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| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
August 31,November 30, 2014oo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
08550 (Address of principal executive offices) (Zip Code) (Do not check if a smaller reporting company) (unaudited) August 31, 2014 May 31, 2014 ASSETS Current Assets Cash and cash equivalents $ 12,496 $ 10,020 Accounts receivable, net 142,643 137,824 Inventories 11,537 11,376 Deferred income taxes 3,844 3,283 Prepaid expenses and other current assets 13,126 12,626 Total current assets 183,646 175,129 Property, plant and equipment, net 85,322 77,811 Intangible assets, net 68,606 57,875 Goodwill 170,887 130,516 Deferred income taxes 1,324 1,344 Other assets 1,469 1,297 Total assets $ 511,254 $ 443,972 LIABILITIES AND EQUITY Current Liabilities Accounts payable $ 14,852 $ 14,978 Accrued expenses and other current liabilities 56,059 54,650 Current portion of long-term debt 22,536 8,058 Current portion of capital lease obligations 7,120 7,251 Income taxes payable 1,588 1,854 Total current liabilities 102,155 86,791 Long-term debt, net of current portion 113,571 68,590 Obligations under capital leases, net of current portion 13,550 13,664 Deferred income taxes 22,306 15,521 Other long-term liabilities 16,148 17,014 Total liabilities 267,730 201,580 Commitments and contingencies Equity Preferred stock, 10,000,000 shares authorized — — Common stock, $0.01 par value, 200,000,000 shares authorized 286 284 Additional paid-in capital 203,195 201,831 Retained earnings 43,166 41,500 Accumulated other comprehensive loss (3,416 ) (1,511 ) Total Mistras Group, Inc. stockholders’ equity 243,231 242,104 Noncontrolling interests 293 288 Total equity 243,524 242,392 Total liabilities and equity $ 511,254 $ 443,972 Three months ended August 31, 2014 2013 Revenues: Services $ 159,309 $ 128,342 Products and systems 7,264 7,496 Total revenues 166,573 135,838 Cost of revenues: Cost of services 116,254 88,624 Cost of products and systems sold 3,468 3,629 Depreciation related to services 4,582 4,050 Depreciation related to products and systems 275 258 Total cost of revenues 124,579 96,561 Gross profit 41,994 39,277 Selling, general and administrative expenses 35,220 28,699 Research and engineering 649 643 Depreciation and amortization 3,422 2,457 Acquisition-related (benefit), net (961 ) (2,097 ) Income from operations 3,664 9,575 Interest expense 905 745 Income before provision for income taxes 2,759 8,830 Provision for income taxes 1,088 3,195 Net income 1,671 5,635 Less: net (income) loss attributable to noncontrolling interests, net of taxes (5 ) 6 Net income attributable to Mistras Group, Inc. $ 1,666 $ 5,641 Earnings per common share Basic $ 0.06 $ 0.20 Diluted $ 0.06 $ 0.19 Weighted average common shares outstanding: Basic 28,477 28,241 Diluted 29,552 29,109 Three months ended August 31, 2014 2013 Net income $ 1,671 $ 5,635 Other comprehensive (loss)/income: Foreign currency translation adjustments (1,905 ) (265 ) Comprehensive income (234 ) 5,370 less: comprehensive (income) loss attributable to noncontrolling interest (5 ) 6 Comprehensive income attributable to Mistras Group, Inc. $ (239 ) $ 5,376 Three months ended August 31, 2014 2013 Cash flows from operating activities Net income $ 1,671 $ 5,635 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 8,279 6,765 Deferred income taxes 6,456 866 Share-based compensation expense 2,167 1,707 Fair value adjustment to contingent consideration liabilities (1,396 ) (2,165 ) Other 430 (177 ) Changes in operating assets and liabilities, net of effect of acquisitions of businesses: Accounts receivable 905 1,794 Inventories 1,431 (493 ) Prepaid expenses and other current assets 56 (818 ) Other assets (51 ) (126 ) Accounts payable (1,749 ) 126 Accrued expenses and other current liabilities (2,637 ) (1,569 ) Income taxes payable (1,047 ) (7 ) Net cash provided by operating activities 14,515 11,538 Cash flows from investing activities Purchase of property, plant and equipment (3,804 ) (2,514 ) Purchase of intangible assets (358 ) (142 ) Acquisition of businesses, net of cash acquired (36,801 ) — Proceeds from sale of equipment 318 140 Net cash used in investing activities (40,645 ) (2,516 ) Cash flows from financing activities Repayment of capital lease obligations (2,104 ) (1,893 ) Repayment of long-term debt (1,875 ) (911 ) Net borrowings against revolver 35,558 (6,569 ) Payment of contingent consideration for business acquisitions — (125 ) Taxes paid related to net share settlement of share-based awards (1,427 ) (998 ) Excess tax benefit from share-based compensation 337 124 Proceeds from the exercise of stock options — 303 Net cash provided by (used in) financing activities 30,489 (10,069 ) Effect of exchange rate changes on cash and cash equivalents (1,883 ) 178 Net change in cash and cash equivalents 2,476 (869 ) Cash and cash equivalents Beginning of period 10,020 7,802 End of period $ 12,496 $ 6,933 Supplemental disclosure of cash paid Interest $ 885 $ 732 Income taxes $ 2,135 $ 1,346 Noncash investing and financing Equipment acquired through capital lease obligations $ 1,951 $ 2,475 Issuance of notes payable $ 20,000 $ — Three months ended August 31, 2014 2013 Cash proceeds from options exercised $ — $ 303 Aggregate intrinsic value of options exercised $ — $ 326 The one-year market condition of the fiscal 2014 awards was achieved and will payout at 170% of target once the requisite service period is complete. Three months ended August 31, 2014 2013 Basic earnings per share Numerator: Net income attributable to Mistras Group, Inc. $ 1,666 $ 5,641 Denominator: Weighted average common shares outstanding 28,477 28,241 Basic earnings per share $ 0.06 $ 0.20 Diluted earnings per share: Numerator: Net income attributable to Mistras Group, Inc. $ 1,666 $ 5,641 Denominator: Weighted average common shares outstanding 28,477 28,241 Dilutive effect of stock options outstanding 834 723 Dilutive effect of restricted stock units outstanding 241 145 29,552 29,109 Diluted earnings per share $ 0.06 $ 0.19 to continue its market expansion strategy. The Company’s International Segment completed an acquisition of an asset inspection business located in the United Kingdom. common stock in exchange for $1.5 million in cash. Fiscal 2015 2014 Number of Entities 3 2 Consideration transferred: Cash paid $ 33,970 $ 3,140 Notes payable to seller and other liabilities assumed 22,649 — Contingent consideration 1,373 297 Consideration transferred 57,992 3,437 Current assets 9,745 366 Property, plant and equipment 7,835 212 Current deferred tax asset 481 –– Intangibles 14,150 2,159 Goodwill 41,683 815 Current liabilities (10,134 ) (3 ) Long-term deferred tax liability (5,768 ) (112 ) Net assets acquired $ 57,992 $ 3,437 During the three and six month $0.8 million and $3.0 million, respectively. August 31, 2014 May 31, 2014 Trade accounts receivable $ 145,254 $ 140,120 Allowance for doubtful accounts (2,611 ) (2,296 ) Total $ 142,643 $ 137,824 August 31, 2014 May 31, 2014 Raw materials $ 3,805 $ 3,663 Work in process 1,750 2,069 Finished goods 3,732 3,462 Services-related consumable supplies 2,250 2,182 Total $ 11,537 $ 11,376 Useful Life (Years) August 31, 2014 May 31, 2014 Land $ 1,931 $ 1,938 Buildings and improvements 30-40 22,736 22,983 Office furniture and equipment 5-8 7,645 7,169 Machinery and equipment 5-7 156,639 144,798 188,951 176,888 Accumulated depreciation and amortization (103,629 ) (99,077 ) Property, plant and equipment, net $ 85,322 $ 77,811 Inventories Depreciation expense for the six months ended November 30, 2014 and 2013 was $10.9 million and $9.2 million, respectively. August 31, 2014 May 31, 2014 Useful Life Gross Accumulated Net Gross Accumulated Net Customer relationships 5-12 $ 88,859 $ (36,635 ) $ 52,224 $ 82,395 $ (34,636 ) $ 47,759 Software/Technology 3-15 15,371 (9,400 ) 5,971 15,328 (9,172 ) 6,156 Covenants not to compete 2-5 11,516 (8,082 ) 3,434 9,471 (7,882 ) 1,589 Other 2-5 10,760 (3,783 ) 6,977 5,869 (3,498 ) 2,371 $ 126,506 $ (57,900 ) $ 68,606 $ 113,063 $ (55,188 ) $ 57,875 Amortization expense for the six months ended November 30, 2014 and 2013 was $5.8 million and $4.3 million, respectively. August 31, 2014 May 31, 2014 Accrued salaries, wages and related employee benefits $ 26,128 $ 26,236 Contingent consideration, current portion 5,564 4,778 Accrued workers’ compensation and health benefits 4,725 3,661 Deferred revenue 2,750 2,659 Other accrued expenses 16,892 17,316 Total $ 56,059 $ 54,650 August 31, 2014 May 31, 2014 Senior credit facility $ 96,706 $ 61,148 Notes payable 34,160 10,512 Other 5,241 4,988 Total debt 136,107 76,648 Less: Current portion (22,536 ) (8,058 ) Long-term debt, net of current portion $ 113,571 $ 68,590 Notes Payable and Other August 31, 2014 Level 1 Level 2 Level 3 Total Liabilities: Contingent consideration $ — $ — $ 14,325 $ 14,325 Total Liabilities $ — $ — $ 14,325 $ 14,325 May 31, 2014 Level 1 Level 2 Level 3 Total Liabilities: Contingent consideration $ — $ — $ 14,145 $ 14,145 Total Liabilities $ — $ — $ 14,145 $ 14,145 considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the applicable acquisition agreements. Three months ended August 31, 2014 2013 Revenues Services $ 121,932 $ 95,810 International 40,038 37,759 Products and Systems 6,567 6,585 Corporate and eliminations (1,964 ) (4,316 ) $ 166,573 $ 135,838 Three months ended August 31, 2014 2013 Gross profit Services $ 29,771 $ 26,747 International 9,468 10,120 Products and Systems 2,664 2,384 Corporate and eliminations 91 26 $ 41,994 $ 39,277 Three months ended August 31, 2014 2013 Income (loss) from operations Services $ 8,880 $ 10,846 International (699 ) 1,815 Products and Systems (433 ) 591 Corporate and eliminations (4,084 ) (3,677 ) $ 3,664 $ 9,575 Three months ended August 31, 2014 2013 Depreciation and amortization Services $ 5,385 $ 4,235 International 2,161 1,922 Products and Systems 596 583 Corporate and eliminations 137 25 $ 8,279 $ 6,765 August 31, 2014 May 31, 2014 Goodwill Services $ 113,808 $ 73,767 International 43,882 43,552 Products and Systems 13,197 13,197 $ 170,887 $ 130,516 August 31, 2014 May 31, 2014 Total assets Services $ 324,564 $ 249,378 International 149,158 155,571 Products and Systems 36,011 38,041 Corporate and eliminations 1,521 982 $ 511,254 $ 443,972 Three months ended August 31, 2014 2013 Revenues United States $ 111,940 $ 83,157 Other Americas 14,298 13,420 Europe 36,645 35,406 Asia-Pacific 3,690 3,855 $ 166,573 $ 135,838 Three months ended August 31, 2014 2013 ($ in thousands) Revenues $ 166,573 $ 135,838 Gross profit 41,994 39,277 Gross profit as a % of Revenue 25 % 29 % Total operating expenses 38,330 29,702 Operating expenses as a % of Revenue 23 % 22 % Income from operations 3,664 9,575 Income from Operations as a % of Revenue 2 % 7 % Interest expense 905 745 Income before provision for income taxes 2,759 8,830 Provision for income taxes 1,088 3,195 Net income 1,671 5,635 Less: net income attributable to noncontrolling interests, net of taxes (5 ) 6 Net income attributable to Mistras Group, Inc. $ 1,666 $ 5,641 Three months ended August 31, 2014 2013 ($ in thousands) EBITDA and Adjusted EBITDA data Net income attributable to Mistras Group, Inc. $ 1,666 $ 5,641 Interest expense 905 745 Provision for income taxes 1,088 3,195 Depreciation and amortization 8,279 6,765 EBITDA $ 11,938 $ 16,346 Share-based compensation expense 2,167 1,707 Acquisition-related expense, net (961 ) (2,097 ) Adjusted EBITDA $ 13,144 $ 15,956 which we note. Later in Revenues were $373.5 million for the six months ended November 30, 2014 compared to $292.6 million for the six months ended November 30, 2013. Three months ended August 31, 2014 2013 ($ in thousands) Revenues Services $ 121,932 $ 95,810 International 40,038 37,759 Products and Systems 6,567 6,585 Corporate and eliminations (1,964 ) (4,316 ) $ 166,573 $ 135,838 Three months ended August 31, 2014 2013 ($ in thousands) Revenue growth $ 30,735 $ 22,451 % Growth over prior year 22.6 % 19.8 % Comprised of: % of organic growth 8.6 % 4.6 % % of acquisition growth 12.7 % 15.6 % % foreign exchange increase 1.3 % (0.4 )% 22.6 % 19.8 % our Acoustic Emission product line. Three months ended August 31, 2014 2013 ($ in thousands) Gross profit Services $ 29,771 $ 26,747 International 9,468 10,120 Products and Systems 2,664 2,384 Corporate and eliminations 91 26 $ 41,994 $ 39,277 cost reductions and higher margin sales. (benefit), net, to income from Three months ended August 31, 2014 2013 ($ in thousands) Services: Income from operations before acquisition-related expense, net $ 9,141 $ 11,015 Acquisition-related expense, net 261 169 Income from operations 8,880 10,846 International: Income from operations before acquisition-related expense (benefit), net $ (588 ) $ 1,345 Acquisition-related expense (benefit), net 111 (470 ) (Loss) Income from operations (699 ) 1,815 Products and Systems: Loss from operations before acquisition-related (benefit), net $ (433 ) $ (425 ) Acquisition-related (benefit), net — (1,016 ) (Loss) Income from operations (433 ) 591 Corporate and Eliminations: Loss from operations before acquisition-related (benefit), net $ (5,417 ) $ (4,457 ) Acquisition-related (benefit), net (1,333 ) (780 ) Loss from operations (4,084 ) (3,677 ) Total Company Income from operations before acquisition-related (benefit), net $ 2,703 $ 7,478 Acquisition-related (benefit), net $ (961 ) $ (2,097 ) Income from operations $ 3,664 $ 9,575 operations for each of the Company's three segments and for the Company in total: headcount and recent acquisitions. Three months ended August 31 2014 2013 ($ in thousands) Net cash provided by (used in): Operating Activities $ 14,515 $ 11,538 Investing Activities (40,645 ) (2,516 ) Financing Activities 30,489 (10,069 ) Effect of exchange rate changes on cash (1,883 ) 178 Net change in cash and cash equivalents $ 2,476 $ (869 ) Cash Balance and Credit Facility Borrowings Credit Agreement. Fiscal Month Ending Total Number of Shares (or Average Price Paid per August 31, 2014 65,757 $ 21.70 Description 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 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 By: /s/ Jonathan H. Wolk Jonathan H. Wolk Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer and duly authorized officer)Delaware22-3341267Delaware 22-3341267 xý Yes o Noxý Yes o Noxý NoOctoberJanuary 1, 2014,2015, the registrant had 28,617,15828,623,549 shares of common stock outstanding.PAGEPAGE 2525252525252527 (unaudited) November 30, 2014 May 31, 2014 ASSETS Current Assets Cash and cash equivalents $ 19,599 $ 10,020 Accounts receivable, net 164,888 137,824 Inventories 12,188 11,376 Deferred income taxes 3,775 3,283 Prepaid expenses and other current assets 15,536 12,626 Total current assets 215,986 175,129 Property, plant and equipment, net 82,266 77,811 Intangible assets, net 61,543 57,875 Goodwill 169,088 130,516 Deferred income taxes 1,301 1,344 Other assets 1,887 1,297 Total assets $ 532,071 $ 443,972 LIABILITIES AND EQUITY Current Liabilities Accounts payable $ 15,558 $ 14,978 Accrued expenses and other current liabilities 54,594 54,650 Current portion of long-term debt 17,988 8,058 Current portion of capital lease obligations 6,968 7,251 Income taxes payable 2,133 1,854 Total current liabilities 97,241 86,791 Long-term debt, net of current portion 137,080 68,590 Obligations under capital leases, net of current portion 12,968 13,664 Deferred income taxes 20,369 15,521 Other long-term liabilities 14,699 17,014 Total liabilities 282,357 201,580 Commitments and contingencies Equity Preferred stock, 10,000,000 shares authorized — — Common stock, $0.01 par value, 200,000,000 shares authorized 286 284 Additional paid-in capital 204,987 201,831 Retained earnings 53,593 41,500 Accumulated other comprehensive loss (9,427 ) (1,511 ) Total Mistras Group, Inc. stockholders’ equity 249,439 242,104 Noncontrolling interests 275 288 Total equity 249,714 242,392 Total liabilities and equity $ 532,071 $ 443,972 Three months ended November 30, Six months ended November 30, 2014 2013 2014 2013 Revenue $ 206,893 $ 156,755 $ 373,466 $ 292,593 Cost of revenue 142,940 104,494 262,662 196,747 Depreciation 4,914 4,284 9,771 8,592 Gross profit 59,039 47,977 101,033 87,254 Selling, general and administrative expenses 37,180 29,849 72,400 58,548 Research and engineering 629 786 1,278 1,429 Depreciation and amortization 3,472 2,501 6,894 4,958 Acquisition-related expense (benefit), net (434 ) (411 ) (1,395 ) (2,508 ) Income from operations 18,192 15,252 21,856 24,827 Interest expense 1,352 772 2,257 1,517 Income before provision for income taxes 16,840 14,480 19,599 23,310 Provision for income taxes 6,428 5,196 7,516 8,391 Net income 10,412 9,284 12,083 14,919 Less: net loss (income) attributable to noncontrolling interests, net of taxes 15 (27 ) 10 (21 ) Net income attributable to Mistras Group, Inc. $ 10,427 $ 9,257 $ 12,093 $ 14,898 Earnings per common share Basic $ 0.36 $ 0.33 $ 0.42 $ 0.53 Diluted $ 0.35 $ 0.32 $ 0.41 $ 0.51 Weighted average common shares outstanding: Basic 28,619 28,378 28,547 28,309 Diluted 29,397 29,102 29,551 29,147 Three months ended November 30, Six months ended November 30, 2014 2013 2014 2013 Net income $ 10,412 $ 9,284 $ 12,083 $ 14,919 Other comprehensive (loss)/income: Foreign currency translation adjustments (6,011 ) 2,697 (7,916 ) 2,432 Comprehensive income 4,401 11,981 4,167 17,351 less: comprehensive (income) loss attributable to noncontrolling interest 15 (27 ) 10 (21 ) Comprehensive income attributable to Mistras Group, Inc. $ 4,416 $ 11,954 $ 4,177 $ 17,330 Six months ended November 30, 2014 2013 Cash flows from operating activities Net income $ 12,083 $ 14,919 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 16,665 13,550 Deferred income taxes 1,192 695 Share-based compensation expense 4,257 2,747 Fair value adjustment to contingent consideration liabilities (808 ) (2,976 ) Other 968 211 Changes in operating assets and liabilities, net of effect of acquisitions of businesses: Accounts receivable (24,196 ) (12,498 ) Inventories 601 (265 ) Prepaid expenses and other current assets (2,952 ) (2,802 ) Other assets (478 ) (22 ) Accounts payable (666 ) 2,524 Accrued expenses and other current liabilities (3,041 ) 124 Income taxes payable (395 ) (573 ) Net cash provided by operating activities 3,230 15,634 Cash flows from investing activities Purchase of property, plant and equipment (7,862 ) (8,189 ) Purchase of intangible assets (433 ) (275 ) Acquisition of businesses, net of cash acquired (32,967 ) (1,507 ) Proceeds from sale of equipment 596 734 Acquisition-related deposit — (11,000 ) Net cash used in investing activities (40,666 ) (20,237 ) Cash flows from financing activities Repayment of capital lease obligations (4,183 ) (3,757 ) Repayment of long-term debt (9,854 ) (4,105 ) Net borrowings against revolver 62,648 22,013 Payment of contingent consideration for business acquisitions (700 ) (500 ) Taxes paid related to net share settlement of share-based awards (1,384 ) (1,005 ) Excess tax benefit from share-based compensation 283 122 Proceeds from the exercise of stock options — 362 Net cash provided by (used in) financing activities 46,810 13,130 Effect of exchange rate changes on cash and cash equivalents 205 (89 ) Net change in cash and cash equivalents 9,579 8,438 Cash and cash equivalents Beginning of period 10,020 7,802 End of period $ 19,599 $ 16,240 Supplemental disclosure of cash paid Interest $ 1,815 $ 1,666 Income taxes $ 8,028 $ 7,570 Noncash investing and financing Equipment acquired through capital lease obligations $ 3,533 $ 3,443 Issuance of notes payable $ 20,500 $ — &and Basis of Presentationone-monthone month lag. Therefore, in the quarter and year of acquisition, results of acquired subsidiaries in the International segment are generally included in consolidated results for one less month than the actual number of months from the acquisition date to the end of the reporting period. Management does not believe that any events occurred during the one-month lag period that would have a material effect on the Company’s consolidated financial statements.(“ASU”)(ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.first quarterthree months ended November 30, 2014 and 2013, the Company recognized share-based compensation expense related to stock option awards of fiscal 2015less than $0.1 million and $0.1 million, respectively. For the six months ended November 30, 2014 and 2013, the Company recognized share-based compensation expense related to stock option awards of less than $0.1 million and $0.7 million respectively. As of August 31,November 30, 2014, there was less than $0.1 million of unrecognized compensation costs, net of estimated forfeitures, related to stock option awards, which are expected to be recognized over a remaining weighted average period of 1.51.3 years. Cash proceeds from, and the aggregate intrinsic value of, stock options exercised during the three months ended August 31, 2014 and 2013 were as follows:threesix months ended August 31,November 30, 2014 and 2013.The approximately $1.1 million and $0.8 million during the first quarter of fiscal 2015 and 2014, respectively, in share-based compensation expense related to restricted stock unit awards.awards of $1.2 million and $1.1 million, respectively. For the six months ended November 30, 2014 and 2013, the Company recognized share-based compensation expense related to restricted stock unit awards of $2.3 million and $1.9 million, respectively. As of August 31,November 30, 2014, there was approximately $11.1$10.2 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 2.82.6 years.approximately $0.2 million for each period respectively, which was recorded as share-based compensation expense during the quartersix months ended August 31,November 30, 2014 and 2013.quarterhalf of fiscal 2015 and 2014, respectively, approximately 217,000226,000 and 175,000 restricted stock units, respectively, vested. The fair value of these units was $4.7$4.9 million and $3.2 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.2014,2015, the company granted performance restricted stock units to its executive and certain other senior officers. These units have requisite service (vesting) periods of three years and have no dividend rights. CompensationFor the three months ended November 30, 2014, the Company recognized share-based compensation expense related to performance restricted stock units was $0.8 million for the first quarter of fiscal 2015.$0.1 million. At August 31,November 30, 2014, there was $6.6$1.8 million of total unrecognized compensation costs related to approximately 423,000115,000 non-vested performance restricted stock units. These costs are expected to be recognized over a weighted-average period of approximately 2.02.8 years. The actual payout of these units will vary based on the Company’s performance over one, two and three-year periodsa three -year period (based on pre-established targets) and a market condition modifier based on total shareholder return (TSR) compared to an industry peer group. Compensation cost is initially measured assuming that the target performance condition will be achieved. However, compensation cost related to the performance condition is adjusted for subsequent changes in the expected outcome of the performance condition. Compensation cost related to the TSR condition is fixed at the measurement date, and not subsequently adjusted. Three months ended November 30, Six months ended November 30, 2014 2013 2014 2013 Basic earnings per share Numerator: Net income attributable to Mistras Group, Inc. $ 10,427 $ 9,257 $ 12,093 $ 14,898 Denominator: Weighted average common shares outstanding 28,619 28,378 28,547 28,309 Basic earnings per share $ 0.36 $ 0.33 $ 0.42 $ 0.53 Diluted earnings per share: Numerator: Net income attributable to Mistras Group, Inc. $ 10,427 $ 9,257 $ 12,093 $ 14,898 Denominator: Weighted average common shares outstanding 28,619 28,378 28,547 28,309 Dilutive effect of stock options outstanding 675 697 763 702 Dilutive effect of restricted stock units outstanding 103 27 241 136 29,397 29,102 29,551 29,147 Diluted earnings per share $ 0.35 $ 0.32 $ 0.41 $ 0.51 quarterhalf of fiscal 2015, the Company completed three acquisitions. The Company purchased The NACHER Corporation, located in Louisiana, a provider of maintenance and inspection services primarily on offshore platforms. This acquisition expands the service offerings within the Services segment, allowing the Company to provide services to the upstream operations of its customers. The Company also purchased ana group of asset protection businesses located in Quebec, CanadaMistras Group, Inc. and SubsidiariesNotes to Unaudited Condensed Consolidated Financial Statements(tabular dollars in thousands, except per share data)$34.0$33.7 million in cash and $22.7$20.5 million in notes payable issued as part of the acquisition and other liabilities assumed. The Company accounted for these transactions in accordance with the acquisition method of accounting for business combinations. In addition, the acquisition in Quebec provides for contingent consideration of up to $2.7 million to be earned based upon the acquired companybusiness achieving specific performance metrics over the next three years of operation. The Company is in the process of completing the preliminary purchase price allocations.did not complete any acquisitions duringacquired 100% of the three months ended August 31, 2013.ourits review of ourthe fair value estimate of assets acquired and liabilities assumed for two entitiesone entity acquired in fiscal 2014. This process will conclude as soon as the Company finalizes information regarding facts and circumstances that existed as of the acquisition date. Goodwill and intangibles for these two entitiesthis entity totaled $0.8$0.6 million and $2.2$1.6 million, respectively. This measurement period will not exceed one year from the acquisition date.businessbusinesses acquired in fiscal 2015 were included in the Company’s consolidated balance sheet based upon their estimated fair values on the date of acquisition as determined in a preliminary 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. The results of operations for these acquisitions are included in each respective operating segment’s results of operations from the date of acquisition. The Company’s preliminary purchase price allocation forFor acquisitions in fiscal 2015 and 2014 for which the final purchase accounting has yet to be completed, the Company’swhich summarizessummarizing the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition: Fiscal 2015 2014 Number of Entities 2 1 Consideration transferred: Cash paid $ 32,529 $ 2,300 Notes payable issued to seller 20,000 — Contingent consideration 1,373 297 Consideration transferred 53,902 2,597 Current assets 9,996 346 Property, plant and equipment 6,764 68 Current deferred tax asset 481 — Intangibles 11,561 1,600 Goodwill 42,042 583 Current liabilities (12,570 ) — Long-term deferred tax liability (4,372 ) — Net assets acquired $ 53,902 $ 2,597 approximately $41.7$42.9 million of goodwill in connection with these acquisitions, reflecting the strategic fit and revenue and earnings growth potential of these business.approximately $7.5$25.9 million and $0.7$2.7 million, respectively, for the threesix month period ended August 31,November 30, 2014. AsNo unaudited pro forma financial information is required as these acquisitions are not significant to the Company’s fiscal 2015 results, no unaudited pro forma financial information has been included in this report.Company.Mistras Group, Inc. and SubsidiariesNotes to Unaudited Condensed Consolidated Financial Statements(tabular dollars in thousands, except per share data)periodperiods ended August 31,November 30, 2014, the Company incurred acquisition-related costs of less than $0.1$0.2 million, in connection with due diligence, professional fees, and other expenses related to its acquisition activity. Additionally, the Company adjusted the fair value of certain previously recorded acquisition-related contingent consideration liabilities. For the three and six month periodperiods ended August 31,November 30, 2014, these adjustments resulted in a net decrease of acquisition-related contingent consideration liabilities and a corresponding increase in income from operations of approximately $1.0 million.$0.6 million and $1.6 million, respectively. The Company’s aggregate acquisition-related contingent consideration liabilities were approximately $14.3$12.5 million and $14.1 million as of August 31,November 30, 2014 and May 31, 2014, respectively.August 31,November 30, 2013, the Company incurred acquisition-related costs of $0.1$0.4 million and $0.5 million in connection with due diligence, professional fees, and other expenses for its acquisition activity. Additionally, the Company adjusted the fair value of certain acquisition-related contingent consideration liabilities. For the three and six month periodperiods ended August 31,November 30, 2013, these adjustments resulted in a net decrease of acquisition-related contingent consideration liabilities and a corresponding increase in income from operations of approximately $2.2 million.August 31,November 30, 2014 and 2013.6.InventoriesInventories consisted of the following:7.Property, Plant and Equipment, netProperty, plant and equipment consisted of the following: November 30, 2014 May 31, 2014 Trade accounts receivable $ 167,518 $ 140,120 Allowance for doubtful accounts (2,630 ) (2,296 ) Account receivable, net $ 164,888 $ 137,824 November 30, 2014 May 31, 2014 Raw materials $ 3,832 $ 3,663 Work in process 1,897 2,069 Finished goods 3,991 3,462 Services-related consumable supplies 2,468 2,182 Inventory $ 12,188 $ 11,376 November 30, 2014 May 31, 2014 Land $ 1,905 $ 1,938 Buildings and improvements 30-40 17,948 22,983 Office furniture and equipment 5-8 7,731 7,169 Machinery and equipment 5-7 156,979 144,798 184,563 176,888 Accumulated depreciation and amortization (102,297 ) (99,077 ) Property, plant and equipment, net $ 82,266 $ 77,811 August 31,November 30, 2014 and 2013 was approximately $5.4$5.5 million and $4.6 million, respectively.
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Amortization
Carrying
Amount November 30, 2014 May 31, 2014 Customer relationships 5-12 $ 87,595 $ (38,261 ) $ 49,334 $ 82,395 $ (34,636 ) $ 47,759 Software/Technology 3-15 15,447 (9,684 ) 5,763 15,328 (9,172 ) 6,156 Covenants not to compete 2-5 10,408 (8,266 ) 2,142 9,471 (7,882 ) 1,589 Other 2-5 8,212 (3,908 ) 4,304 5,869 (3,498 ) 2,371 Total $ 121,662 $ (60,119 ) $ 61,543 $ 113,063 $ (55,188 ) $ 57,875 August 31,November 30, 2014 and 2013 was approximately $2.9 million and $2.2 million, respectively. November 30, 2014 May 31, 2014 Accrued salaries, wages and related employee benefits $ 24,677 $ 26,236 Contingent consideration, current portion 4,382 4,778 Accrued workers’ compensation and health benefits 6,893 3,661 Deferred revenue 2,447 2,659 Other accrued expenses 16,195 17,316 Total accrued expenses and other liabilities $ 54,594 $ 54,650 Mistras Group, Inc. and SubsidiariesNotes to Unaudited Condensed Consolidated Financial Statements(tabular dollars in thousands, except per share data) November 30, 2014 May 31, 2014 Senior credit facility $ 123,796 $ 61,148 Notes payable 26,335 10,512 Other 4,937 4,988 Total debt 155,068 76,648 Less: Current portion (17,988 ) (8,058 ) Long-term debt, net of current portion $ 137,080 $ 68,590 In December 2011,(Credit Agreement)(“Credit Agreement”), dated December 21, 2011, with Bank of America, N.A., as agent for the lenders and a lender, and JPMorgan Chase Bank, N.A., Keybank, National Association and TD Bank, N.A., as lenders. The Credit Agreement providesAmendment increased the Company with a $125.0 millionCompany’s revolving line of credit which,to from $125.0 million to $175.0 million and provides that under certain circumstances the line of credit can be increased to $150.0$225.0 million. The Credit Agreement has a maturity date of December 20, 2016. The Company may continue to borrow up to $30.0 million in non-U.S. Dollar currencies and use up to $10.0 million of the credit limit for the issuance of letters of credit. The Amendment also extended the original maturity date of the Credit Agreement from December 20, 2016 to October 30, 2019. As of August 31,November 30, 2014, the Company had borrowings of $96.7$123.8 million and a total of $4.9$4.2 million of letters of credit outstanding under the Credit Agreement.2%1.75%, or a base rate less a margin of 0.25%1.25% to 1.25%0.375%, at the option of the Company, or 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-bearing indebtedness as of the date of determination to (2) EBITDA (which is (a) net income, less (b) income (or plus loss) from discontinued operations and extraordinary items, plus (c) income tax expenses, plus (d) interest expense, plus (e) depreciation, depletion, and amortization (including non-cash loss on retirement of assets), plus (f) stock compensation expense, less (g) cash expense related to stock compensation, plus or minus certain other adjustments) for the period of four consecutive fiscal quarters immediately preceding the date of determination. The Company has the benefit of the lowest margin if its Funded Debt Leverage Ratio is equal to or less than 0.5 to 1, and the margin increases as the ratio increases, to the maximum margin if the ratio is greater than 2.52.0 to 1. The Company will also bear additional costs for market disruption, regulatory changes effecting the lenders’ funding costs, and default pricing of an additional 2% interest rate margin if the Funded Debt Leverage Ratio exceeds 3.0on any1.Unaudited Condensed Consolidated Financial Statementslessno greater than 3.0 to 1 and an Interest Coverage Ratio of at least 3.0 to 1. Interest Coverage Ratio means the ratio, as of any date of determination, of (a) EBITDA for the 12 month period immediately preceding the date of determination, to (b) all interest, premium payments, debt discount, fees, charges and related expenses of the Company and its subsidiaries in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, paid during the 12 month period immediately preceding the date of determination. The Credit Agreement also limits the Company’s ability to, among other things, create liens, make investments, incur more indebtedness, merge or consolidate, make dispositions of property, pay dividends and make distributions to stockholders, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements. The Credit Agreement does not limit the Company’s ability to acquire other businesses or companies except that the acquired business or company must be in its line of business, the Company must be in compliance with the financial covenants on a pro forma basis after taking into account the acquisition, and, if the acquired business is a separate subsidiary, in certain circumstances the lenders will receive the benefit of a guaranty of the subsidiary and liens on its assets and a pledge of its stock.August 31,November 30, 2014, the Company was in compliance with the terms of the credit agreement,Credit Agreement, and will continuously monitor its compliance with the covenants contained in its credit agreement.Mistras Group, Inc. and SubsidiariesNotes to Unaudited Condensed Consolidated Financial Statements(tabular dollars in thousands, except per share data)August 31,November 30, 2014 and May 31, 2014, respectively.2014. Amortization is recorded as interest expense in the consolidated statements of income. November 30, 2014 Level 1 Level 2 Level 3 Total Liabilities: Contingent consideration $ — $ — $ 12,531 $ 12,531 Total Liabilities $ — $ — $ 12,531 $ 12,531 May 31, 2014 Level 1 Level 2 Level 3 Total Liabilities: Contingent consideration $ — $ — $ 14,145 $ 14,145 Total Liabilities $ — $ — $ 14,145 $ 14,145 Mistras Group, Inc. and SubsidiariesNotes to Unaudited Condensed Consolidated Financial Statements(tabular dollars in thousands, except per share data) owner is claiming damages as a result of the alleged quality defects of the Company’s x-ray images. No lawsuit has been filed at this time. The Company is currently unable to determine the likely outcome or reasonably estimate the amount or range of potential liability related to this matter, and accordingly, has not established any reserves for this matter. also received a notice from an insurance company of a chemical plant alleging that the Company is liable due to faulty inspections for all or part of $46 million of damages paid by the insurance company as a result of an explosion at the facility. The Company believes it was not involved in inspecting the portion of the plant where the explosion occurred and therefore has no liability for the claim. Accordingly, the Company has not established a reserve for this matter.August 31,November 30, 2014, total potential acquisition-related contingent consideration ranged from zero to approximately $28.5$26.9 million and would be payable upon the achievement of specific performance metrics by certain of the acquired companies over the next three years of operations. See Note 4 - Acquisitions to these consolidated financial statements for further discussion of the Company’s acquisitions.··Mistras Group, Inc. and SubsidiariesNotes to Unaudited Condensed Consolidated Financial Statements(tabular dollars in thousands, except per share data)·Mistras Group, Inc. and SubsidiariesNotes to Unaudited Condensed Consolidated Financial Statements(tabular dollars in thousands, except per share data) Three months ended November 30, Six months ended November 30, 2014 2013 2014 2013 Revenues Services $ 160,874 $ 108,862 $ 282,806 $ 204,672 International 41,018 43,209 81,056 80,968 Products and Systems 7,495 8,604 14,062 15,189 Corporate and eliminations (2,494 ) (3,920 ) (4,458 ) (8,236 ) $ 206,893 $ 156,755 $ 373,466 $ 292,593 Three months ended November 30, Six months ended November 30, 2014 2013 2014 2013 Gross profit Services $ 44,252 $ 30,918 $ 74,023 $ 57,665 International 11,309 13,293 20,777 23,413 Products and Systems 3,328 3,718 5,992 6,102 Corporate and eliminations 150 48 241 74 $ 59,039 $ 47,977 $ 101,033 $ 87,254 Three months ended November 30, Six months ended November 30, 2014 2013 2014 2013 Income (loss) from operations Services $ 20,071 $ 14,400 $ 28,951 $ 25,246 International 3,177 7,293 2,478 9,108 Products and Systems 417 469 (16 ) 1,060 Corporate and eliminations (5,473 ) (6,910 ) (9,557 ) (10,587 ) $ 18,192 $ 15,252 $ 21,856 $ 24,827 Revenues by geographic area for the three months ended August 31, 2014 and 2013, respectively, were as follows: Three months ended November 30, Six months ended November 30, 2014 2013 2014 2013 Depreciation and amortization Services $ 5,579 $ 4,156 $ 10,964 $ 8,391 International 2,050 1,983 4,211 3,905 Products and Systems 605 583 1,201 1,166 Corporate and eliminations 152 63 289 88 $ 8,386 $ 6,785 $ 16,665 $ 13,550 November 30, 2014 May 31, 2014 Goodwill Services $ 115,039 $ 73,767 International 40,852 43,552 Products and Systems 13,197 13,197 $ 169,088 $ 130,516 November 30, 2014 May 31, 2014 Total assets Services $ 345,133 $ 249,378 International 143,527 155,571 Products and Systems 35,697 38,041 Corporate and eliminations 7,714 982 $ 532,071 $ 443,972 Three months ended November 30, Six months ended November 30, 2014 2013 2014 2013 Revenues United States $ 140,308 $ 99,497 $ 252,248 $ 182,654 Other Americas 25,266 13,752 39,564 27,172 Europe 38,081 37,399 74,726 72,805 Asia-Pacific 3,238 6,107 6,928 9,962 $ 206,893 $ 156,755 $ 373,466 $ 292,593 August 31,November 30, 2014 and 2013. The MD&A should be read together with our condensed consolidated financial statements and related notes included in Item 1 in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for fiscal 2014 (“2014 Annual Report”). In this quarterly report, our fiscal years, which end on May 31, are identified according to the calendar year in which they end (e.g., the fiscal year ending May 31, 2015 is referred to as “fiscal 2015”), and unless otherwise specified or the context otherwise requires, “Mistras,” “the Company,” “we,” “us” and “our” refer to Mistras Group, Inc. and its consolidated subsidiaries. The MD&A includes disclosure in the following areas:·•Forward-Looking Statements·•Overview·•Results of Operations·•Liquidity and Capital Resources·•Critical Accounting Policies and Estimateselsewhere in this Report in Part II, Item 1A “Risk Factors” and inthe “Business—Forward-Looking Statements,” and “Risk Factors” sections of our 2014 Annual Report as well as those discussed in our other Securities and Exchange Commission (SEC) filings.···and develop new technologies in order to aggressively expand our proprietary portfolio of customized solutions, and to make acquisitions of complementary businesses at reasonable valuations.August 31,November 30, 2014 and 2013 were as follows: Three Months Ended
November 30, Six Months Ended
November 30, 2014 2013 2014 2013 ($ in thousands) ($ in thousands) Revenues $ 206,893 $ 156,755 $ 373,466 $ 292,593 Gross profit 59,039 47,977 101,033 87,254 Gross profit as a % of Revenue 29 % 31 % 27 % 30 % Total operating expenses 40,847 32,725 79,177 62,427 Operating expenses as a % of Revenue 20 % 21 % 21 % 21 % Income from operations 18,192 15,252 21,856 24,827 Income from Operations as a % of Revenue 9 % 10 % 6 % 8 % Interest expense 1,352 772 2,257 1,517 Income before provision for income taxes 16,840 14,480 19,599 23,310 Provision for income taxes 6,428 5,196 7,516 8,391 Net income 10,412 9,284 12,083 14,919 Less: net loss (income) attributable to noncontrolling interests, net of taxes 15 (27 ) 10 (21 ) Net income attributable to Mistras Group, Inc. $ 10,427 $ 9,257 $ 12,093 $ 14,898 August 31,November 30, 2014 and 2013 were as follows: Three Months Ended
November 30, Six Months Ended
November 30, 2014 2013 2014 2013 ($ in thousands) ($ in thousands) EBITDA and Adjusted EBITDA data Net income attributable to Mistras Group, Inc. $ 10,427 $ 9,257 $ 12,093 $ 14,898 Interest expense 1,352 772 2,257 1,517 Provision for income taxes 6,428 5,196 7,516 8,391 Depreciation and amortization 8,386 6,785 16,665 13,550 EBITDA $ 26,593 $ 22,010 $ 38,531 $ 38,356 Share-based compensation expense 2,090 1,040 4,257 2,747 Acquisition-related expense, net (434 ) (411 ) (1,395 ) (2,508 ) Adjusted EBITDA $ 28,249 $ 22,639 $ 41,393 $ 38,595 (which items are listed in the reconciliation table above).this report,the MD&A under the heading "Income for Operations", the non-GAAP financial performance measures “Segment and Total Company Income"Income from Operationsoperations before Acquisition-Related Expense (Benefit)acquistion-related expense (benefit), net” are used for each of our three segments and the "Total Company", with tables reconciling the measures to financial measures under GAAP. These non-GAAP measures exclude from the GAAP measures income from operations (a) transaction expenses related to acquisitions, such as professional fees and due diligence costs and (b) the net changes in the fair value of acquisition-related contingent consideration liabilities. These items have been excluded from the GAAP measures because these expenses and credits are not related to the Company’s or Segment’s core business operations and are related solely to the Company’s or Segment’s acquisition activities. Changes in the fair value of acquisition-related contingent consideration liabilities can be a net expense or credit in any given period, and fluctuate based upon the then current value of cash consideration the Company expects to pay in the future for prior acquisitions, without impacting cash generated from the Company’s business operations.“Segment"Income from operations before acquisition-related expense (benefit), net” for each of our three segments and Total Company Income from Operations before Acquisition-Related Expense (Benefit), net”the "Total Company" in evaluating our operating performance because they provide additional tools to compare our operating performance on a consistent basis and measure underlying trends and results in our business. EBITDA and Adjusted EBITDA remove the impact of certain items that management believes do not directly reflect our core operations. For instance, Adjusted EBITDA generally excludes interest expense, taxes and depreciation and amortization, each of which can vary substantially from company to company depending upon accounting methods and the book value and age of assets, capital structure, capital investment cycles and the method by which assets were acquired. It also eliminates share-based compensation, which is a non-cash expense and is excluded by management when evaluating the underlying performance of our business operations. Similarly, we believe that Segment"Income from operations before acquisition-related expense (benefit), net” for each of our three segments and Total Company Income from Operations before Acquisition-Related Expense (Benefit)the "Total Company", net, provides investors with useful information and more meaningful period over period comparisons by identifying and excluding these acquisition-related costs so that the performance of the core business operations can be identified and compared.Segment"Income from operations before acquisition-related expense (benefit), net” for each of our three segments and Total Company Income from Operations before Acquisition-Related Expense (Benefit), net,for the consolidated company are not metrics used to determine incentive compensation for executives or employees.$166.6$206.9 million for the three months ended August 31,November 30, 2014 compared to $135.8$156.8 million for the three months ended August 31,November 30, 2013.August 31,November 30, 2014 and 2013 were as follows: Three months ended November 30, Six months ended November 30, 2014 2013 2014 2013 ($ in thousands) ($ in thousands) Revenues Services $ 160,874 $ 108,862 $ 282,806 $ 204,672 International 41,018 43,209 81,056 80,968 Products and Systems 7,495 8,604 14,062 15,189 Corporate and eliminations (2,494 ) (3,920 ) (4,458 ) (8,236 ) $ 206,893 $ 156,755 $ 373,466 $ 292,593 August 31,November 30, 2014 and 2013 were as follows: Three months ended November 30, Six months ended November 30, 2014 2013 2014 2013 ($ in thousands) ($ in thousands) Revenue growth $ 50,138 $ 19,026 $ 80,873 $ 41,477 % Growth over prior year 32.0 % 13.8 % 27.6 % 16.5 % Comprised of: % of organic growth 14.0 % 4.3 % 11.4 % 4.4 % % of acquisition growth 18.7 % 9.4 % 16.0 % 12.2 % % foreign exchange increase (0.7 )% 0.1 % 0.2 % (0.1 )% 32.0 % 13.8 % 27.6 % 16.5 % quartersix months of fiscal 2015, our revenue growth was primarily driven by our Services segment. Services segment revenues increased 27%38% due to acquisition growth of approximately 17%22% and organic growth of approximately 10%16%. International Segment’s revenues grew by approximately 6%, driven by foreign exchange impact of almost 5%.were flat compared with prior year. Products and Systems segment revenues weredeclined approximately 7% primarily due to lower revenue in line with prior year.quartersix months of fiscal 2015. Oil and gas revenues grew by approximately 24%37% and remained the Company’s most significant vertical market, reflecting 52% and 48% of total Company revenues in the first quartersix months of fiscal 2015 and 2014.2014, respectively. We also experienced growth in several of our other target markets, primarily industrials, power generation and transmission, industrials,process industries and public infrastructure and process industries.infrastructure. The Company’s top ten customers comprised approximately 32% of total revenues in the first quartersix months of fiscal 2015 compared with 35% in the first quartersix months of the prior fiscal year.$2.7$11.1 million, or 7%23%, to $42.0$59.0 million in the firstsecond quarter of fiscal 2015, compared with $39.3$48.0 million in the second quarter of fiscal 2014. Gross profit increased by $13.8 million, or 16%, to $101.0 million during the first six months of fiscal 2015, compared with $87.3 million in the first quartersix months of fiscal 2014.August 31,November 30, 2014 and 2013 was as follows: Three months ended November 30, Six months ended November 30, 2014 2013 2014 2013 ($ in thousands) ($ in thousands) Gross profit Services $ 44,252 $ 30,918 $ 74,023 $ 57,665 International 11,309 13,293 20,777 23,413 Products and Systems 3,328 3,718 5,992 6,102 Corporate and eliminations 150 48 241 74 $ 59,039 $ 47,977 $ 101,033 $ 87,254 25%29% and 29%31% for the firstsecond quarters of fiscal 2015 and 2014, respectively. The decrease in gross profit percentage was primarily attributable to the Services and International segments. Service segment gross profit margin declined to 24% compared towas 28% in, a decline of 90 basis points from the firstsecond quarter of fiscal 2014, due primarily to a continued investment in expanding the Company’s capability to service the Canadian oil sands region, wage increases that exceeded price increases, and a lower mix of advanced services. International segment gross margins decreased to 24%28% in the firstsecond quarter of fiscal 2015 compared with 27%31% in the prior year, due primarily to a lower level of project sales in the U.K. and product sales which typically have higher margins. Products and Systems segment gross margin improved to 44% compared to 43% in the prior year driven by cost reductions and higher margin sales.41%43% compared to 36%40% in the prior year driven by a favorable sales mix.segment income from operations before acquisition-related expenseoperations: Three months ended November 30, Six months ended November 30, 2014 2013 2014 2013 ($ in thousands) ($ in thousands) Services: Income from operations before acquisition-related expense, net $ 20,596 $ 14,387 $ 29,737 $ 25,402 Acquisition-related expense (benefit), net 525 (13 ) 786 156 Income from operations 20,071 14,400 28,951 25,246 International: Income from operations before acquisition-related expense (benefit), net $ 2,130 $ 3,992 $ 1,542 $ 5,337 Acquisition-related (benefit), net (1,047 ) (3,301 ) (936 ) (3,771 ) Income from operations 3,177 7,293 2,478 9,108 Products and Systems: Loss from operations before acquisition-related (benefit), net $ 417 $ 450 $ (16 ) $ 25 Acquisition-related (benefit), net — (19 ) — (1,035 ) Income (Loss) from operations 417 469 (16 ) 1,060 Corporate and Eliminations: Loss from operations before acquisition-related (benefit), net $ (5,385 ) $ (3,988 ) $ (10,802 ) $ (8,445 ) Acquisition-related expense (benefit), net 88 2,922 (1,245 ) 2,142 Loss from operations (5,473 ) (6,910 ) (9,557 ) (10,587 ) Total Company Income from operations before acquisition-related (benefit), net $ 17,758 $ 14,841 $ 20,461 $ 22,319 Acquisition-related (benefit), net $ (434 ) $ (411 ) $ (1,395 ) $ (2,508 ) Income from operations $ 18,192 $ 15,252 $ 21,856 $ 24,827 August 31,November 30, 2014, income from operations exclusive of acquisition-related costs decreased $4.8increased $2.9 million, or 64%20%, compared with the prior year’s quarter. As a percentage of revenues, income from operations excluding acquisition-related items was 2% and 6%9% for the firstsecond quarters of fiscal 2015 and fiscal 2014, respectively.$8.6$8.1 million or 29%25%, compared with the prior year’s first quarter, and by $7.5 million, or 24%, excluding acquisition-related items.second quarter. This increase was driven byprimarily from the Services segment, which incurred a year-on-year operating expense increase of $4.9$7.1 million, or 31%43%, exclusive of acquisition-related charges. The impact of recent acquisitions accounted for $2.9$4.9 million of this increase. The remainder of the increase in Services operating expenses was primarily due to increased salary, benefits and facility-related costs incurred due to growth in Canada and in the United States.$1.3$1.2 million or 15%6%, exclusive of acquisition-related charges primarily due to increased salary and benefits costs from increased headcount.$0.9$1.4 million and $0.7$0.8 million for the firstsecond quarters of fiscal 2015 and 2014, respectively. The increase was primarily related to an increase in average borrowings in the second quarter of fiscal 2015. Interest expense was approximately $2.3 million and $1.5 million for the first six months of fiscal 2015 and 2014, respectively. The increase was primarily related to an increase in average borrowings in the first quartersix months of fiscal 2015.39%38% and 36% for the firstsecond quarter of fiscal 2015 and 2014, respectively. The increase was primarily due to higher permanent tax differences and state taxes, lower overall income in the quarter and a lower proportion of income from various foreign jurisdictions that carry lower tax rates.22rates and higher state income taxes, partially offset by lower permanent tax differences. The Company’s effective income tax rate was approximately 38% and 36% for the first six months of fiscal 2015 and 2014, respectively. The increase was primarily due to the same items described above for the second quarter of fiscal 2015. Six months ended November 30, 2014 2013 ($ in thousands) Net cash provided by (used in): Operating Activities $ 3,230 $ 15,634 Investing Activities (40,666 ) (20,237 ) Financing Activities 46,810 13,130 Effect of exchange rate changes on cash 205 (89 ) Net change in cash and cash equivalents $ 9,579 $ 8,438 threesix months ended August 31,November 30, 2014, cash provided by our operating activities was $14.5$3.2 million, an increasea decrease of $3.0$12.4 million from the comparable period of fiscal 2014. The increasedecrease of cash provided by our operating activities was primarily attributable to a reduction in working capital items of $17.6 million, primarily accounts receivable, accounts payable, and accrued expenses and other liabilities. This was partially offset by an increase in our net income, excluding depreciation, amortization and other non-cash expenses of $5.0$5.2 million. This was partially offset by a reduction in working capital items of $2.0 million.threesix months ended August 31,November 30, 2014, cash used in investing activities was $40.6$40.7 million, an increase of $38.1$20.4 million, principally due to acquisitions totaling $36.8$33.0 million, net of cash acquired in fiscal 2015. Cash used in investing activities also included purchases of property, plant and equipment of $3.8$7.9 million.$30.5$46.8 million for the threesix months ended August 31,November 30, 2014, a changean increase of $40.6$33.7 million from the comparable period of fiscal 2014. The increase in cash provided by financing activities compared with prior year was driven by net borrowings of $35.6$62.6 million from our revolving credit facility to fund acquisitions, offset by payments of notes payable, other long-term debt and capital lease obligations and totaling $4.0$14.0 million.($1.9)$0.2 million and $0.2$(0.1) million for the threesix months ended August 31,November 30, 2014 and 2013, respectively.In December 2011, weOn October 31, 2014, the Company entered into a Third Amendment and Modification Agreement (the “Amendment”), to our $125.0 million revolving line of credit, the Third Amended and Restated Credit Agreement (Credit Agreement)(“Credit Agreement”), dated December 21, 2011, with Bank of America, N.A., as agent for the lenders and a lender, and JPMorgan Chase Bank, N.A., Keybank, National Association and TD Bank, N.A., as lenders. The termsAmendment increased the Company’s revolving line of ourcredit to $175.0 million and provides that under certain circumstances the line of credit can be increased to $225.0 million. The Company may continue to borrow up to $30.0 million in non-U.S. Dollar currencies and use up to $10.0 million of the credit limit for the issuance of letters of credit. The Amendment also extended the original maturity date of the Credit Agreement have not changed from those set forth in Part II, Item 7 of our 2014 Annual Report under the Section “Liquidity and Capital Resources” — “Cash Balance and Credit Facility Borrowings,” andDecember 20, 2016 to October 30, 2019. See Note 10 — Long-Term Debt to these consolidated financial statements included in this report, under the heading “Senior Credit Facility.”Facility” for further detail.August 31,November 30, 2014, we had cash and cash equivalents totaling $12.5$19.6 million and available borrowing capacity of $23.4$47.0 million under our credit agreement. There wereCredit Agreement with borrowings of $96.7$123.8 million and a total$4.2 million of $4.9 million letters of credit outstanding under the existing agreement as of August 31, 2014.outstanding. 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.August 31,November 30, 2014, we were in compliance with the terms of the credit agreement,Credit Agreement, and we will continuously monitor our compliance with the covenants contained in our credit agreement.threesix months ended August 31,November 30, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposesReport on Form 10-K for the fiscal year ended May 31, 2014.Report.August 31,November 30, 2014, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Exchange Act. Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information requiredAugust 31,November 30, 2014 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.informationinformation set forth in this report, you should carefully consider the risk factors discussed under the “Risk Factors” section included in our 2014 Annual Report. There have been no material changes to the risk factors previously disclosed in the 2014 Annual Report.
Units) Purchased
Share (or Unit)Fiscal Month Ending September 30, 2014 684 $ 20.25 October 31, 2014 226 $ 15.98 November 30, 2014 2,116 $ 16.94 None.None.Exhibit No.Description31.110.1 Third Amendment and Modification Agreement, dated October 31, 2014 to the Third Amended and Restated Credit Agreement, dated December 21, 2011 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 32.132.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. MISTRAS GROUP, INC.