1,200
—
(463)
79
2,490
(117)
(2,464)
2,574
4,188
1,007
55,239
(19,314)
(1,255)
(83,424)
1,196
(102,797)
(6,492)
6,653
(2,101)
124,000
(50,600)
(560)
(15,923)
(1,647)
—
275
53,605
2,340
8,387
19,154
27,541
4,264
3,063
3,185
$
$
$
$
— $
19,199
(174)
4,559
—
—
—
262
559
4,123
628
(4,453)
(3,667)
(2,301)
1,913
30,259
(9,093)
(697)
(8,262)
678
(17,374)
(4,490)
386
(11,919)
48,400
(34,300)
(795)
(9,000)
(2,323)
568
604
(12,869)
(2,050)
(2,034)
21,188
19,154
2,079
8,119
1,829
325
$
$
$
$
$
32,474
240
6,514
—
—
—
(2,066)
(1,052)
(4,999)
1,595
(1,812)
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
(1,109)
(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
The accompanying notes are an integral part of these consolidated financial statements.
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Mistras Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(tabular dollars in thousands, except 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), non-destructive
testing (NDT) and mechanical 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, commercial aerospace and defense, fossil and nuclear power, alternative and renewable energy, public
infrastructure, chemicals, 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 non-
controlling interests are reported in stockholders’ equity in the accompanying consolidated balance sheets. The non-controlling
interests in net income, net of tax, is classified separately in the accompanying consolidated statements of income.
On January 3, 2017, the Company's Board of Directors approved a change in the Company's fiscal year from May 31 to
December 31, effective December 31, 2016. In connection with this change, we previously filed a Transition Report on Form
10-K to report the results of the seven-month transition period from June 1, 2016 to December 31, 2016. In this Annual
Report, the periods presented are the year ended December 31, 2017, the seven-month transition period from June 1, 2016 to
December 31, 2016 and the years ended May 31, 2016 and 2015. The Company has also included unaudited data for the year
ended December 31, 2016 and for the seven months ended December 31, 2015 (See Note 21).
All significant intercompany accounts and transactions have been eliminated in consolidation. For fiscal 2016 and 2015,
Mistras Group, Inc.’s and its subsidiaries’ fiscal years ended on May 31 except for the subsidiaries in the International segment,
which ended on April 30. Accordingly, the Company’s International segment subsidiaries were consolidated on a one-month
lag. Therefore, in the quarter and year of acquisition, results of acquired subsidiaries in the International segment were
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. 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. Effective December 31,
2016, the Company's International segment is no longer consolidated on a one month lag, and such change for the seven month
transition period ended December 31, 2016 was not material.
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.
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 11% and 12% of our revenues for the year ended
December 31, 2017 and the transition period ended December 31, 2016, which primarily were generated from the Services
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segment. 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. The following revenue recognition policies
define the manner in which we account for specific transaction types:
Services
Most of our projects are short-term in nature and 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, earned revenue is accrued for services that have been provided 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 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 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 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
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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 written off when they are deemed
uncollectible. One customer accounted for 7% and 11% of our accounts receivable as of December 31, 2017 and December 31,
2016, respectively.
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
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. We test 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). Our annual impairment test is conducted on the first day of our fourth
quarter. In connection with the change in our fiscal year to December 31, our annual test date is October 1. For the transition
period ended December 31, 2016, a December 1 date was used and historically, prior to the fiscal year end change, the
Company tested for impairment annually as of March 1. Goodwill is also tested for impairment 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.
During the third quarter of 2017, there was a triggering event in the Products and Systems segment that resulted in a $13.2
million goodwill impairment charge. See Note 8 for further details.
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. As a result of the Company adopting ASU 2017-04, impairment will be recorded in the amount that fair
value is less than carrying value, as the ASU eliminated step two of goodwill impairment process. 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.
Impairment of Long-lived Assets
The Company reviews the recoverability of its long-lived assets (or asset groups) 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
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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. During the third
quarter of 2017, there was a triggering event in the Products and Systems segment that resulted in a $2.6 million impairment
charge of long-lived assets. See Note 9 for further details.
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 $1.9 million, $1.2 million, $1.8 million and $2.2 million for
the year ended December 31, 2017, the transition period ended December 31, 2016 and fiscal 2016 and 2015, 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
The financial position and results of operations of the Company’s foreign subsidiaries are measured using their functional
currencies, which are their local currencies. 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 (loss) income for the period and
included in accumulated other comprehensive (loss) income 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 $0.6 million, $(0.7) million, $(0.1) million and
$1.5 million for the year ended December 31, 2017, transition period ended December 31, 2016 and fiscal 2016 and 2015,
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 per occurence 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. Such value is recognized as a non-cash expense 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 with
graded vesting that contain an internal performance measure where each tranche is recognized on a straight-line basis over its
vesting period subject to the probability of meeting the performance requirements and adjusted for the number of shares
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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 August 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU
2014-09 for all entities by one year. This update is effective for public business entities for annual reporting periods beginning
after December 15, 2017, including interim periods within those reporting periods. Earlier application is permitted only as of
annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
ASU 2014-09 will become effective for the Company beginning 2018. The ASU permits two methods of adoption:
retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative
effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method).
The ASU also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows
arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer
contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.
The Company adopted ASU 2014-09 along with the related additional ASU’s on Topic 606 on January 1, 2018, utilizing the
cumulative catch-up method. The result of adoption is immaterial to the Company's consolidated financial statements, largely
because most of our projects are short-term in nature and billed on a time and material basis. The Company utilizes a practical
expedient that provides for revenue to be recognize in an amount that corresponds directly with the value to the customer of the
entity’s performance completed to date. The Company will make the additional required disclosures under Topic 606, starting
with the Company's condensed consolidated financial statements in the first quarter of 2018.
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 adopted this
guidance prospectively beginning in the first quarter of 2017, which did not have a material impact on the 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 the 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 issued ASU No. 2016-09, Stock Compensation (Topic 718). This amendment simplifies 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,
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and interim periods within those fiscal years beginning after December 15, 2016, with early adoption permitted. The Company
adopted this guidance prospectively beginning in the first quarter of 2017, and accordingly, is recording excess tax benefits and
tax deficiencies as a component of income tax expense.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). This amendment will provide
guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash
flows. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15,
2017, with early adoption permitted. The Company does not expect that ASU 2016-15 will have a material impact on its
consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230). This amendment will clarify the
presentation of restricted cash on the statement of cash flows. Amounts generally described as restricted cash and restricted
cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending cash balances
on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those fiscal years
beginning after December 15, 2017, with early adoption permitted. The Company does not expect that ASU 2016-18 will have
a material impact on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350). This amendment eliminates
Step Two of the goodwill impairment test. Under the amendments in this update, entities should perform the annual goodwill
impairment test by comparing the carrying value of its reporting units to their fair value. An entity should record an
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Tax deductibility of
goodwill should be considered in evaluating any reporting unit's impairment loss to be taken. ASU 2017-04 is effective for
fiscal years beginning after December 15, 2019, with early adoption permitted. The Company early adopted ASU 2017-04 in
the third quarter of 2017 for its consolidated financial statements and related disclosures. See Notes 8 and 9 for information on
the impairment of assets in the Products and Systems reporting unit during the three months ended September 30, 2017.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification
Accounting. This amendment provides guidance concerning which changes to the terms or conditions of a share-based
payment require an entity to apply modification accounting. Certain changes to stock awards, notably administrative changes,
do not require modification accounting. There are three specific criteria that need to be met in order to prove that modification
accounting is not required. ASU 2017-09 is effective for fiscal years, and interim period within those fiscal years, beginning
after December 15, 2017, with early adoption permitted. The Company does not expect that ASU 2017-09 will have a material
impact on its consolidated financial statements and related disclosures.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on
accounting for the tax effects of the Tax Cuts and Jobs Act (the "Tax Act"). SAB 118 provides a measurement period that
should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740.
In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the
accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act
is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply
ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
The Company considers the accounting for the Tax Act to be provisional as of December 31, 2017. The Company will
complete the accounting for the tax effects of all of the provisions of the Tax Act within the required measurement period not to
extend beyond one year from the enactment date.
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:
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For the year ended
December 31,
For the transition
period ended
December 31,
For the year ended May 31,
2017
2016
2016
2015
Basic (loss) earnings per share
Numerator:
Net (loss) income attributable to Mistras Group, Inc.
$
(2,175)
$
$
9,568
$
24,654
$
16,081
28,989
0.33
$
28,856
0.85
$
28,613
0.56
28,422
(0.08)
Denominator
Weighted average common shares outstanding
Basic (loss) 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 (loss) earnings per share
$
$
$
(2,175)
$
9,568
$
24,654
$
16,081
28,422
—
—
28,422
(0.08)
$
28,989
791
345
30,125
0.32
$
28,856
712
323
29,891
0.82
$
28,613
719
258
29,590
0.54
The following potential common shares were excluded from the computation of diluted earnings per share, as the effect would
have been anti-dilutive:
For the year
ended
December 31,
2017
For the
transition period
ended December
31,
2016
For the year ended
May 31,
2016
2015
Potential common stock attributable to stock options outstanding
Potential common stock attributable to restricted stock units (RSUs)
and performance stock units (PSUs) outstanding
Total
810 (1)
353 (2)
1,163
—
2
2
5
24
29
6
1
7
(1) - 805 shares related to stock options were excluded from the calculation of diluted EPS due to the net loss for the period.
(2) - 351 shares related to RSUs and PSUs were excluded from the calculation of diluted EPS due to the net loss for the period.
4. Accounts Receivable, net
Accounts receivable consist of the following:
Trade accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
December 31,
December 31,
2017
2016
$
$
141,952
(3,872)
138,080
$
$
133,704
(2,852)
130,852
The Company had $14.4 million and $16.8 million of unbilled revenues accrued as of December 31, 2017 and December 31,
2016, respectively. Unbilled revenues as of December 31, 2017 are expected to be billed in the first quarter of 2018.
5. Inventories
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Inventories consist of the following:
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
December 31,
December 31,
2017
2016
$
$
5,105
1,192
2,746
1,460
10,503
$
$
5,054
1,246
2,335
1,382
10,017
December 31,
December 31,
Useful Life
2017
2016
(Years)
30-40
5-8
5-7
$
2,414
$
24,003
14,230
191,721
232,368
(145,225)
87,143
$
1,714
19,261
9,069
169,928
199,972
(126,823)
73,149
$
Depreciation expense was approximately $22.4 million, $14.0 million, $22.9 million and $22.2 million for the year ended
December 31, 2017, the transition period ended December 31, 2016 and fiscal 2016 and 2015, respectively.
7. Acquisitions and Dispositions
Acquisitions
During the year ended December 31, 2017, the Company completed three acquisitions, one that performs mechanical services
at height, located in Canada, a company located in the U.S. that primarily performs chemical and specialty process services and
a company in the U.S. that performs a wide variety of non-destructive testing services. Both U.S. companies primarily provide
services to the aerospace industry.
In these acquisitions, the Company acquired 100% of the equity interests of the entity based in Canada and one of the entities
based in the U.S. in exchange for aggregate consideration of $79.5 million in cash, contingent consideration up to $2.4 million
to be earned based upon the acquired business achieving specific performance metrics over the initial three years of operations
from the acquisition date and $0.2 million for working capital adjustments yet to be finalized. The Company acquired the
assets of one of the U.S. based entities noted above in exchange for aggregate consideration of $4.5 million in cash and
contingent consideration up to $3.5 million to be earned based upon the acquired business achieving specific performance
metrics over the initial three years of operations from the acquisition date. The Company accounted for these transactions in
accordance with the acquisition method of accounting for business combinations.
During the transition period ended December 31, 2016, the Company completed three acquisitions. The Company purchased
three companies, two that provide NDT services, located in Canada and one that provides mechanical services, located in the
U.S.
For the Canadian acquisitions, the Company acquired 100% of the common stock of both acquirees in exchange for aggregate
consideration of $1.3 million in cash, $0.3 million of notes payable and contingent consideration up to $0.6 million to be
earned based upon the acquired businesses achieving specific performance metrics over their initial three years of operations
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from their acquisition dates. For the U.S. acquisition, the Company acquired assets of the acquiree in exchange for aggregate
consideration of $7.0 million in cash and contingent consideration up to $2.0 million to be earned based upon the acquired
businesses achieving specific performance metrics over the initial three years of operations from its acquisition date. The
Company accounted for these three transactions in accordance with the acquisition method of accounting for business
combinations.
Assets and liabilities of the acquired businesses were included in the consolidated balance sheets as of December 31, 2017
based on their estimated fair value on the date of acquisition as determined in a purchase price allocation, using available
information and making assumptions management believes are reasonable. The Company is still in the process of completing
its valuation of the assets, both tangible and intangible, and liabilities acquired for two of the acquisitions completed during the
year ended December 31, 2017. Goodwill of $41.7 million primarily relates to expected synergies and assembled workforce, of
which $39.7 million is generally deductible for tax purposes. Other intangible assets, primarily related to customer
relationships and covenants not to compete, were $31.7 million. The results of operations of each of the acquisitions completed
during the year ended December 31, 2017 and the transition period ended December 31, 2016 are included in each respective
operating segment’s results of operations from the date of acquisition. The following table summarizes the estimated fair value
of the assets acquired and liabilities assumed, the Company's allocation of purchase price and any subsequent adjustments
made during the year ended December 31, 2017 and the transition period ended December 31, 2016:
Number of entities
Cash paid
Working capital adjustments
Notes payable
Contingent consideration
Consideration paid
Current net assets
Debt and other long-term liabilities
Property, plant and equipment
Deferred tax asset (liability)
Intangibles
Goodwill
Net assets acquired
Year ended
December 31,
2017
Transition
Period
3
3
$
83,963 $
8,295
$
$
150
—
—
325
3,407
1,630
87,520 $
10,250
7,165 $
(2,848)
11,115
(1,278)
31,671
41,695
1,632
(214)
953
392
3,367
4,120
$
87,520 $
10,250
The amortization period for intangible assets acquired ranges from two to fourteen years. The Company recorded $41.7 million
and $4.1 million of goodwill in connection with its acquisitions for the year ended December 31, 2017 and the transition period
ended December 31, 2016, respectively, reflecting the strategic fit and revenue and earnings growth potential of these
businesses.
Revenue included in the consolidated statement of income for the year ended December 31, 2017 from the three businesses
acquired in 2017 for the period subsequent to the closing of the transactions was approximately $17.9 million. Aggregate
income from operations included in the consolidated statement of income for the year ended December 31, 2017 from the
acquisitions for the period subsequent to the closing of each transaction was $0.8 million, inclusive of $0.9 million of
acquisition-related expense. As these acquisitions were immaterial on an individual basis and in the aggregate, 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
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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.
During the fourth quarter of 2017, the Company began the process of marketing one of its subsidiaries in the Products and
Systems segment for sale. The Company determined that the classification of being held for sale has been met as of December
31, 2017. For the year ended December 31, 2017, this subsidiary represented 0.6% of consolidated revenues and loss from
operations was $3.5 million, inclusive of a $2.6 million impairment charge for long-lived assets (See Note 9). In the aggregate,
the assets and liabilities of this subsidiary represents 0.4% and 0.2% of consolidated assets and liabilities, respectively, and are
included in their natural classifications on the consolidated balance sheet as of December 31, 2017.
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
quarterly basis. These amounts are recorded as acquisition-related (benefit) expense, net, on the consolidated statements of
income and were as follows for the year ended December 31, 2017, the transition period ended December 31, 2016 and fiscal
2016 and 2015:
For the year ended
December 31,
For the Transition
Period ended
December 31,
For the year ended May 31,
2017
2016
2016
2015
Due diligence, professional fees and other transaction costs
$
945
$
231
$
629
$
215
Adjustments to fair value of contingent consideration liabilities $
Acquisition-related (benefit) expense, net
$
(463) $
482
$
265
496
$ (2,082) $
(5,382)
$ (1,453) $
(5,167)
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:
Services
International
Products and
Systems
Total
Balance at May 31, 2016
$
119,683
$
36,340
$
13,197
$
169,220
Goodwill acquired during the year
Adjustments to preliminary purchase price allocations
Foreign currency translation
Balance at December 31, 2016
Goodwill acquired during the year
Impairment charge
Adjustments to preliminary purchase price allocations
Foreign currency translation
Balance at December 31, 2017
$
$
4,120
(19)
(392)
123,392
41,695
—
(211)
925
—
—
(2,989)
33,351
—
—
—
4,286
—
—
—
$
13,197
$
—
(13,197)
—
—
4,120
(19)
(3,381)
169,940
41,695
(13,197)
(211)
5,211
$
165,801
$
37,637
$
— $
203,438
During the second quarter of 2017, there were pending Products and Systems contract bids which management assessed as
having a reasonable chance of success. During the third quarter of 2017, these contract bids were not awarded to the
Company. As a result of this missed opportunity, the annual forecasting process was accelerated, resulting in lower expected
future operating profits and cash flows. As such, during the third quarter of 2017, there were indicators that the carrying
amount of the goodwill for the Products and Systems reporting unit may not have been recoverable due to the decline in the
projected future cash flows.
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The Company performed an analysis to determine any impairment of goodwill as well as long-lived assets (see Note 9). For
the goodwill analysis, we used income and market approaches to estimate the fair value of the reporting unit, which required
significant judgment in evaluation of economic and industry trends, estimated future cash flows, discount rates and other
factors, and compared that fair value to the carrying value, and determined that the fair value of the reporting unit was less than
the carrying value. The Company recorded an impairment charge of $13.2 million, based on the difference between the fair
value and the carrying value of the reporting unit, which resulted in an impairment of the entire amount of goodwill for the
Products and Systems reporting unit.
The Company performed an impairment test of its remaining reporting units as of October 1, 2017 and concluded that there
was no impairment. For the year ended December 31, 2017, the Company reviewed goodwill for impairment on a reporting
unit basis. As of December 31, 2017, the Company did not identify any changes in circumstances that would indicate the
remaining carrying value of goodwill may not be recoverable.
The Company's cumulative goodwill impairment for the periods ended December 31, 2017 was $23.1 million, of which $13.2
million related to the Products and Systems segment and $9.9 million related to the International segment. The Company's
cumulative goodwill impairment as of December 31, 2016 was $9.9 million, all of which is within its International segment.
9. Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets were as follows:
December 31,
2017
December 31,
2016
Useful Life
(Years)
Gross
Amount
Accumulated
Amortization
Impairment
Net
Carrying
Amount
Gross
Amount
Accumulated
Amortization
Net
Carrying
Amount
Customer relationships
5-14
$ 113,299
$
(58,107) $
(170) $55,022
$ 81,559
$
(50,417) $ 31,142
Software/Technology
3-15
19,523
(14,133)
(2,411)
2,979
18,128
(12,577)
5,551
Covenants not to compete
Other
Total
2-5
2-5
12,510
(10,438)
—
2,072
11,143
(9,647)
1,496
10,109
$ 155,441
$
(6,411)
(89,089) $
(32)
3,666
(2,613) $63,739
7,266
$118,096
$
(5,448)
1,818
(78,089) $ 40,007
Amortization expense for the year ended December 31, 2017, the transition period ended December 31, 2016 and the years
ended May 31, 2016 and 2015 was approximately $9.0 million, $5.2 million, $9.6 million and $11.1 million, respectively,
including amortization of software/technology for these periods of $0.7 million, $0.5 million, $1.0 million and $0.9 million,
respectively.
As described in Note 8, the Company performed an analysis to determine whether there was any impairment of long-lived
assets for the Products and Systems reporting unit. We used income and market approaches to estimate the fair value of the
long-lived assets, which requires significant judgment in evaluation of the useful lives of the assets, economic and industry
trends, estimated future cash flows, discount rates, and other factors. The result of the analysis was an impairment of $2.4
million to software/technology, $0.2 million to customer relationships and less than $0.1 million to other intangibles, which are
included in the impairment charges line on the consolidated statements of income for the year ended December 31, 2017.
Amortization expense in each of the five years and thereafter subsequent to December 31, 2017 related to the Company’s
intangible assets is expected to be as follows:
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2018
2019
2020
2021
2022
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 workers' 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
$
$
10,117
8,952
7,483
6,411
6,076
24,700
63,739
December 31,
2017
2016
27,185
3,430
5,181
6,338
1,600
21,827
65,561
$
$
23,442
1,826
6,351
3,743
6,320
17,015
58,697
December 31,
2017
156,948
228
9,702
166,878
(2,358)
164,520
$
$
2016
82,776
320
4,200
87,296
(1,379)
85,917
$
$
$
$
On December 8, 2017, the Company entered into a Fourth Amended and Restated Credit Agreement (“Credit Agreement”). The
Credit Agreement increased the Company’s revolving line of credit from $175.0 million to $250.0 million and provides that
under certain circumstances the line of credit can be increased to $300.0 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 maturity date of the Credit Agreement is December 7, 2022. At December 31, 2017, the Company had borrowings of
$156.9 million and letters of credit of $4.9 million were outstanding under the Credit Agreement. The Company has capitalized
costs of $0.8 million associated with debt modifications.
Loans under the Credit Agreement bear interest at LIBOR plus an applicable LIBOR margin ranging from 1% to 2%, 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 interest-
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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 (h) certain amounts of EBITDA of acquired business for the
prior twelve months, plus (i) certain expenses related to the closing of the Credit Agreement, plus (j) non-cash expenses which
do not (in the current or any future period) represent a cash item (excluding non-cash gains which increase net income), plus
(k) non-recurring charges (not to exceed $5 million in the four consecutive quarters immediately preceding the date of
determination) for items such as severance, lease termination charges, asset write-offs and litigation settlements paid during the
period, all determined 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 2.75 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 and is guaranteed by some of our subsidiaries.
The Credit Agreement contains financial covenants requiring that the Company maintain a Funded Debt Leverage Ratio of no
greater than 3.5 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 Company can elect to increase the Funded Debt Leverage Ratio to 3.75 to 1 temporarily for four fiscal
quarters immediately following the fiscal quarter in which the Company acquires another business. The Company can make
this election twice during the term of the Credit Agreement.
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 or
repurchase our stock, 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 December 31, 2017, 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 are three years from the date of acquisition and bear interest at the prime rate for the Bank of
Canada, currently 3.2% as of December 31, 2017. Interest expense is recorded in the consolidated statements of income.
The Company's other debt includes local bank financing provided at the local subsidiary levels used to support working capital
requirements and fund capital expenditures. At December 31, 2017, there was approximately $9.7 million outstanding, payable
at various times from 2018 to 2029. Monthly payments range from $1 thousand to $18 thousand. Interest rates range from
0.6% to 6.2%.
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
December 31, 2017 are as follows:
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2018
2019
2020
2021
2022
Thereafter
Total
$
$
2,358
1,664
1,243
892
157,728
2,993
166,878
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
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.
Financial instruments measured at fair value on a recurring basis
The fair value of contingent consideration liabilities 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 applicable acquisition agreements.
The following table represents the changes in the fair value of Level 3 contingent consideration:
Balance at May 31, 2016
Acquisitions
Payments
Accretion of liability
Revaluation
Foreign currency translation
Balance at December 31, 2016
Acquisitions
Payments
Accretion of liability
Revaluation
Foreign currency translation
Balance at December 31, 2017
$
$
$
2,075
1,630
(795)
136
126
(78)
3,094
3,407
(560)
272
(735)
30
5,508
Financial instruments not measured at fair value on a recurring basis
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 issuances of debt.
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13. Share-Based Compensation
The Company has share-based incentive awards outstanding to its eligible employees and Directors under three employee stock
ownership plans: (i) the 2007 Stock Option Plan (the 2007 Plan), (ii) the 2009 Long-Term Incentive Plan (the 2009 Plan) and
(iii) the 2016 Long-Term Incentive Plan. No further awards may be granted under either the 2007 Plan or the 2009 Plan,
although awards granted under the 2007 Plan and 2009 Plan remain outstanding in accordance with their terms. Awards granted
under the 2016 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 2016 Plan allows for the
grant of awards of up to approximately 1,700,000 shares of common stock, of which 1,438,000 shares were available for future
grants as of December 31, 2017. As of December 31, 2017, there was an aggregate of approximately 2,130,000 stock options
outstanding and approximately 724,000 unvested restricted stock units outstanding under the 2009 Plan and the 2007 Plan.
Stock Options
For the year ended December 31, 2017 and the transition period ended December 31, 2016, the Company did not have any
share-based compensation expense related to stock option awards. For each of 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. No stock
options were granted during the year ended December 31, 2017, the transition period ended December 31, 2016 or the years
ended May 31, 2016 and 2015. As of December 31, 2017, no unrecognized compensation costs remained related to stock
option awards. Cash proceeds from, and the intrinsic value of stock options exercised during the year ended December 31,
2017, the transition period ended December 31, 2016 and the years ended May 31, 2016 and 2015 were as follows:
Cash proceeds from options exercised
Aggregate intrinsic value of options exercised
For the year ended
December 31,
For the Transition
Period ended
December 31,
For the year ended May 31,
2017
2016
2016
2015
$
$
275
580
$
604
993
$
543
658
750
563
A summary of the stock option activity, weighted average exercise prices, and options outstanding and exercisable as of
December 31, 2017, the transition period ended December 31, 2016 and the years ended May 31, 2016 and 2015 is as follows
(in thousands, except per share amounts):
For the year ended
December 31,
For the Transition
Period ended December
31,
For the year ended May 31,
2017
2016
2016
2015
Common
Stock
Options
Weighted
Average
Exercise
Price
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:
Granted
Exercised
Expired or forfeited
Outstanding at end of
year:
2,167
$ 13.33
2,232
$ 13.21
2,287
$ 13.13
2,352
$ 13.09
— $ —
(37) $
7.39
— $ —
— $
—
(65) $
9.27
— $
—
— $
(55) $
— $
—
9.87
—
— $
—
(65) $ 11.54
—
— $
2,130
$ 13.43
2,167
$ 13.33
2,232
$ 13.21
2,287
$ 13.13
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Range of Exercise Prices
$10.00-$11.54
$13.46-$22.35
For the year ended December 31, 2017
Options Outstanding
Options Exercisable
Total
Options
Outstanding
Weighted
Average
Remaining
Life (Years)
Weighted
Average
Exercise
Price
35
2,095
2,130
1.1
1.7
$
$
10.54
13.48
Weighted
Average
Exercise
Price
10.54
13.48
Number
Exercisable
$
$
35
2,095
2,130
Aggregate Intrinsic Value
$
21,374
$
21,374
Restricted Stock Unit Awards
The Company recognized approximately $4.5 million of share-based compensation for the year ended December 31, 2017,
$2.6 million of share-based compensation for the transition period ended December 31, 2016, $4.4 million of share-based
compensation in fiscal 2016 and $4.7 million of share-based compensation in fiscal 2015 related to restricted stock unit awards.
As of December 31, 2017, there were approximately $8.2 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 2.3 years. Approximately 185,000 restricted stock units vested in the year ended December 31, 2017, of which the fair
value of these units was $3.4 million. Approximately 207,000 restricted stock units vested in the transition period ended
December 31, 2016, of which the fair value of these units was $5.1 million. Approximately 223,000 restricted stock units
vested in fiscal 2016 and 232,000 restricted stock units vested in fiscal 2015. The fair value of these units was $3.5 million and
$5.2 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.
During the year ended December 31, 2017, the Company granted approximately 21,000 shares of fully-vested common stock to
its five non-employee directors, in connection with its non-employee director compensation plan, which shares had a grant date
fair value of approximately $0.4 million. During the transition period ended December 31, 2016, the Company granted
approximately 10,000 shares of fully-vested common stock to its five non-employee directors, in connection with its non-
employee director compensation plan, which shares had a grant date fair value of approximately $0.3 million. During the years
ended May 31, 2016 and 2015, the Company granted approximately 28,000 and 21,000 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 and $0.4 million, respectively, which is included in the share-
based compensation expense recorded during the years ended May 31, 2016 and 2015.
For the year ended
December 31,
For the transition
period ended December
31,
For the year ended May 31,
2017
2016
2016
2015
Weighted
Average
Grant-Date
Fair Value
Units
Weighted
Average
Grant-Date
Fair Value
Weighted
Average
Grant-Date
Fair Value
Units
Weighted
Average
Grant-Date
Fair Value
Units
Units
Outstanding at beginning of period:
Granted
Released
Forfeited
569
183
$
$
(185) $
(35) $
20.81
21.26
20.49
21.45
575
$
$
219
(207) $
(18) $
18.85
24.48
19.40
19.55
564
$
$
264
(223) $
(30) $
20.47
16.73
20.40
19.26
628
$
$
192
(232) $
(24) $
19.37
21.87
18.17
20.57
Outstanding at end of period:
532
$
21.05
569
$
20.81
575
$
18.85
564
$
20.47
Performance Restricted Stock Units
The Company maintains Performance Restricted Stock Units (PRSUs) that have been granted to select executives and senior
officers whose ultimate payout is based on the Company’s performance over a one-year period based on three metrics, as
defined: (1) Operating Income, (2) Adjusted EBITDAS and (3) Revenue. There is a discretionary portion of the PRSUs based
on individual performance, at the discretion of the Compensation Committee (Discretionary PRSUs). PRSUs and Discretionary
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PRSUs generally vest ratably on each of the first four anniversary dates upon completion of the performance period, for a total
requisite service period of up to five years and have no dividend rights.
PRSUs are equity-classified and compensation costs are initially measured using the fair value of the underlying stock at the
date of grant, assuming that the target performance conditions will be achieved. Cumulative compensation costs related to the
PRSUs are subsequently adjusted for changes in the expected outcomes of the performance conditions.
Discretionary PRSUs are liability-classified and adjusted to fair value (with a corresponding adjustment to compensation
expense) based upon the targeted number of shares to be awarded and the fair value of the underlying stock each reporting
period until approved by the Compensation Committee, at which point they are classified as equity.
A summary of the Company's Performance Restricted Stock Unit activity is presented below:
Outstanding at beginning of period:
Granted
Performance condition adjustments, net
Released
Forfeited
Outstanding at end of period:
For the year ended December 31,
2017
For the Transition Period ended
December 31, 2016
Weighted
Average
Grant-Date
Fair Value
Units
Weighted
Average
Grant-Date
Fair Value
Units
290
128
$
$
(68) $
(72) $
— $
278
$
16.01
20.42
20.55
15.82
—
17.00
328
105
$
$
(54) $
(89) $
— $
290
$
17.02
24.90
24.49
24.50
—
16.01
In fiscal 2014, the company granted one-year, two-year and three-year PRSUs to its executive and certain other senior officers.
These units had 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. 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. The one-year
and two-year awards related to market conditions were paid at 170% and 105%, respectively, of target, upon vesting during the
transition period ended December 31, 2016. 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 PRSUs 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 PRSUs 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 fiscal 2016 PRSUs increased by approximately 104,000 units to a total of 258,000 units, which represents Company
performance above target as well as individual performance, and was approved by the Compensation Committee in August
2016.
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For the transition period ended December 31, 2016, 105,000 PRSUs were granted. There was a 73,000 unit reduction to these
awards, which represents Company performance below target, during the transition period ended December 31, 2016. As of
December 31, 2016, the aggregate liability related to 12,000 outstanding Discretionary PRSUs was less than $0.1 million and is
classified within accrued expenses and other liabilities on the consolidated balance sheet. The Compensation Committee
approved these PSUs in the first quarter of 2017, which reduced them by 3,000 units. The discretionary portion of these
awards were reclassed from a liability to equity on the consolidated balance sheet upon Compensation Committee approval.
For the year ended December 31, 2017, 128,000 PRSUs were granted. There was a 65,000 unit reduction to these awards,
which represents Company performance below target, during the year ended December 31, 2017. As of December 31, 2017,
the aggregate liability related to 13,000 outstanding Discretionary PRSUs was less than $0.1 million and is classified within
accrued expenses and other liabilities on the consolidated balance sheet.
Compensation expense related to all PRSUs described above was $1.7 million, $1.7 million, $1.6 million and $1.5 million for
the year ended December 31, 2017, the transition period ended December 31, 2016 and the years ended May 31, 2016 and
2015, respectively. At December 31, 2017, there was $2.3 million of total unrecognized compensation costs related to
approximately 278,000 nonvested performance restricted stock units. These costs are expected to be recognized over a
weighted-average period of approximately 2.0 years.
For the year ended December 31, 2017, the transition period ended December 31, 2016 and the fiscal years ended May 31,
2016 and 2015, the income tax benefit recognized on all share based compensation arrangements referenced above was
approximately $2.2 million, $1.6 million, $2.2 million and $2.3 million, respectively.
14. Income Taxes
Income before provision for income taxes is as follows:
(Loss) income before provision for income taxes from:
U.S. operations
Foreign operations
(Loss) Earnings before income taxes
For the year
ended
December
31,
For the
Transition
Period ended
December
31,
For the year ended May 31,
2017
2016
2016
2015
$
$
(7,303) $
7,077
(226) $
5,116
10,365
15,481
$
$
27,772
10,643
38,415
$
$
26,893
(1,162)
25,731
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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
December
31,
For the
Transition
Period ended
December 31,
For the year ended May
31,
2017
2016
2016
2015
$
$
3,558
39
3,131
71
6,799
(3,857)
(810)
(437)
(5,104)
247
(4,857)
1,942
$
$
1,990
483
3,569
(39)
6,003
6
(28)
(514)
(536)
403
(133)
5,870
$
$
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
The provision for income taxes differs from the amount computed by applying the statutory federal tax rate to income tax as
follows:
Federal tax at statutory rate
State taxes, net of federal benefit
Foreign tax
Contingent consideration
Permanent differences
Transition tax, net of foreign tax credits
Federal tax rate change due to the Tax Act
Other
Change in valuation allowance
Total provision for income taxes
For the year ended December 31,
For the Transition period
ended December 31,
2017
2016
$
$
(79)
(502)
217
(63)
377
3,942
(1,956)
(241)
247
1,942
35.0 % $
5,418
35.0 %
221.6 %
(95.8)%
27.7 %
(166.4)%
(1,741.4)%
864.0 %
106.5 %
(109.1)%
296
(573)
(4)
373
—
—
(43)
403
1.9 %
(3.7)%
— %
2.4 %
— %
— %
(0.3)%
2.6 %
(857.9)% $
5,870
37.9 %
On December 22, 2017, the United States enacted fundamental changes to the federal tax law following the passage of the Tax
Act.
The Tax Act is complex and significantly changes the U.S. corporate tax system by, among other things, (a) reducing the
federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, (b) replacing the prior system of
taxing corporations on foreign earnings of their foreign subsidiaries when the earnings are repatriated with a partial territorial
tax system that provides a 100% dividends-received deduction (DRD) to domestic corporations for foreign-sourced dividends
received from 10%-or-more owned foreign corporations, (c) subjecting certain unrepatriated foreign earnings to a mandatory
one-time transition tax on post-1986 earnings and profits ("the transition tax"), and (d) further limiting a public entity's ability
to deduct compensation in excess of $1 million for covered employees.
Our income tax expense for 2017 was $1.9 million. This amount reflects a net tax benefit of $2.3 million as a result of the Tax
Act due to the remeasurement of federal deferred tax assets and liabilities from 35% to 21%. This amount also includes a
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Table of Contents
charge of $3.9 million due to the transition tax. Additionally, we incurred a charge attributable to reducing our deferred tax
assets by $0.3 million due to changes made to executive compensation rules pursuant to the Tax Act.
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
For the year ended May 31,
2016
2015
$
$
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 %
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
Foreign tax credit carryover
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
December 31,
2017
2016
$
838
265
2,255
2,560
3,729
1,004
463
618
4,080
484
16,296
(4,044)
12,252
(6,893)
(6,578)
(5,972)
(6)
(19,449)
(7,197) $
969
236
2,529
5,157
4,094
1,140
719
—
5,802
285
20,931
(3,896)
17,035
(8,655)
(13,586)
(5,051)
(11)
(27,303)
(10,268)
$
$
As of December 31, 2017, the Company had federal net operating loss carry forwards (NOLs) in the amount of approximately
$0.2 million which may be utilized subject to limitation under Internal Revenue Code section 382. The federal NOLs expire at
various times from 2031 to 2033. In addition, as of December 31, 2017, the Company had state and foreign NOLs of $38.4
million and $11.0 million, respectively. The state NOLs expire at various times from 2020 to 2037. Approximately $0.7 million
of the foreign NOLs expire at various times from 2022 to 2037, 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 December 31, 2017 and December 31, 2016, the Company has a valuation
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allowance of approximately $4.0 million and $3.9 million, respectively, primarily against certain state and foreign NOLs,
capital losses generated by the disposals of certain foreign subsidiaries and other specific deferred tax assets. The increase of
$0.1 million is primarily attributable to a $0.2 million increase in against state deferred tax assets and a net $0.1 million
decrease in federal valuation allowance attributable to the Tax Act. 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 the Company has deferred tax assets.
The following table summarizes the changes in the Company’s gross unrecognized tax benefits, excluding interest and
penalties:
For the year ended
December 31,
For the Transition
Period ended
December 31,
Balance at beginning of period
Additions for tax positions related to the current fiscal period
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 end of period
$
2017
2016
$
267
$
11
188
—
10
(198)
(122)
156
$
303
8
—
(11)
—
—
(33)
267
The Company has recorded the unrecognized tax benefits in other long-term liabilities in the consolidated balance sheets. As of
December 31, 2017 and December 31, 2016, there were approximately $0.2 million and $0.3 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 year ended
December 31, 2017, the transition period ended December 31, 2016 and the fiscal years ended May 31, 2016 and 2015. The
Company anticipates a decrease to its unrecognized tax benefits of less than $0.1 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, 2015 and generally is no longer subject to
state, local or foreign income tax examinations by tax authorities for years ending before May 31, 2014.
Net income (loss) of foreign subsidiaries was $4.1 million, $6.9 million, $7.5 million and $(0.8) million for the year ended
December 31, 2017, the transition period ended December 31, 2016, fiscal 2016 and 2015, respectively. Generally, it has been
our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. As previously noted, the
Tax Act made significant changes to the taxation of undistributed earnings, requiring that all previously untaxed earnings and
profits of our controlled foreign operations be subjected to the transition tax. Since these earnings have now been subjected to
U.S. federal tax they would only be potentially subject to limited other taxes, including foreign withholding and certain state
taxes. As of December 31, 2017, 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.
The Company considers the accounting of the effects of the Tax Act to be estimates. The provisional amounts recorded are
based on the Company’s current interpretation and understanding of the Tax Act and may change as the Company receives
additional clarification and implementation guidance and finalizes their analysis of all impacts and positions with regard to the
Tax Act. The Company will continue to gather and evaluate the data and guidance to refine the income tax impact of the Tax
Act. The effect of the change in federal corporate tax rate from 35% to 21% is subject to change based on resolution of
estimates used in determining the amounts of deferred tax assets and liabilities that were remeasured. Our calculation of the
transition tax is subject to further refinement as more information is gathered from our foreign subsidiaries, estimates used in
the calculation are resolved, and as states provide guidance on how the transition tax may or may not apply in their respective
jurisdictions. The reduction of the deferred tax asset related to executive compensation may be changed based upon actual
2018 compensation as compared to our projections of compensation that may be limited. Finally, the Tax Act also imposes a
minimum tax on certain foreign subsidiaries deemed to be in excess of a routine return based on tangible asset investment,
which is designed to discourage income shifting by subjecting certain foreign intangibles and other income to current U.S. tax.
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Effective for tax years beginning after 2017, U.S. shareholders of certain foreign corporations are subject to current U.S. tax on
their global intangible low-taxes income (GILTI). We have not yet evaluated our potential liability, if any, under the minimum
tax for GILTI in 2018 or future years. Accordingly, we have not yet made an accounting policy election either to account for
these effects in the future period when the tax arises or to recognize them as part of the deferred taxes. Pursuant to SAB 118,
the Company will complete the accounting for the tax effects of all of the provisions of the Tax Act within the required
measurement period not to extend beyond one year from the enactment date.
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 three 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 $3.7 million, $2.0 million, $3.5 million and $3.0 million for the year ended December 31, 2017, the transition period ended
December 31, 2016 and the years ended May 31, 2016 and 2015, respectively.
The Company participates with other employers in contributing to the Boilermaker-Blacksmith National Pension Trust (EIN
48-6168020) (“Boilermakers”) and Plumbers and Pipefitters National Pension Fund (EIN 52-6152779) (“Pipefitters”), multi-
employer defined benefit pension plans, which covers certain U.S. based union employees. The plans provide multiple plan
benefits with corresponding contribution rates that are collectively bargained between participating employers and their
affiliated Boilermakers and Pipefitters local unions. Both the Boilermakers and Pipefitters plans are between 65 percent and 80
percent funded as of the latest Form 5500 filed. The Company’s contributions to the Boilermakers and Pipefitters plans,
collectively, were $2.4 million, $1.5 million, $2.5 million and $2.5 million for the year ended December 31, 2017, the transition
period ended December 31, 2016 and the years ended May 31, 2016 and 2015. These contributions represented less than five
percent of total contributions made to the plans.
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
On August 17, 2016, the Company entered into an agreement with its then Chairman, CEO and Director, Dr. Sotirios
Vahaviolos, to purchase up to 1 million of his shares, commencing in October 2016. Refer to Note 20 for further details of the
treasury stock repurchases from Dr. Vahaviolos.
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 the year ended December 31, 2017 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 the year ended December 31, 2017 were approximately $0.2 million.
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 the year ended December 31, 2017 were approximately $0.1 million.
The Company receives benefits consulting services from Capital Management Enterprise (“CME”), which is owned by one of
its non-employee directors, Manuel N. Stamatakis. The Company does not pay any fees directly to CME. Any compensation
CME receives is from third-party benefit providers.
17. Obligations under Capital Leases
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The Company leases certain office space, and service equipment under capital leases, requiring monthly payments ranging
from less than $1 thousand to $73 thousand, including effective interest rates that range from approximately 1% to 7% expiring
through June 2029. The net book value of assets under capital lease obligations was $19.5 million and $17.6 million at
December 31, 2017 and December 31, 2016, respectively.
Scheduled future minimum lease payments subsequent to December 31, 2017 are as follows:
2018
2019
2020
2021
2022
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
$
$
5,899
3,788
2,485
1,778
634
760
15,344
(731)
14,613
(5,875)
8,738
The Company is party to various non-cancelable operating 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 December 31, 2017 are as follows:
2018
2019
2020
2021
2022
Thereafter
Total
$
$
11,542
8,888
6,902
4,881
4,304
12,915
49,432
Total rent expense was $11.8 million, $6.6 million, $11.2 million and $10.6 million for the year ended December 31, 2017, the
transition period ended December 31, 2016 and the years ended May 31, 2016 and 2015, respectively.
Legal Proceedings and Government Investigations
The Company is subject to periodic lawsuits, investigations and claims that arise in the ordinary course of business. The
Company cannot predict with certainty the ultimate resolution of lawsuits, 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
The Company was a defendant in a consolidated 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, originally filed in April 2015. The Company
settled the consolidated class and collective action that resulted in the Company recording a pre-tax charge of $6.3 million in
the fourth quarter of fiscal 2016, and the Company paid the settlement in the quarter ended March 31, 2017.
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The Company was a defendant in the lawsuit AGL Services Company v. Mistras Group, Inc., pending in U.S. District Court for
the Northern District of Georgia, filed November 2016. The case involved radiography work performed by the Company in
2012 on the construction of a pipeline project in the U.S. The owner of the pipeline project claimed damages of approximately
$5.8 million. At a trial concluded on October 26, 2017, the jury awarded the plaintiff its damage claim plus interest, which the
Company believes is fully covered by insurance.
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 Company recorded a
reserve for the full amount of the judgment during the three months ended June 30, 2016. The Company’s subsidiary appealed
the judgment and the entire judgment was overturned on appeal, however the full appeals process is not yet completed, and
therefore, we have not adjusted the reserve as of December 31, 2017.
The Company was a defendant in a lawsuit, Triumph Aerostructures, LLC d/b/a Triumph Aerostructures-Vought Aircraft
Division v. Mistras Group, Inc., pending in Texas State district court, 193rd Judicial District, Dallas County, Texas, filed
September 2016. The plaintiff alleged that in 2014 Mistras delivered a defective Ultrasonic inspection system and alleged
damages of approximately $2.3 million, the amount it paid for the system. In January 2018, the Company agreed to settle this
matter for a payment of $1.6 million and Mistras subsequently obtained ownership of the underlying ultrasonic inspection
system. A charge for $1.6 million was recorded in 2017 and payment was made in February 2018.
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.
Other Potential Contingencies
Some the Company’s workforce is unionized and the terms of employment for these workers are governed by collective
bargaining agreements, or CBAs. Under these CBAs, the Company’s subsidiaries are required to contribute to the national
pension funds for the unions representing these employees, which are multi-employer pension plans. The Company was
notified that a significant project was awarded to another contractor in early 2018, and as a result, the Company and its
subsidiaries may experience a significant reduction in the number of its employees covered by CBAs. Under certain
circumstances, such a reduction in the number of employees participating in a multi-employer pension plan could result in a
complete or partial withdrawal liability to these multi-employer pension plans under ERISA. Presently, the Company is
uncertain when or whether its subsidiaries will incur withdrawal liability and, if such liability is incurred, whether it will be
material.
Acquisition-related contingencies
The Company is liable for contingent consideration in connection with certain of its acquisitions. As of December 31, 2017,
total potential acquisition-related contingent consideration ranged from zero to $8.5 million and would be payable upon the
achievement of specific performance metrics by certain of the acquired companies over the next 2.5 years of operations. See
Note 7 - Acquisitions to these consolidated financial statements for further information with respect to the Company’s
acquisitions completed during the year ended December 31, 2017 and the transition period ended December 31, 2016.
19. Segment Disclosure
The Company’s three operating segments are:
•
Services. This segment provides asset protection solutions predominantly in North America, with the largest
concentration in the United States, followed by Canada, consisting primarily of non-destructive testing, and inspection
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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 other segments to select
markets within 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 December
31,
For the
Transition
Period ended
December 31,
For the year ended May
31,
2017
2016
2016
2015
$
$
543,565
144,265
23,297
(10,157)
700,970
$
$
293,218
104,013
14,541
(7,611)
404,161
$553,279
143,025
30,293
(7,416)
$719,181
$540,224
146,953
31,255
(7,180)
$711,252
For the year
ended
December 31,
For the
Transition
Period ended
December 31,
For the year ended May
31,
2017
2016
2016
2015
$
$
139,160
38,974
9,798
(220)
187,712
$
$
75,784
34,210
6,920
90
117,004
$ 145,262
43,613
14,022
111
$ 203,008
$135,201
34,572
14,314
646
$184,733
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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
For the year
ended
December 31,
2017
For the Transition
Period ended
December 31,
2016
For the year ended
May 31,
2016
2015
$
$
46,677
3,537
(16,991)
(29,063)
4,160
$
$
22,411
10,597
(254)
(15,221)
17,533
$ 52,552
9,293
2,688
(21,356)
$ 43,177
$ 49,142
(575)
2,461
(20,675)
$ 30,353
For the year
ended
December 31,
For the Transition
Period ended
December 31,
2017
2016
For the year ended
May 31,
2016
2015
$
$
21,649
7,768
2,180
(214)
31,383
$
$
12,765
5,306
1,372
(244)
19,199
$ 22,725
7,774
2,323
(348)
$ 32,474
$ 22,268
8,451
2,426
141
$ 33,286
December 31,
2017
2016
$
$
46,864
13,899
2,261
715
63,739
$
$
19,550
14,139
5,482
836
40,007
December 31,
2017
2016
$
$
377,585
150,779
12,733
13,344
554,441
$
$
291,539
130,427
28,964
18,497
469,427
Revenue and long-lived assets by geographic area was as follows:
Revenue
United States
Other Americas
Europe
Asia-Pacific
For the year ended
December 31,
2017
For the Transition
Period ended
December 31,
2016
For the year ended May 31,
2016
2015
466,683
86,870
132,421
14,996
700,970
$
$
256,926
41,777
91,847
13,611
404,161
$ 519,361
67,809
118,566
13,445
$ 719,181
$ 491,818
68,628
137,071
13,735
$ 711,252
$
$
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Long-lived assets
United States
Other Americas
Europe
December 31,
2017
2016
$ 237,616
36,011
80,693
$ 354,320
$ 186,960
29,065
67,072
$ 283,097
20. Repurchase of Common Stock
On October 7, 2015, the Company's Board of Directors approved a $50 million stock repurchase plan. As part of this plan, on
August 17, 2016, the Company entered into an agreement with its Chairman and then CEO, Dr. Sotirios Vahaviolos, to
purchase up to 1 million of his shares, commencing in October 2016. Pursuant to the agreement, in general, the Company
agreed to purchase from Dr. Vahaviolos up to $2 million of shares each month, at a 2% discount to the average daily price of
the Company's common stock for the preceding month. During the transition period ended December 31, 2016, the Company
purchased approximately 274,000 shares from Dr. Vahaviolos at an average price of $21.90 per share and an aggregate cost of
$6.0 million as well as 146,000 shares in the open market at an average price of $20.48 per share and an aggregate cost of
approximately $3.0 million. During the year ended December 31, 2017, the Company purchased approximately 726,000 shares
from Dr. Vahaviolos at an average price of $21.93 per share and an aggregate cost of $15.9 million. From the inception of the
plan through December 31, 2017, the Company purchased 1,000,000 shares from Dr. Vahaviolos at an average price of $21.92
per share for an aggregate cost of approximately $21.9 million.
The Company retired all of its repurchased shares during the fourth quarter of 2017 and they are not included in common stock
issued and outstanding as of December 31, 2017. As of December 31, 2017, approximately $25.1 million remained available to
repurchase shares under the stock repurchase plan.
21. TWELVE MONTHS ENDED DECEMBER 31, 2016 AND SEVEN MONTHS ENDED DECEMBER 31, 2015
COMPARATIVE DATA (Unaudited)
The condensed consolidated statement of income for the twelve months ended December 31, 2016 and the seven months ended
December 31, 2015 is as follows:
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Revenues
Cost of revenues
Depreciation
Gross profit
Selling, general and administrative expenses
Research and engineering
Depreciation and amortization
Litigation charges
Acquisition-related benefit, net
Income from operations
Interest expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income (loss) attributable to non-controlling interests
Net income available to Mistras Group, Inc. shareholders
Net income per share: Basic
Net income per share: Diluted
Weighted average shares outstanding:
Basic
Diluted
Twelve Months Ended
December 31, 2016
Seven Months Ended
December 31, 2015
$
$
$
$
(unaudited)
684,762
$
468,929
21,699
194,134
148,914
2,670
10,689
6,320
(5)
25,546
3,075
22,471
8,008
14,463
54
14,409
0.50
0.48
28,960
30,114
$
$
$
427,913
292,718
12,005
123,190
81,117
1,431
6,503
—
(959)
35,098
3,672
31,426
11,627
19,799
(15)
19,814
0.69
0.67
28,810
29,676
22. Selected Quarterly Financial Information (unaudited)
The following is a summary of the quarterly results of operations for calendar years 2017 and 2016.
Fiscal quarter ended
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
Revenues
Gross Profit
Income (loss) from operations
Net income (loss) attributable to Mistras Group, Inc.
Earnings (loss) per common share:
Basic
Diluted
$
$
$
$
187,643
$
179,570
$
170,439
$
50,319
6,282
47,897
(10,375)
46,343
5,003
884
$
(6,968)
$
2,217
$
0.03
0.03
$
$
(0.25)
(0.25)
$
$
0.08
0.07
$
$
163,318
43,153
3,250
1,692
0.06
0.06
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Fiscal quarter ended
Revenues
Gross Profit
Income from operations
Net income attributable to Mistras Group, Inc.
Earnings per common share:
Basic
Diluted
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
$
$
$
$
170,156
$
168,811
$
178,340
$
47,978
2,944
50,651
12,116
51,535
4,840
963
$
7,238
$
2,761
$
0.03
0.03
$
$
0.25
0.24
$
$
0.10
0.09
$
$
167,455
43,970
5,646
3,447
0.12
0.11
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 President and Chief Executive Officer and our Senior 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 President and Chief Executive Officer and our Senior Vice
President, Chief Financial Officer and Treasurer concluded that, as of December 31, 2017, 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 President and Chief Executive
Officer and our Senior Vice President, Chief Financial Officer and Treasurer, and effected by the Company’s 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 December 31, 2017.
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. We acquired three
entities during 2017, and management excluded from its assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2017, these entities’ internal control over financial reporting associated with total assets
of 4.0% and total revenues of 2.6% included in the consolidated financial statements of the Company as of and for the year
ended December 31, 2017. Based on that assessment, excluding the three entities acquired during 2017 as noted above, our
management concluded that, as of December 31, 2017, our internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, 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
There have been no changes in our internal control over financial reporting during the year ended December 31, 2017
that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
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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 2018 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 of this Annual Report.
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 2018 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 2018 annual meeting of shareholders.
Equity Compensation Plan Information
The following table provides certain information as of December 31, 2017 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)
2,130
$
13.43
Equity Compensation Plans Not Approved by
Security Holders
Total
—
2,130
$
—
13.43
________________________________________
(1) Includes all the Company’s plans: 2007 Stock Option Plan, 2009 Long-Term Incentive Plan and 2016 Long-Term
Incentive Plan.
1,438
—
1,438
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 2018 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 2018 annual shareholders meeting.
PART IV
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) The following financial statements are filed herewith in Item 8 of Part II above:
Report of independent registered public accounting firm
Consolidated Balance sheets as of December 31, 2017 and December 31, 2016
Consolidated Statements of (loss) income for the year ended December 31, 2017, the transition period ended
December 31, 2016 and the years ended May 31, 2016 and 2015
Consolidated Statements of comprehensive income (loss) for the year ended December 31, 2017, the transition
period ended December 31, 2016 and the years ended May 31, 2016 and 2015
Consolidated Statements of equity for the year ended December 31, 2017, the transition period ended December
31, 2016 and the years ended May 31, 2016 and 2015
Consolidated Statements of cash flows for the year ended December 31, 2017, the transition period ended
December 31, 2016 and the years ended May 31, 2016 and 2015
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.
2.1
3.1
3.2
3.3
4.1
10.1
10.2
10.3*
10.4
Description
Membership Interest Purchase Agreement, dated December 15, 2017, among Mistras Group, Inc., WPT
Holdings Inc., West Penn Non-Destructive Testing, LLC (formerly known as West Penn Non-
Destructive Testing, Inc.), N. David Campbell and James C. DeChellis III (filed as exhibit 2.1 to the
Current Report on Form 8-K filed on December 21, 2017 and incorporated herein by reference)
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)
Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation (filed as
exhibit 3.1 to the Quarterly Report on Form 10-Q filed on January 11, 2017 and incorporated herein by
reference)
Amended and Restated Bylaws, effective July 20, 2016 (filed as exhibit 3.1 to the Quarterly Report on
Form 10-Q filed on October 7, 2016 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)
Fourth Amended and Restated Credit Agreement dated December 8, 2017
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)
89
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10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19*
21.1*
23.1*
24.1*
31.1*
31.2*
32.1**
32.2**
Agreement, dated August 17, 2016, between registrant and Sotirios Vahaviolos (filed as exhibit 10.1 to
the Quarterly Report on Form 10-Q filed on October 7, 2016 and incorporated herein by reference)
Joint stipulation of settlement and release between Registrant and Plantiffs, with respect to Visceral and
Kruger, et al. v. Mistras Group, Inc., et al. (filed as exhibit 10.2 to the Quarterly Report on Form 10-Q
filed on October 7, 2016 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)
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)
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)
2016 Long-Term Incentive Plan (filed as exhibit B to the Definitive Proxy Statement dated September 7,
2016 and incorporated herein by reference)
Form of Restricted Stock Unit Certificate for awards under the 2016 Long-Term Incentive Plan (filed as
Exhibit 10.16 to Transition Report on Form 10-K filed on March 20, 2017 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
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
90
Table of Contents
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 10.7 to 10.19 are management contracts or compensatory plans, contracts, or arrangements.
* Filed herewith.
** Furnished herewith.
91
Table of Contents
ITEM 16. FORM 10-K SUMMARY
None.
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.
SIGNATURES
MISTRAS GROUP, INC.
/s/ Dennis Bertolotti
By:
Dennis Bertolotti
President and Chief Executive Officer
Date: March 14, 2018
We, the undersigned directors and officers of Mistras Group, Inc., hereby severally constitute Dennis Bertolotti, Edward J.
Prajzner 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.
92
Table of Contents
Signature
Title
Date
/s/Dr. Sotirios J. Vahaviolos
Dr. Sotirios J. Vahaviolos
/s/Dennis Bertolotti
Dennis Bertolotti
/s/ Edward J. Prajzner
Edward J. Prajzner
/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
Executive Chairman and Director
March 14, 2018
President, Chief Executive Officer and Director
(Principal Executive Officer)
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
March 14, 2018
Senior Vice President, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer)
Director
Director
Director
Director
Director
Director
93
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S TOCK PRI CE PERFORM ANC E GR APH
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, 2012 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 67 Month Cumulative Total Return
Assumes Initial Investment of $100
December 2017
250.00
200.00
150.00
100.00
50.00
0.00
5/31/2012
5/31/2013
5/31/2014
5/31/2015
5/31/2016
12/31/2016
12/31/2017
Mistras Group, Inc.
Russell 3000 Index
Peer Group
5/31/2012
5/31/2013
5/31/2014
5/31/2015
12/31/2016
12/31/2017
Mistras Group, Inc.
Russell 3000 Index
New Peer Group
Return %
Cum $
Return %
Cum $
Return %
Cum $
Peer Group +
Mistras Group, Inc.
Return %
Cum $
100.00
100.00
100.00
100.00
-5.15
94.85
27.89
127.89
38.46
138.46
31.19
131.19
6.45
100.98
20.57
154.20
30.40
180.56
27.47
167.22
-18.67
82.12
11.85
172.48
-11.81
159.22
-12.52
146.27
3.51
113.93
9.02
188.43
16.15
200.44
14.69
186.03
-8.61
104.12
21.13
228.25
-6.52
187.38
-6.74
173.50
Peer group index uses beginning-of-period market capitalization weighting.
COMPANY AND SHA REHOLD ER INFO RM ATI ON
LEADERSHIP TEAM
Dr. Sotirios J. Vahaviolos
Executive Chairman and Founder
Dennis M. Bertolotti
President and Chief Executive Officer
Jonathan H. Wolk
Senior Executive Vice President and
Chief Operating Officer
Michael J. Lange
Vice Chairman; Senior Executive Vice President of
Business Development and Strategic Planning
Michael C. Keefe
Executive Vice President,
General Counsel and Secretary
Edward J. Prajzner
Senior Vice President,
Chief Financial Officer and Treasurer
Chris Smith
Group Vice President Corporate Compliance
Julie Marini
Group Vice President of Human Resources
STOCK LISTING
The Company’s common stock is listed and
traded on the New York Stock Exchange under the
symbol “MG”.
INVESTOR RELATIONS
Security analysts, investors, stockbrokers,
portfolio managers and other investors seeking
additional information about MISTRAS Group
should contact Edward J. Prajzner, Senior Vice
President, Chief Financial Officer and Treasurer at
Corporate Headquarters.
BOARD OF DIRECTORS
ANNUAL MEETING
Dr. Sotirios J. Vahaviolos
Executive Chairman and Founder
Michael J. Lange
Vice Chairman; Senior Executive Vice President of
Business Development and Strategic Planning
Dennis M. Bertolotti
President and Chief Executive Officer
Nicholas DeBenedictis
Chairman Emeritus 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
Manuel Stamatakis
Chairman and Chief Executive Officer
of Capital Management Enterprises
W. Curtis Weldon
Former US Congressman 7th District and
Founder of Jenkins Hill International
SHAREHOLDER COMMUNICATION
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 2017 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 website.
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
The 2017 Annual Meeting of Shareholders will be
held at 2:00 p.m. local time on May 15, 2018, at
Corporate Headquarters, 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.
WEBSITE
www.mistrasgroup.com
MISTRAS Group’s website offers financial
information and facts about the Company and
its products, systems and services. Website
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 website at
mistrasgroup.com/locations.
One Source for
Asset Protection
Solutions
MISTRAS GROUP, INC.
A leading “one source” global provider
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MG
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Scan code with
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for MG Investor
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