UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended ~~November~~September 30, ~~2016~~2017



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

For the transition period to

Commission file number 001- 34481

Mistras Group, Inc.

(Exact name of registrant as specified in its charter)



Delaware		22-3341267
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

195 Clarksville Road Princeton Junction, New Jersey		08550
(Address of principal executive offices)		(Zip Code)

(609) 716-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

ý Yes o No

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



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)		Emerging Growth Company o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes ý No

As of ~~January~~November 2, 2017, the registrant had ~~28,796,487~~28,290,709 shares of common stock outstanding and ~~420,258~~1,146,249 shares of treasury stock.

TABLE OF CONTENTS



			PAGE
PART I—FINANCIAL INFORMATION

	ITEM 1.	Financial Statements	1

		Condensed Consolidated Balance Sheets as of ~~November~~September 30, ~~2016~~2017 (unaudited) and ~~May~~December 31, 2016	1

		Unaudited Condensed Consolidated Statements of Income (Loss) for the three and ~~six~~nine months ended ~~November~~September 30, ~~2016~~2017 and ~~November~~September 30, ~~2015~~2016	2

		Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and ~~six~~nine months ended ~~November~~September 30, ~~2016~~2017 and ~~November~~September 30, ~~2015~~2016	3

		Unaudited Condensed Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~November~~September 30, ~~2016~~2017 and ~~November~~September 30, ~~2015~~2016	4

		Notes to Unaudited Condensed Consolidated Financial Statements	5

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	27

	ITEM 4	Controls and Procedures	27

PART II—OTHER INFORMATION

	ITEM 1.	Legal Proceedings	2928

	ITEM 1.A.	Risk Factors	2928

	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2928

	ITEM 3.	Defaults Upon Senior Securities	2928

	ITEM 4.	Mine Safety Disclosures	2928

	ITEM 5.	Other Information	29

	ITEM 6.	Exhibits	3130

SIGNATURES			3231

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

Mistras Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	(unaudited)						(unaudited)
	November 30, 2016			May 31, 2016			September 30, 2017			December 31, 2016
ASSETS
Current Assets
Cash and cash equivalents	$	26,261		$	21,188		$	26,863		$	19,154
Accounts receivable, net	141,367			137,913			140,189			130,852
Inventories	10,396			9,918			11,237			10,017
Deferred income taxes	6,174			6,216			—			6,230
Prepaid expenses and other current assets	16,759			12,711			16,077			16,399
Total current assets	200,957			187,946			194,366			182,652
Property, plant and equipment, net	74,580			78,676			77,173			73,149
Intangible assets, net	42,137			43,492			42,242			40,007
Goodwill	171,060			169,220			165,704			169,940
Deferred income taxes	952			1,000			2,108			1,086
Other assets	2,480			2,341			2,829			2,593
Total assets	$	492,166		$	482,675		$	484,422		$	469,427
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable	$	8,112		$	10,796		$	8,925		$	6,805
Accrued expenses and other current liabilities	64,257			62,983			65,608			58,697
Current portion of long-term debt	2,028			12,553			2,490			1,379
Current portion of capital lease obligations	6,689			7,835			6,261			6,488
Income taxes payable	3,814			2,710			4,576			4,342
Total current liabilities	84,900			96,877			87,860			77,711
Long-term debt, net of current portion	91,332			72,456			101,803			85,917
Obligations under capital leases, net of current portion	10,340			11,932			8,349			9,682
Deferred income taxes	19,670			18,328			9,238			17,584
Other long-term liabilities	7,679			6,794			9,510			7,789
Total liabilities	213,921			206,387			216,760			198,683
Commitments and contingencies
Equity
Preferred stock, 10,000,000 shares authorized	—			—			—			—
Common stock, $0.01 par value, 200,000,000 shares authorized	292			290
Common stock, $0.01 par value, 200,000,000 shares authorized, 29,434,816 and 29,216,745 shares issued							294			292
Additional paid-in capital	215,956			213,737			221,149			217,211
Treasury stock, at cost	(7,000		)	—
Treasury stock, at cost, 1,146,249 and 420,258 shares							(24,923		)	(9,000		)
Retained earnings	96,102			82,235			88,744			91,803
Accumulated other comprehensive loss	(27,262		)	(20,099		)	(17,789		)	(29,724		)
Total Mistras Group, Inc. stockholders’ equity	278,088			276,163			267,475			270,582
Noncontrolling interests	157			125
Non-controlling interests							187			162
Total equity	278,245			276,288			267,662			270,744
Total liabilities and equity	$	492,166		$	482,675		$	484,422		$	469,427

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

Mistras Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Income (Loss)

(in thousands, except per share data)


	Three months ended					Six months ended					Three months ended					Nine months ended
	November 30, 2016		November 30, 2015			November 30, 2016		November 30, 2015			September 30, 2017			September 30, 2016		September 30, 2017			September 30, 2016

Revenue	$	176,642	$	194,786		$	345,085	$	374,639		$	179,570		$	168,811	$	513,326		$	514,606
Cost of revenue	119,214		132,720			232,195		256,120			126,316			112,754		360,144			352,027
Depreciation	5,352		5,141			10,758		10,320			5,357			5,406		15,790			16,423
Gross profit	52,076		56,925			102,132		108,199			47,897			50,651		137,392			146,156
Selling, general and administrative expenses	36,249		34,008			71,526		69,844			38,217			34,995		113,491			107,266
Impairment charges											15,810			—		15,810			—
Research and engineering	580		601			1,212		1,222			555			643		1,749			1,928
Depreciation and amortization	2,542		2,822			5,139		5,603			2,738			2,513		7,854			8,140
Litigation charges											1,200			—		1,200			6,320
Acquisition-related expense (benefit), net	197		(75		)	591		(971		)	(248		)	384		(589		)	(99		)
Income from operations	12,508		19,569			23,664		32,501
Income (loss) from operations											(10,375		)	12,116		(2,123		)	22,601
Interest expense	928		1,335			1,748		3,257			1,081			778		3,114			2,218
Income before provision for income taxes	11,580		18,234			21,916		29,244
Provision for income taxes	4,284		6,804			8,011		10,967
Net income	7,296		11,430			13,905		18,277
Less: net income (loss) attributable to noncontrolling interests, net of taxes	26		5			39		(20		)
Net income attributable to Mistras Group, Inc.	$	7,270	$	11,425		$	13,866	$	18,297
Earnings per common share
Income (loss) before (benefit) provision for income taxes											(11,456		)	11,338		(5,237		)	20,383
(Benefit) provision for income taxes											(4,503		)	4,083		(2,199		)	6,908
Net income (loss)											(6,953		)	7,255		(3,038		)	13,475
Less: net income attributable to non-controlling interests, net of taxes											15			17		21			29
Net income (loss) attributable to Mistras Group, Inc.											$	(6,968	)	$	7,238	$	(3,059	)	$	13,446
Earnings (loss) per common share:
Basic	$	0.25	$	0.40		$	0.48	$	0.64		$	(0.25	)	$	0.25	$	(0.11	)	$	0.46
Diluted	$	0.24	$	0.39		$	0.46	$	0.62		$	(0.25	)	$	0.24	$	(0.11	)	$	0.45
Weighted average common shares outstanding:
Basic	29,056		28,869			29,016		28,796			28,274			29,051		28,465			28,966
Diluted	29,998		29,594			30,139		29,641			28,274			30,231		28,465			30,139

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

Mistras Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

Three months ended Six months ended
November 30, 2016 November 30, 2015 November 30, 2016 November 30, 2015

Net income $ 7,296
$ 11,430
$ 13,905
$ 18,277
Other comprehensive loss:

Foreign currency translation adjustments (3,580 ) (384 ) (7,163 ) (1,036 )
Comprehensive income 3,716
11,046
6,742
17,241
Less: comprehensive (loss) income attributable to noncontrolling interest (3 ) 5
(7 ) (20 )
Comprehensive income attributable to Mistras Group, Inc. $ 3,719
$ 11,041
$ 6,749
$ 17,261



	Three months ended						Nine months ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016

Net income (loss)	$	(6,953	)	$	7,255		$	(3,038	)	$	13,475
Other comprehensive income:
Foreign currency translation adjustments	4,443			(2,641		)	11,935			1,966
Comprehensive income (loss)	(2,510		)	4,614			8,897			15,441
Less: comprehensive income attributable to non-controlling interest	16			13			25			25
Comprehensive income (loss) attributable to Mistras Group, Inc.	$	(2,526	)	$	4,601		$	8,872		$	15,416

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

Mistras Group, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)


	Six months ended						Nine months ended
	November 30, 2016			November 30, 2015			September 30, 2017			September 30, 2016

Cash flows from operating activities
Net income	$	13,905		$	18,277
Adjustments to reconcile net income to net cash provided by operating activities
Net income (loss)							$	(3,038	)	$	13,475
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization	15,897			15,923			23,644			24,563
Impairment charges							15,810			—
Deferred income taxes	2,045			1,809			(4,755		)	512
Share-based compensation expense	3,313			3,227			5,179			5,161
Fair value changes in contingent consideration liabilities	381			(1,068		)
Bad debt provision for unexpected customer bankruptcy							1,200			—
Fair value adjustments to contingent consideration							(880		)	(582		)
Other	(1,744		)	(259		)	226			(2,017		)
Changes in operating assets and liabilities, net of effect of acquisitions:
Changes in operating assets and liabilities, net of effect of acquisitions
Accounts receivable	(5,508		)	(17,641		)	(4,017		)	9,968
Inventories	742			1,496			(838		)	200
Prepaid expenses and other current assets	(4,333		)	(790		)
Other assets	(145		)	(9		)
Prepaid expenses and other assets							995			(2,777		)
Accounts payable	(2,455		)	(1,248		)	1,466			(1,761		)
Accrued expenses and other liabilities	2,581			5,226			668			5,247
Income taxes payable	1,290			1,581			(434		)	120
Net cash provided by operating activities	25,969			26,524			35,226			52,109
Cash flows from investing activities
Purchase of property, plant and equipment	(6,846		)	(7,753		)	(14,413		)	(11,238		)
Purchase of intangible assets	(598		)	(480		)	(941		)	(1,106		)
Acquisition of businesses, net of cash acquired	(8,174		)	(1,709		)	(8,356		)	(1,200		)
Proceeds from sale of equipment	576			319			1,194			1,057
Net cash used in investing activities	(15,042		)	(9,623		)	(22,516		)	(12,487		)
Cash flows from financing activities
Repayment of capital lease obligations	(3,808		)	(3,681		)	(4,878		)	(6,703		)
Proceeds from borrowings of long-term debt	196			1,968			5,599			761
Repayment of long-term debt	(11,056		)	(15,870		)	(1,638		)	(12,187		)
Proceeds from revolver	44,900			39,200			38,400			38,200
Repayments of revolver	(25,600		)	(36,800		)
Payment of contingent consideration for acquisitions	(796		)	(394		)
Repayment of revolver							(26,900		)	(49,000		)
Payment of contingent consideration for business acquisitions							(554		)	(2,919		)
Purchases of treasury stock	(7,000		)	—			(15,923		)	—
Taxes paid related to net share settlement of share-based awards	(2,323		)	(951		)	(1,497		)	(2,146		)
Excess tax benefit from share-based compensation	558			(303		)	—			646
Proceeds from exercise of stock options	585			187			277			857
Net cash used in financing activities	(4,344		)	(16,644		)	(7,114		)	(32,491		)
Effect of exchange rate changes on cash and cash equivalents	(1,510		)	(233		)	2,113			(221		)
Net change in cash and cash equivalents	5,073			24			7,709			6,910
Cash and cash equivalents
Beginning of period	21,188			10,555			19,154			9,599
End of period	$	26,261		$	10,579		$	26,863		$	16,509
Supplemental disclosure of cash paid
Interest	$	1,849		$	3,010		$	3,031		$	2,454
Income taxes	$	7,637		$	6,223		$	2,868		$	9,562
Noncash investing and financing
Equipment acquired through capital lease obligations	$	1,707		$	1,555		$	2,824		$	7,408
Issuance of notes payable for acquisitions	$	481		$	—
Issuance of notes payable and other debt obligations, primarily related to acquisitions							$	—		$	325

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

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares 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) ~~and~~, 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, fossil and nuclear power, alternative and renewable energy, public infrastructure, chemicals, commercial aerospace and defense, transportation, primary metals and metalworking, pharmaceutical/biotechnology and food processing industries and research and engineering institutions.

Basis of Presentation

The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the fiscal years ending ~~May~~December 31, 2017 and 2016. Reference to a fiscal year means the fiscal year ended May 31, which has historically been the end of the Company's fiscal year. See Note 15 regarding a change in the Company’s fiscal year. For purposes of this report, references to fiscal 2017 and 2016 shall mean to our historical fiscal year periods, without adjusting for the change in the fiscal year.

Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements contained in the Company’s ~~Annual~~Transition Report on Form 10-K (“2016 ~~Annual~~Transition Report”) for ~~fiscal~~the transition period ended December 31, 2016, as filed with the Securities and Exchange Commission on ~~August 15, 2016.~~March 20, 2017.

Principles of Consolidation

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

All significant intercompany accounts and transactions have been eliminated in consolidation. ~~Mistras Group, Inc.’s and its subsidiaries’~~

On January 3, 2017, the Company's Board of Directors approved a change in the Company's fiscal ~~years~~year end onfrom May 31 ~~except~~to December 31, effective December 31, 2016. The transition period was for the ~~subsidiaries in~~ seven months ended December 31, 2016 ("the transition period"). Prior to this change, the Company's International segment ~~which end on April 30. Accordingly, the Company’s International segment subsidiaries are~~was consolidated on a one month lag. Therefore, infor this interim report, the ~~quarter and year of acquisition, results of acquired subsidiaries in~~condensed consolidated income statements include a one month lag for the International segment ~~are generally included in consolidated results~~ for ~~one less month than~~ the ~~actual number of~~three and nine months ~~from the acquisition date to the end of the reporting period.~~ended September 30, 2016. Management does not believe that any events occurred during the one-month lag period that would have a material effect on the Company’s condensed consolidated financial statements. The one- month lag was removed with the change in the Company's fiscal year noted above, and accordingly, the condensed consolidated income statements do not include a one month lag for the International segment's results for the three and nine months ended September 30, 2017.

Reclassification

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

Customers

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

One customer, ~~accounted for approximately 13% of our revenues and 12% of accounts receivable for the six months ended November 30, 2016 and as of November 30, 2016, respectively, which~~ primarily ~~were~~ generated from the Services ~~segment. No~~segment, accounted for approximately 10% and 11% of our revenues for the three and nine months ended September 30, 2017. This customer accounted for ~~10% or more~~8% of accounts receivable as of September 30, 2017. One customer accounted for 14% and 12% of our revenues ~~or accounts receivable~~ for the ~~six~~three and nine months ended ~~November~~September 30, ~~2015.~~2016.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in Note 2 — Summary of Significant Accounting Policies in the Company's 2016 ~~Annual~~Transition Report. On an ongoing basis, the Company evaluates its estimates and assumptions, including among other things, those related to revenue recognition, valuations of accounts receivable, long-lived assets, goodwill, deferred tax assets and uncertain tax positions. Since the date of the 2016 ~~Annual~~Transition Report, there have been no material changes to the Company's significant accounting policies.

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

Recent Accounting Pronouncements

In ~~May 2014,~~August 2015, the Financial Accounting Standards Board ("FASB") issued ~~ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers~~, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017, as a result of a one year deferral in the standard issued by the FASB in August 2015 with ASUAccounting Standards Update ("ASU") 2015-14, Revenue from Contracts with Customers -(Topic 606): Deferral of the Effective ~~Date.~~Date, ~~Early~~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 ~~not permitted.~~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 us beginning 2018, which is when we plan to adopt this standard. The ~~standard~~ASU permits ~~the use~~two methods of ~~either~~adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the ~~retrospective or~~ cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition ~~method.~~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 isplans to adopt this guidance using the cumulative catch-up method. We are still in the process of evaluating the effect ~~that ASU 2014-09 will have~~of adoption on ~~its~~our condensed consolidated financial statements and ~~related disclosures.~~

~~In September 2015,~~are currently assessing our contracts with customers across each of its global operating segments. Our assessment is not yet complete and therefore we are unable to quantify the ~~FASB issued~~potential impacts. However, as most of our projects are short-term in nature and billed on at time and materials basis, we do not currently anticipate that the adoption of ASU ~~No. 2015-16,~~ ~~Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.~~ ~~This amendment~~2014-09 will ~~simplify the accounting for adjustments made to provisional amounts recognized~~result in a business combination and eliminates the requirement to retrospectively account for those adjustments in previous reporting periods. This update will require on the face of the income statement or in the notessubstantial changes to the ~~financial statements the amount recorded in current-period earnings that would have previously been recorded if the adjustment to the provisional amounts had been recognized as~~overall pattern or timing of the acquisition date. ASU 2015-16 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2015. The Company adopted this guidance during the first quarter ended August 31, 2016. There was not a material impact on its condensed consolidated financial statements and related disclosures.our revenue recognition.

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 ~~does~~adopted this guidance prospectively beginning in the first quarter of 2017, which did not ~~expect that ASU 2015-17 will~~ have a material impact on ~~its~~the condensed 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 condensed consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation (Topic 718). This amendment ~~will simplify~~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, and interim periods within those fiscal years beginning after December 15, 2016, with early adoption permitted. ~~Upon adoption~~The Company adopted this guidance prospectively beginning in the first quarter of ~~this standard,~~2017, and accordingly, is recording excess tax benefits and tax deficiencies ~~will be recognized~~ as a component of income tax ~~expense,~~expense.

Mistras Group, Inc. and ~~the tax effects of exercised or vested awards will be treated as discrete items~~Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in ~~the period in which they occur.~~thousands, except per share data)

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 is evaluating the impact that ASU 2016-15 will have on its condensed 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 condensed consolidated financial statements and related disclosures.

~~Mistras Group, Inc.~~In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and ~~Subsidiaries~~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 has early adopted ASU 2017-04 in the third quarter of 2017 for its condensed consolidated financial statements and related disclosures. See Notes 7 and 8 for information on the impairment of assets in the Products and Systems reporting unit during the three months ended September 30, 2017.

~~Notes~~

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 ~~Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars~~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 ~~shares in thousands, except per share data)~~interim period within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the impact that ASU 2017-09 will have on its condensed consolidated financial statements and related disclosures.

2. Share-Based Compensation

The Company has share-based incentive awards outstanding to its eligible employees and ~~Directors~~non-employee directors under three equity incentive 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 (the 2016 Plan).~~Plan. No further awards may be granted under the 2007 orand 2009 Plans, although awards granted under the 2007 and 2009 Plans 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.

Stock Options

For the three ~~and six~~ months ended ~~November~~September 30, 2017 and 2016, the Company did not recognize any share-based compensation expense related to stock option awards.

For the nine months ended September 30, 2017 and 2016, the Company did not recognize any share-based compensation expense and recognized less than $0.1 million, respectively, related to stock option awards.

No unrecognized compensation costs remained related to stock option awards as of ~~November~~September 30, ~~2016.~~

~~For the three and six months ended November 30, 2015, the Company recognized share-based compensation expense related to stock option awards of less than $0.1 million.~~2017.

No stock options were granted during the ~~six~~three and nine months ended ~~November~~September 30, ~~2016~~2017 and ~~November~~September 30, ~~2015.~~2016.

A summary of the stock option activity, weighted average exercise prices and options outstanding as of ~~November~~September 30, ~~2016~~2017 and ~~2015~~2016 is as follows:

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)


	For the six months ended November 30,								For the nine months ended September 30,
	2016				2015				2017				2016
	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 period:	2,232		$	13.21	2,287		$	13.13	2,167		$	13.33	2,265		$	13.16
Granted	—		$	—	—		$	—	—		$	—	—		$	—
Exercised	(62	)	$	9.42	(22	)	$	10.18	(37	)	$	7.39	(87	)	$	9.83
Expired or forfeited	—		$	—	—		$	—	—		$	—	—		$	—
Outstanding at end of period:	2,170		$	13.32	2,265		$	13.16	2,130		$	13.43	2,178		$	13.29

Restricted Stock Unit Awards

For ~~both~~ the three months ended ~~November~~September 30, ~~2016~~2017 and ~~November~~September 30, ~~2015,~~2016, the Company recognized share-based compensation expense related to restricted stock unit awards of $1.1 ~~million.~~ million and $1.2 million, respectively.

For ~~both~~ the ~~six~~nine months ended ~~November~~September 30, ~~2016~~2017 and ~~November~~September 30, ~~2015,~~2016, the Company recognized share-based compensation expense related to restricted stock unit awards of ~~$2.2 million.~~$3.4 million for each respective period. As of ~~November~~September 30, ~~2016,~~2017, there was ~~$9.8~~$8.1 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 ~~2.8~~2.4 years.

During the ~~six~~first nine months ~~ended November 30,~~of 2017 and 2016, ~~and 2015,~~ the Company granted approximately ~~10,000~~21,000 and ~~15,000~~22,000 shares, respectively, of fully-vested common stock to its five non-employee directors, ~~in connection with its~~as provided for under the Company's non-employee director compensation plan. These shares had grant date fair values of ~~$0.3~~$0.4 million and ~~$0.2~~$0.5 million, respectively, which was recorded as share-based compensation expense during the ~~six~~nine months ended ~~November~~September 30, ~~2016~~2017 and ~~November~~September 30, ~~2015,~~2016, respectively.

During the ~~six~~first nine months ~~ended November 30,~~of 2017 and 2016, approximately 175,000 and ~~2015, approximately 207,000 and 217,000~~182,000 restricted stock units ~~respectively, vested.~~vested for each period. The fair value of these units was ~~$5.1~~$3.2 million and ~~$3.4~~$4.5 million ~~respectively.~~for each respective period. 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.

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

A summary of the Company's outstanding, ~~nonvested~~non-vested restricted ~~stock~~share units is presented below:


	For the six months ended November 30,								For the nine months ended September 30,
	2016				2015				2017				2016
	Units		Weighted Average Grant-Date Fair Value		Units		Weighted Average Grant-Date Fair Value		Units		Weighted Average Grant-Date Fair Value		Units		Weighted Average Grant-Date Fair Value
Outstanding at beginning of period:	575		$	18.85	564		$	20.47	569		$	20.81	595		$	18.89
Granted	219		$	24.48	263		$	16.72	124		$	21.21	218		$	24.51
Released	(207	)	$	19.40	(217	)	$	19.80	(175	)	$	20.61	(182	)	$	19.66
Forfeited	(17	)	$	19.42	(8	)	$	19.23	(30	)	$	21.21	(26	)	$	19.24
Outstanding at end of period:	570		$	20.81	602		$	18.85	488		$	20.97	605		$	20.68

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 also is a discretionary portion of the PRSUs

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

based on individual performance, at the discretion of the Compensation Committee (Discretionary PRSUs). PRSUs and Discretionary 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. 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:


	For the six months ended November 30, 2016				For the nine months ended September 30, 2017
	Units		Weighted Average Grant-Date Fair Value		Units		Weighted Average Grant-Date Fair Value
Outstanding at beginning of period:	328		$	17.02	290		$	16.01
Granted	105		$	24.90	128		$	20.42
Performance condition adjustments, net	(7	)	$	24.06
Performance condition adjustments					(67	)	$	20.55
Released	(89	)	$	24.50	(64	)	$	14.87
Forfeited	—		$	—	—		$	—
Outstanding at end of period:	337		$	17.22	287		$	17.07

During the nine months ended September 30, 2017, the Compensation Committee modified the awards issued during the transition period ended December 31, 2016 from a one-year performance period to a seven month performance period to align the awards with the change in the Company's fiscal year from May 31 to December 31. Accordingly, for the nine months ended September 30, 2017, the Compensation Committee approved these transition period PRSUs, which resulted in a reduction of approximately 3,000 units. There was a reduction of approximately 64,000 units to the awards granted in 2017 during the nine months ended September 30, 2017.

As of September 30, 2017, the liability related to Discretionary PRSUs was less than $0.1 million and is classified within accrued expenses and other current liabilities on the condensed consolidated balance sheet.

For the three months ended September 30, 2017 and September 30, 2016, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.4 million and $0.5 million, respectively.

For the nine months ended September 30, 2017 and September 30, 2016, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $1.3 million for each respective period.

At September 30, 2017, there was $2.7 million of total unrecognized compensation costs related to approximately 287,000 non-vested performance restricted stock units, which are expected to be recognized over a remaining weighted average period of 2.1 years.

3.Earnings per Share

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

During the three months ended August 31, 2016, the Compensation Committee approved an additional 19,000 units pertaining to the 2016 Discretionary PRSUs. There was a 26,000 unit reduction to the fiscal 2017 awards during the three months ended November 30, 2016.

As of November 30, 2016, the aggregate liability related to 21,000 outstanding Discretionary PRSUs was less than $0.1 million, and is classified within accrued expenses and other liabilities on the condensed consolidated balance sheet.

For the three months ended November 30, 2016 and November 30, 2015, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.3 million and $0.2 million, respectively. For the six months ended November 30, 2016 and November 30, 2015, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.9 million and $0.8 million, respectively. At November 30, 2016, there was $4.7 million of total unrecognized compensation costs related to 337,000 non-vested performance restricted stock units, which are expected to be recognized over a remaining weighted average period of 3.9 years.

3.~~Earnings per Share~~

Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, and (2) the dilutive effect of assumed conversion of equity awards using the treasury stock method. With respect to the number of weighted-average shares outstanding (denominator), diluted shares reflects: (i) the exercise of options to acquire common stock to the extent that the options’ exercise prices are less than the average market price of common shares during the period and (ii) the pro forma vesting of restricted stock units.

The following table sets forth the computations of basic and diluted earnings per share:


	Three months ended				Six months ended				Three months ended						Nine months ended
	November 30, 2016		November 30, 2015		November 30, 2016		November 30, 2015		September 30, 2017				September 30, 2016		September 30, 2017				September 30, 2016

Basic earnings per share
Basic earnings (loss) per share:
Numerator:
Net income attributable to Mistras Group, Inc.	$	7,270	$	11,425	$	13,866	$	18,297
Net income (loss) attributable to Mistras Group, Inc.									$	(6,968	)		$	7,238	$	(3,059	)		$	13,446
Denominator:
Weighted average common shares outstanding	29,056		28,869		29,016		28,796		28,274				29,051		28,465				28,966
Basic earnings per share	$	0.25	$	0.40	$	0.48	$	0.64
Basic earnings (loss) per share									$	(0.25	)		$	0.25	$	(0.11	)		$	0.46

Diluted earnings per share:
Diluted earnings (loss) per share:
Numerator:
Net income attributable to Mistras Group, Inc.	$	7,270	$	11,425	$	13,866	$	18,297
Net income (loss) attributable to Mistras Group, Inc.									$	(6,968	)		$	7,238	$	(3,059	)		$	13,446
Denominator:
Weighted average common shares outstanding	29,056		28,869		29,016		28,796		28,274				29,051		28,465				28,966
Dilutive effect of stock options outstanding	745		592		788		610		n/a			⁽¹⁾	814		n/a			⁽¹⁾	810
Dilutive effect of restricted stock units outstanding	197		133		335		235		n/a			⁽²⁾	366		n/a			⁽²⁾	363
	29,998		29,594		30,139		29,641		28,274				30,231		28,465				30,139
Diluted earnings per share	$	0.24	$	0.39	$	0.46	$	0.62
Diluted earnings (loss) per share									$	(0.25	)		$	0.24	$	(0.11	)		$	0.45

(1) - For the three and nine months ended September 30, 2017, 716 and 802 shares, respectively were excluded from the calculation of diluted EPS due to the net loss for the respective periods.

(2) - For the three and nine months ended September 30, 2017, 308 and 337 shares, respectively, were excluded from the calculation of diluted EPS due to the net loss for the respective periods.

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

4. Acquisitions

During the ~~six~~nine months ended ~~November~~September 30, ~~2016,~~2017, the Company completed ~~three acquisitions. The Company purchased three companies,~~ two acquisitions, one that ~~provide NDT~~performs mechanical services at height, located in Canada, and ~~one that provides mechanical services,~~a company located in the U.S. that primarily performs chemical and specialty process services, primarily in the aerospace industry.

~~For the Canadian~~In these acquisitions, the Company acquired the assets of the U.S. acquiree and 100% of the common stock of ~~both acquirees~~the Canada acquiree in exchange for aggregate consideration of ~~$1.2~~$8.5 million in cash, ~~$0.3 million of notes payable and~~ contingent consideration ~~estimated~~up to ~~be $0.4~~$5.9 million to be earned based upon the acquired businesses achieving specific performance metrics over their initial three years of operations 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, $0.2 million of notes payable and contingent consideration estimated to be $1.2 million to be earned based upon the acquired businessesbusiness achieving specific performance metrics over the initial three years of operations from ~~its~~the acquisition ~~date.~~date and $1.6 million for working capital adjustments yet to be finalized. The Company accounted for these ~~three~~ transactions in accordance with the acquisition method of accounting for business combinations.

The assets and liabilities of the businesses acquired in ~~fiscal~~ 2017 were included in the Company's condensed 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~~valuations of the assets ~~both tangible and intangible, and liabilities~~ acquired. The results of operations for these acquisitions are included in the Services segment's results from the date of acquisition. Goodwill of $4.3 million primarily relates to expected synergies and assembled workforce, of which $1.8 million is generally deductible for tax purposes. Other intangible assets, primarily related to customer relationships and covenants not to compete, were $8.4 million.

The Company's preliminary purchase price allocations are included in the table below, summarizing the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:


	Fiscal
	2017			2017
Number of Entities	3			2
Consideration transferred:
Cash paid	$	8,196		$	8,509
Notes payable	481
Working capital adjustments				1,604
Contingent consideration	1,630			4,126
Consideration transferred	$	10,307		$	14,239

Current assets	$	1,781		$	2,443
Property, plant and equipment	953			1,140
Long-term net deferred tax asset	434
Intangible assets	3,367			8,436
Goodwill	3,986			4,271
Current liabilities	(214		)	(881		)
Long-term deferred tax liability				(1,170		)
Net assets acquired	$	10,307		$	14,239

Revenues and operating income included in the condensed consolidated statement of operations for ~~fiscal~~ 2017 from these acquisitions for the period subsequent to the closing of ~~these transactions were~~this transaction was approximately ~~$1.7~~$9.1 million and ~~less than $0.1~~$1.1 million, respectively. As these acquisitions were immaterial ~~on an individual basis and in~~to the ~~aggregate,~~Company's 2017 results, no unaudited pro forma financial information has been included in this ~~report.~~report for either acquisition.

The Company completed ~~one acquisition in the first six months of fiscal 2016. The Company purchased a company~~two acquisitions that ~~provides unmanned aerial systems and~~provide NDT services, located in Canada, during the ~~U.S. In this acquisition, the~~nine months ended September 30, 2016. The Company acquired 100% of the common stock of ~~the acquiree~~both acquirees in exchange for aggregate

consideration of ~~$1.8~~$1.2 million in cash, $0.3 million of notes payable and contingent consideration estimated to be ~~$0.9~~$0.4 million to

be earned based upon the acquired ~~business~~businesses achieving specific performance metrics over ~~the~~their initial ~~four~~three years of operations

from their acquisition dates.

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

~~years of operations from the acquisition date. The Company accounted for this transaction in accordance with the acquisition method of accounting for business combinations.~~

Acquisition-Related Expense

~~During~~In the ~~three and six months ended November 30, 2016 and 2015,~~course of its acquisition activities, the Company ~~incurred acquisition-related~~incurs costs ~~of $0.2 million and less than $0.1 million, respectively,~~ in connection with due diligence, professional fees, and other ~~expenses for its acquisition activities.~~expenses. Additionally, the Company ~~adjusted~~adjusts the fair value ~~of certain previously recorded acquisition-related contingent consideration liabilities. These adjustments resulted in a net (increase) decrease~~ of acquisition-related contingent consideration liabilities ~~and~~on a corresponding (decrease) increase in income from operations of less than $(0.1) million and $0.2 million, for the three months ended November 30, 2016 and 2015, respectively and $(0.4) million and $1.1 million for the six months ended November 30, 2016 and 2015, respectively. The Company’s aggregate acquisition-related contingent consideration liabilities were $3.2 million and $2.1 million as of November 30, 2016 and May 31, 2016, respectively.

~~Fair value adjustments to acquisition-related contingent consideration liabilities and acquisition-related transaction costs have been classified~~quarterly basis. These amounts are recorded as acquisition-related expense (benefit), net, inon the condensed consolidated statements of income and were as follows for the three and ~~six month periods~~nine months ended ~~November~~September 30, ~~2016~~2017 and ~~November 30, 2015.~~2016:



	Three months ended September 30,					Nine months ended September 30,
	2017			2016		2017			2016
Due diligence, professional fees and other transaction costs	$	—		$	28	$	291		$	577
Adjustments to fair value of contingent consideration liabilities	(248		)	356		(880		)	(676		)
Acquisition-related expense (benefit), net	$	(248	)	$	384	$	(589	)	$	(99	)

5. Accounts Receivable, net

Accounts receivable consisted of the following:


	November 30, 2016			May 31, 2016			September 30, 2017			December 31, 2016

Trade accounts receivable	$	143,876		$	140,820		$	144,503		$	133,704
Allowance for doubtful accounts	(2,509		)	(2,907		)	(4,314		)	(2,852		)
Accounts receivable, net	$	141,367		$	137,913		$	140,189		$	130,852

6. Property, Plant and Equipment, net

Property, plant and equipment consisted of the following:


	Useful Life (Years)	November 30, 2016			May 31, 2016			Useful Life (Years)	September 30, 2017			December 31, 2016

Land		$	1,723		$	1,735			$	1,909		$	1,714
Buildings and improvements	30-40	19,050			19,364			30-40	22,735			19,261
Office furniture and equipment	5-8	8,971			8,692			5-8	13,941			12,574
Machinery and equipment	5-7	174,119			173,053			5-7	179,681			166,423
		203,863			202,844				218,266			199,972
Accumulated depreciation and amortization		(129,283		)	(124,168		)		(141,093		)	(126,823		)
Property, plant and equipment, net		$	74,580		$	78,676			$	77,173		$	73,149

Depreciation expense for the three months ended ~~November~~September 30, ~~2016~~2017 and ~~November~~September 30, ~~2015~~2016 was $5.7 million and ~~$5.5~~$5.8 million, respectively.

Depreciation expense for the ~~six~~nine months ended ~~November~~September 30, 2017 and September 30, 2016 ~~and November 30, 2015~~ was ~~$11.6~~$16.8 million and ~~$11.1~~$17.6 million, respectively.

7. Goodwill

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Changes in the carrying amount of goodwill by segment is shown below:

Services International Products and Systems Total
Balance at May 31, 2015 $ 117,279
$ 35,938
$ 13,197
$ 166,414
Goodwill acquired (disposed) during the year 2,728
(374 ) —
2,354
Adjustments to preliminary purchase price allocations 270
—
—
270
Foreign currency translation (594 ) 776
—
182
Balance at May 31, 2016 $ 119,683
$ 36,340
$ 13,197
$ 169,220
Goodwill acquired during the year 3,986
—
—
3,986
Adjustments to preliminary purchase price allocations (19 ) —
—
(19 )
Foreign currency translation (369 ) (1,758 ) —
(2,127 )
Balance at November 30, 2016 $ 123,281
$ 34,582
$ 13,197
$ 171,060



	Services			International		Products and Systems			Total
Balance at December 31, 2016	$	123,392		$	33,351	$	13,197		$	169,940
Goodwill acquired during the period	4,271			—		—			4,271
Impairment charges	—			—		(13,197		)	(13,197		)
Adjustments to preliminary purchase price allocations	(211		)	—		—			(211		)
Foreign currency translation	1,028			3,873		—			4,901
Balance at September 30, 2017	$	128,480		$	37,224	$	—		$	165,704

The Company reviews goodwill for impairment on a reporting unit basis on ~~March~~October 1 of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.

During the second quarter of 2017, there were pending contract bids which management assessed as having a reasonable chance of success. These contract bids were not awarded to the Company. As a result of ~~November 30, 2016,~~this missed opportunity, the annual forecasting process was accelerated, resulting in lower future operating profits and cash flows. As such, there were indicators that the carrying amount of the goodwill for the Products and Systems reporting unit may not be recoverable due to the decline in the projected future cash flows.

The Company ~~did not identify~~performed an analysis to determine any ~~changes~~impairment of long-lived assets (see Note 8) as well as an analysis to determine any impairment of goodwill. For the goodwill analysis, we used income and market approaches to estimate the fair value of the reporting unit, which requires significant judgment in ~~circumstances~~evaluation of economic and industry trends, estimated future cash flows, discount rates and other factors, and compared that ~~would indicate~~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 ~~may not be recoverable.~~for the Products and Systems reporting unit.

The Company's cumulative goodwill impairment ~~for each~~as of September 30, 2017 was $23.1 million, of which $13.2 million related to the ~~periods ended November 30, 2016, May~~Products and Systems segment and $9.9 million related to the International segment. As of December 31, 2016, ~~and May 31, 2015~~the cumulative goodwill impairment was $9.9 million, which is within its International segment.

8. Intangible Assets

The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows:


		November 30, 2016							May 31, 2016								September 30, 2017										December 31, 2016
	Useful Life (Years)	Gross Amount		Accumulated Amortization			Net Carrying Amount		Gross Amount		Accumulated Amortization			Net Carrying Amount		Useful Life (Years)	Gross Amount		Accumulated Amortization			Impairment			Net Carrying Amount		Gross Amount		Accumulated Amortization			Net Carrying Amount

Customer relationships	5-12	$	82,463	$	(50,111	)	$	32,352	$	81,262	$	(47,747	)	$	33,515	5-14	$	92,488	$	(56,582	)	$	(170	)	$	35,736	$	81,559	$	(50,417	)	$	31,142
Software/Technology	3-15	18,083		(12,504		)	5,579		17,539		(11,855		)	5,684		3-15	19,219		(13,804		)	(2,411		)	3,004		18,128		(12,577		)	5,551
Covenants not to compete	2-5	11,148		(9,592		)	1,556		10,791		(9,290		)	1,501		2-5	11,687		(10,227		)	—			1,460		11,143		(9,647		)	1,496
Other	2-5	8,039		(5,389		)	2,650		7,827		(5,035		)	2,792		2-12	8,262		(6,188		)	(32		)	2,042		7,266		(5,448		)	1,818
Total		$	119,733	$	(77,596	)	$	42,137	$	117,419	$	(73,927	)	$	43,492		$	131,656	$	(86,801	)	$	(2,613	)	$	42,242	$	118,096	$	(78,089	)	$	40,007

Amortization expense for the three months ended ~~November~~September 30, 2017 and September 30, 2016 ~~and November 30, 2015~~ was ~~$2.2~~$2.4 million and ~~$2.4~~$2.1 million, respectively.

Amortization expense for the ~~six~~nine months ended ~~November~~September 30, 2017 and September 30, 2016 ~~and November 30, 2015~~ was ~~$4.3~~$6.8 million and ~~$4.8~~$6.9 million, respectively.

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

As described in Note 7, 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 condensed consolidated statements of income for the three and nine months ended September 30, 2017.

9. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:


	November 30, 2016		May 31, 2016		September 30, 2017		December 31, 2016

Accrued salaries, wages and related employee benefits	$	29,400	$	31,566	$	29,763	$	23,442
Contingent consideration, current portion	1,982		1,029		2,999		1,826
Accrued workers’ compensation and health benefits	6,848		4,834		5,740		6,351
Deferred revenue	3,092		3,332		5,440		3,743
Legal settlement accrual	6,320		6,320
Litigation accrual					1,200		6,320
Other accrued expenses	16,615		15,902		20,466		17,015
Total accrued expenses and other liabilities	$	64,257	$	62,983	$	65,608	$	58,697

10. Long-Term Debt

Long-term debt consisted of the following:


	November 30, 2016			May 31, 2016			September 30, 2017			December 31, 2016

Senior credit facility	$	88,011		$	68,999		$	95,050		$	82,776
Notes payable	379			10,111			230			320
Other	4,970			5,899			9,013			4,200
Total debt	93,360			85,009			104,293			87,296
Less: Current portion	(2,028		)	(12,553		)	(2,490		)	(1,379		)
Long-term debt, net of current portion	$	91,332		$	72,456		$	101,803		$	85,917

Senior Credit Facility

~~On October 31, 2014, the Company entered into a Third Amendment and Modification Agreement of its~~The Company's revolving ~~line of~~ credit ~~the Third Amended and Restated Credit Agreement (“Credit Agreement”), dated December 21, 2011,~~agreement with its ~~lending group. The~~ banking group ("Credit ~~Agreement~~Agreement") provides the Company with a $175.0 million revolving line of credit, which, under certain circumstances, ~~the line of credit~~ can be increased to $225.0 million. The Company may borrow up to $30.0 million in non-U.S. Dollar currencies and use up to $10.0 million of the credit limit for the issuance of letters of credit. The Credit Agreement has a maturity date of October 30, 2019. As of ~~November~~September 30, ~~2016,~~2017, the Company had borrowings of ~~$88.0~~$95.1 million and a total of ~~$5.7~~$5.0 million of letters of credit outstanding under the Credit Agreement.

Loans under the Credit Agreement bear interest at LIBOR plus an applicable LIBOR margin ranging from 1% to 1.75%, or a base rate less a margin of 1.25% to 0.375%, at the option of the Company, based upon the Company’s Funded Debt Leverage Ratio. Funded Debt Leverage Ratio is ~~generally~~defined as 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 2.0 to 1. The Company will also bear additional costs for market disruption, regulatory changes effecting the lenders’ funding costs, and default pricing of an additional 2% interest rate margin on any

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

amounts not paid when due. Amounts borrowed under the Credit Agreement are secured by liens on substantially all of the assets of the Company.

The Credit Agreement contains financial covenants requiring that the Company maintain a Funded Debt Leverage Ratio of no greater than 3.25 to 1 and an Interest Coverage Ratio of at least 3.0 to 1. Interest Coverage Ratio ~~means~~is defined as the ratio, as of any date

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

of determination, of (a) EBITDA for the 12 month period immediately preceding the date of determination, to (b) all interest, premium payments, debt discount, fees, charges and related expenses of the Company and its subsidiaries in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, paid during the 12 month period immediately preceding the date of determination. The Credit Agreement also limits the Company’s ability to, among other things, create liens, make investments, incur more indebtedness, merge or consolidate, make dispositions of property, pay dividends and make distributions to stockholders, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements. The Credit Agreement does not limit the Company’s ability to acquire other businesses or companies except that the acquired business or company must be in the Company's line of business, the Company must be in compliance with the financial covenants on a pro forma basis after taking into account the acquisition, and, if the acquired business is a separate subsidiary, in certain circumstances the lenders will receive the benefit of a guaranty of the subsidiary and liens on its assets and a pledge of its stock.

As of ~~November~~September 30, ~~2016,~~2017, the Company was in compliance with the terms of the Credit Agreement, and will continuously monitor its compliance with the covenants contained in its ~~credit agreement.~~Credit Agreement.

Notes Payable and Other

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 ~~2.7%~~3.2% as of ~~November~~September 30, ~~2016.~~2017. Interest expense is recorded in the condensed consolidated statements of income.

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

11. Fair Value Measurements

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

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

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

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

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

November 30, 2016
Level 1 Level 2 Level 3 Total
Liabilities:

Contingent consideration $ —
$ —
$ 3,237
$ 3,237
Total Liabilities $ —
$ —
$ 3,237
$ 3,237

basis

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

May 31, 2016
Level 1 Level 2 Level 3 Total
Liabilities:

Contingent consideration $ —
$ —
$ 2,075
$ 2,075
Total Liabilities $ —
$ —
$ 2,075
$ 2,075

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

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

The following table represents the changes in the fair value of Level 3 contingent consideration:



	Nine months ended
	September 30, 2017
Beginning balance	$	3,094
Acquisitions	4,126
Payments	(554		)
Accretion of liability	198
Revaluation	(1,078		)
Foreign currency translation	28
Ending balance	$	5,814

Financial instruments not measured at fair value on a recurring basis

12. Commitments and Contingencies

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 possibly for certain of 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. The Company has accrued an aggregate of approximately $1.6 million for losses related to the matters described below, net of insurance, for which the Company has stated that an accrual has been established. This $1.6 million accrual does not include the California class action matter, described below, as to which the settlement amount has been fully paid.

Litigation and Commercial Claims

The Company ~~is currently a defendant in~~settled a consolidated purported class and collective action ~~Edgar Viceral and David Kruger v Mistras Group, et al, pending in the U.S. District Court for the Northern District of California. This matter results~~that resulted from the consolidation of two cases originally filed in California state court in April 2015. ~~The consolidated case alleges violations of California statutes, primarily~~In connection with the ~~California Labor Code, and seeks to proceed as a collective action under~~settlement, the U.S. Fair Labor Standards Act. The case is predicated on claims for allegedly missed rest and meal periods, inaccurate wage statements, and failure to pay all wages due, as well as related unfair business practices, and is requesting payment of all damages, including unpaid wages, and various fines and penalties available under California and Federal law.

The parties have reached a settlement of the case, whereby the Company agreed to pay $6 million to resolve the allegations and avoid further distraction that would result if the litigation continued. The settlement received preliminary approval by the court in October 2016. The Company recorded a pre-tax charge of $6.3 million induring the ~~fourth quarter of fiscal~~three months ended June 30, 2016 ~~for~~and paid the settlement ~~and payment of payroll taxes and other costs related to the settlement. Upon final approval, the settlement will cover claims dating back to April 2011~~ in ~~some cases and involves approximately 4,900 current and former employees.~~February 2017.

The Company is a defendant in the lawsuit AGL Services Company v. Mistras Group, ~~Inc~~Inc.,., pending in U.S. District Court for the Northern District of Georgia, filed November 2016. The case involves radiography work performed by the Company in ~~fiscal~~ 2013 on the construction of a pipeline project in the U.S. The owner of the pipeline project has claimed damages of approximately $5.8 million and contends that certain of the radiography images the Company’s technicians prepared regarding the project did not meet the code quality interpretation standards required by the American Petroleum Institute. ~~The project owner~~At a trial concluded on October 26, 2017, the jury awarded the plaintiff damages plus interest, which the Company believes is claiming damages as a result of the alleged quality defects of the Company’s radiography images. The complaint alleges damages of approximately $6 million. The Company is currently unable to determine the likely outcome or reasonably estimate the amount or range of potential liability related to this matter, and accordingly, has not established any reserves for this matter.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 judgment is being appealed, but the Company recorded ~~a reserve~~an accrual for the ~~full amount of~~judgment during the ~~judgment~~three months ended June 30, 2016. The loss for this matter is included in the ~~fourth quarter of fiscal 2016.~~

accrual set forth above.

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

The Company is 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, ~~193~~^rd193rd Judicial District, Dallas County, Texas, filed September 2016. The plaintiff alleges Mistras delivered ~~in fiscal 2014,~~ a defective Ultrasonic inspection system in 2014 and is alleging damages of approximately $2.3 ~~million,~~million. The Company has established an accrual for this matter, which is included in the amount ~~it paid for the system. The Company is vigorously defending the case and has not established any reserves for the matter at this time.~~set forth above.

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~~accruals for this matter.

Acquisition-related contingencies

The Company is liable for contingent consideration in connection with certain of its acquisitions. As of ~~November~~September 30, ~~2016,~~2017, total potential acquisition-related contingent consideration ranged from zero to approximately ~~$15.6~~$8.6 million and would be payable upon the achievement of specific performance metrics by certain of the acquired companies over the next 2.8 years of operations. See Note 4 - Acquisitions to these condensed consolidated financial statements for further ~~information with respect to~~discussion of the Company’s ~~acquisitions completed in fiscal 2016 and 2017.~~acquisitions.

13. Segment Disclosure

The Company’s three operating segments are:

Services. This segment provides asset protection solutions primarily in North America with the largest concentration in the United States and the Canadian services business, consisting primarily of non-destructive testing and inspection, mechanical and engineering services that are used to evaluate and maintain the structural integrity and reliability of critical energy, industrial and public infrastructure.

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

Products and Systems. This segment designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States.

Costs incurred for general corporate services, including 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.

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Selected consolidated financial information by segment for the periods shown was as follows (intercompany transactions are eliminated in Corporate and eliminations):


	Three months ended						Six months ended						Three months ended						Nine months ended
	November 30, 2016			November 30, 2015			November 30, 2016			November 30, 2015			September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Revenues
Services	$	132,418		$	150,463		$	259,108		$	287,868		$	137,194		$	127,153		$	397,565		$	395,089
International	42,230			38,425			79,748			75,284			38,200			37,922			106,360			105,275
Products and Systems	6,686			7,791			12,853			16,477			6,268			6,807			16,925			19,955
Corporate and eliminations	(4,692		)	(1,893		)	(6,624		)	(4,990		)	(2,092		)	(3,071		)	(7,524		)	(5,713		)
	$	176,642		$	194,786		$	345,085		$	374,639		$	179,570		$	168,811		$	513,326		$	514,606


	Three months ended						Six months ended						Three months ended					Nine months ended
	November 30, 2016			November 30, 2015			November 30, 2016			November 30, 2015			September 30, 2017			September 30, 2016		September 30, 2017			September 30, 2016
Gross profit
Services	$	34,184		$	41,118		$	68,629		$	77,687		$	34,729		$	33,704	$	100,432		$	102,652
International	14,837			12,106			27,224			22,886			10,432			13,133		29,720			33,673
Products and Systems	3,230			3,833			6,326			7,755			2,753			3,686		7,313			9,475
Corporate and eliminations	(175		)	(132		)	(47		)	(129		)	(17		)	128		(73		)	356
	$	52,076		$	56,925		$	102,132		$	108,199		$	47,897		$	50,651	$	137,392		$	146,156


	Three months ended						Six months ended						Three months ended						Nine months ended
	November 30, 2016			November 30, 2015			November 30, 2016			November 30, 2015			September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Income (loss) from operations
Services	$	12,172		$	18,815		$	24,641		$	34,214		$	11,699		$	12,221		$	31,211		$	30,932
International	6,717			3,971			11,375			5,789			1,023			5,751			3,866			8,925
Products and Systems	152			1,055			289			2,239			(15,573		)	806			(16,913		)	560
Corporate and eliminations	(6,533		)	(4,272		)	(12,641		)	(9,741		)	(7,524		)	(6,662		)	(20,287		)	(17,816		)
	$	12,508		$	19,569		$	23,664		$	32,501		$	(10,375	)	$	12,116		$	(2,123	)	$	22,601

Income (loss) by operating segment includes intercompany transactions, which are eliminated in Corporate and eliminations.


	Three months ended						Six months ended						Three months ended						Nine months ended
	November 30, 2016			November 30, 2015			November 30, 2016			November 30, 2015			September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Depreciation and amortization
Services	$	5,469		$	5,562		$	11,074		$	11,084		$	5,543		$	5,516		$	16,330		$	17,224
International	1,963			1,914			3,921			3,886			2,004			1,958			5,736			5,881
Products and Systems	566			577			1,114			1,140			594			552			1,746			1,718
Corporate and eliminations	(104		)	(90		)	(212		)	(187		)	(46		)	(107		)	(168		)	(260		)
	$	7,894		$	7,963		$	15,897		$	15,923		$	8,095		$	7,919		$	23,644		$	24,563

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)


	November 30, 2016		May 31, 2016		September 30, 2017		December 31, 2016
Intangible assets, net
Services	$	19,945	$	19,022	$	24,951	$	19,550
International	15,807		17,703		14,228		14,139
Products and Systems	5,555		6,054		2,309		5,482
Corporate and eliminations	830		713		754		836
	$	42,137	$	43,492	$	42,242	$	40,007


	November 30, 2016		May 31, 2016		September 30, 2017		December 31, 2016
Total assets
Services	$	302,920	$	301,678	$	306,323	$	291,539
International	135,981		132,643		150,555		130,427
Products and Systems	31,247		31,596		13,944		28,964
Corporate and eliminations	22,018		16,758		13,600		18,497
	$	492,166	$	482,675	$	484,422	$	469,427

Revenues by geographic area for the three and ~~six~~nine months ended ~~November~~September 30, ~~2016~~2017 and ~~2015,~~2016, respectively, were as follows:


	Three months ended				Six months ended				Three months ended				Nine months ended
	November 30, 2016		November 30, 2015		November 30, 2016		November 30, 2015		September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
Revenues
United States	$	112,719	$	132,068	$	228,842	$	262,411	$	114,249	$	113,409	$	344,808	$	358,343
Other Americas	19,957		23,557		35,006		35,086		26,084		16,940		59,452		48,828
Europe	37,560		36,468		71,054		71,352		36,264		33,126		97,630		93,265
Asia-Pacific	6,406		2,693		10,183		5,790		2,973		5,336		11,436		14,170
	$	176,642	$	194,786	$	345,085	$	374,639	$	179,570	$	168,811	$	513,326	$	514,606

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

14. 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 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 will purchase from Dr.

Vahaviolos up to $2 million of shares each month, at a 2% discount to the average daily closing price of the Company's common stock for the preceding month. During the ~~quarter~~nine months ended ~~November~~September 30, ~~2016,~~2017, the Company purchased approximately ~~181,000~~726,000 shares from Dr. Vahaviolos at an average price of ~~$22.07~~$21.93 per share and an aggregate cost of ~~$4.0~~$15.9 million. ~~In addition, during this same fiscal quarter,~~From the inception of the plan through September 30, 2017, the Company ~~repurchased~~has 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 and approximately 146,000 shares in the open market at an average price of $20.48 per share ~~and~~for an aggregate cost of approximately $3.0 million. All such repurchased shares are classified as Treasury Stock on the condensed consolidated balance sheet. As of ~~November~~September 30, ~~2016,~~2017, approximately ~~$43.0~~$25.1 million remained available to repurchase shares under the stock repurchase plan.

~~15. Subsequent Event~~

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. As a result of this change, the Company will file a Transition Report on Form 10-K for the transition period ending December 31, 2016.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis (“MD&A”) includes a narrative explanation and analysis of our results of operations and financial condition for the three and ~~six~~nine months ended ~~November~~September 30, ~~2016~~2017 and ~~November~~September 30, ~~2015.~~2016. 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~~Transition Report on Form 10-K for ~~fiscal~~the transition period ended December 31, 2016, filed ~~with the Securities and Exchange Commission ("SEC") on August 15, 2016~~March 20, 2017 (“2016 ~~Annual~~Transition Report”). 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 Estimates

Historically, our fiscal years ended on May 31. 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 this quarterly report, our fiscal years are identified according to the calendar year in which they historically ended (e.g., the fiscal year ended May 31, 2016 is referred to as “fiscal 2016”), and references to "fiscal 2017" mean the period that would have been the fiscal year ending May 31, 2017, if we had not changed our fiscal year to a calendar year on January 3, 2017 (effective December 31, 2016). The Company will report its financial results for the period of June 1, 2016 to December 31, 2016 on a Transition Report on Form 10-K.

Forward-Looking Statements

This report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, 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,” or “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “could,” “should,” “would,” “predicts,” “appears,” “projects,” or the negative of such terms or other similar expressions. You are urged not to place undue reliance on any such forward-looking statements, any of which may turn out to be wrong due to inaccurate assumptions, various risks, uncertainties or other factors known and unknown. Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those discussed in the “Business—Forward-Looking Statements,” and “Risk Factors” sections of our 2016 ~~Annual~~Transition Report as well as those discussed in this Quarterly Report on Form 10-Q and in our other filings with the ~~SEC.~~Securities and Exchange Commission (“SEC”).

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, 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 global markets, principally in Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.

Products and Systems 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 provide a majority of our services to our customers on a regular, recurring basis. We serve a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas (downstream, midstream, upstream and petrochemical), power generation (natural gas, fossil, nuclear, alternative, renewable, and transmission and distribution), public infrastructure, chemicals, commercial aerospace and defense, transportation, primary metals and metalworking, pharmaceutical/biotechnology and food processing industries and research and engineering institutions. We have established long-term relationships as a critical solutions provider to many of the leading companies in our target markets.

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. We have made a number of acquisitions in an effort to grow our base of experienced, certified personnel, expand our ~~product~~service lines and technical capabilities, increase our geographical reach and leverage our fixed costs. 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,~~service lines, technologies, resources and customers that we believe will enhance our advantages over our competition.

Demand for outsourced asset protection solutions has generally increased over the last ten years, creating demand from which our entire industry has benefited. We believe continued growth can be realized in all of our target markets. ~~However,~~For most of 2017, current market conditions ~~are~~have been soft, driven by lower oil prices which have ~~driven~~caused many of the Company’s customers to curtail ~~spending.~~

~~Global financial markets continue to experience uncertainty, relatively low consumer confidence, slow economic growth, fluctuating oil prices~~spending for our services and ~~volatile currency exchange rates.~~products. However, during the fall of 2017, market conditions turned modestly positive and we believe ~~these conditions have allowed us to selectively hire new talented individuals that otherwise might not have been available to us,~~this will continue for the remainder of 2017 and ~~to make acquisitions~~through the spring of ~~complementary businesses at reasonable valuations.~~

2018.

Results of Operations

Condensed consolidated results of operations for the three and ~~six~~nine months ended ~~November~~September 30, ~~2016~~2017 and ~~November~~September 30, ~~2015~~2016 were as follows:

Three months ended Six months ended
November 30, 2016 November 30, 2015 November 30, 2016 November 30, 2015
($ in thousands) ($ in thousands)
Revenues $ 176,642
$ 194,786
$ 345,085
$ 374,639
Gross profit 52,076
56,925
102,132
108,199
Gross profit as a % of Revenue 29 % 29 % 30 % 29 %
Total operating expenses 39,568
37,356
78,468
75,698
Operating expenses as a % of Revenue 22 % 19 % 23 % 20 %
Income from operations 12,508
19,569
23,664
32,501
Income from Operations as a % of Revenue 7 % 10 % 7 % 9 %
Interest expense 928
1,335
1,748
3,257
Income before provision for income taxes 11,580
18,234
21,916
29,244
Provision for income taxes 4,284
6,804
8,011
10,967
Net income 7,296
11,430
13,905
18,277
Less: net income (loss) attributable to noncontrolling interests, net of taxes $ 26
5
39
(20 )
Net income attributable to Mistras Group, Inc. $ 7,270
$ 11,425
$ 13,866
$ 18,297

The Company uses Adjusted EBITDA, a non-GAAP metric, as a measure of its consolidated operating performance and assist in comparing performance from period to period on a consistent basis. A reconciliation of Adjusted EBITDA to net income is provided below for the three and six months ended November 30, 2016 and November 30, 2015:

Three months ended Six months ended
November 30, 2016 November 30, 2015 November 30, 2016 November 30, 2015
($ in thousands) ($ in thousands)
Adjusted EBITDA data

Net income attributable to Mistras Group, Inc. $ 7,270
$ 11,425
$ 13,866
$ 18,297
Interest expense 928
1,335
1,748
3,257
Provision for income taxes 4,284
6,804
8,011
10,967
Depreciation and amortization 7,894
7,963
15,897
15,923
Share-based compensation expense 1,407
1,270
3,313
3,227
Acquisition-related expense (benefit), net 197
(75 ) 591
(971 )
Severance 160
320
425
379
Foreign exchange (gain) loss (519 ) 163
(1,044 ) 455
Adjusted EBITDA $ 21,621
$ 29,205
$ 42,807
$ 51,534



	Three months ended						Nine months ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)						($ in thousands)
Revenues	$	179,570		$	168,811		$	513,326		$	514,606
Gross profit	47,897			50,651			137,392			146,156
Gross profit as a % of Revenue	27		%	30		%	27		%	28		%
Total operating expenses	58,272			38,535			139,515			123,555
Operating expenses as a % of Revenue	32		%	23		%	27		%	24		%
Income (loss) from operations	(10,375		)	12,116			(2,123		)	22,601
Income (loss) from Operations as a % of Revenue	(6		)%	7		%	—		%	4		%
Interest expense	1,081			778			3,114			2,218
Income (loss) before (benefit) provision for income taxes	(11,456		)	11,338			(5,237		)	20,383
(Benefit) provision for income taxes	(4,503		)	4,083			(2,199		)	6,908
Net income (loss)	(6,953		)	7,255			(3,038		)	13,475
Less: net income attributable to non-controlling interests, net of taxes	15			17			21			29
Net income (loss) attributable to Mistras Group, Inc.	$	(6,968	)	$	7,238		$	(3,059	)	$	13,446

Note About Non-GAAP Measures

Adjusted EBITDA is a performance measure used by management that is not calculated in accordance with U.S. generally accepted accounting principles (GAAP). Adjusted EBITDA is defined in this Report as net income attributable to Mistras Group, Inc. plus: interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense, certain acquisition-related costs (including transaction due diligence costs and adjustments to the fair value of contingent consideration), foreign exchange (gain) loss and, if applicable, certain special items which are noted.

Management uses Adjusted EBITDA as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations. Adjusted EBITDA is also used as the basis for a performance evaluation metric for certain of our executive and employee incentive compensation programs.

~~Later in~~In this MD&A under the heading "Income (loss) from Operations", the non-GAAP financial performance measure "Income ~~from operations~~(Loss) 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 (Loss) from Operations" (a) transaction expenses related to acquisitions, such as professional fees and due diligence costs, (b) the net changes in the fair value of acquisition-related contingent consideration liabilities and (c) ~~certain non-recurring~~special items. These items have been excluded from the GAAP measure because these expenses and credits are not ~~considered by management to be~~ 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.

InWe believe investors and other users of our financial statements benefit from the ~~MD&A section "Liquidity~~presentation of "Income (loss) before special items" in evaluating our performance. Income (loss) before special items provides an additional tool to compare our core business operating performance on a consistent basis and Capital Resources", we use the term free cash flow, a non-GAAP measurement. We define free cash flow as cash provided by operating activities less capital expenditures (which are purchases of property, plantmeasure underlying trends and ~~equipment and of intangible assets and classified as an investing activity). Free cash flow, which does~~results in our business. Income (loss) before special items is not ~~represent residual cash flow available~~used to determine incentive compensation for discretionary expenditures since items such as debt repayments are not deducted in determining such measures, was $18.5 million for the first six months of fiscal 2017, consisting of $26.0 million of operating cash flow less $7.4 million of capital expenditures. For the comparable period in fiscal 2016, free cash flow was $18.3 million consisting of $26.5 million of operating cash flow less $8.2 million of capital expenditures.executives or employees.

Revenue

Revenues for the three months ended ~~November~~September 30, ~~2016~~2017 were ~~$176.6~~$179.6 million, an increase of $10.8 million, or 6%, compared with the three months ended September 30, 2016. Revenues for the nine months ended September 30, 2017 were $513.3 million, a decrease of ~~$18.1~~$1.3 million, or 9%less than 1%, compared with the ~~prior year. Revenues for the six~~nine months ended ~~November~~September 30, ~~2016 were $345.1 million, a decrease of $29.6 million, or 8%, compared with the prior year.~~2016.

Revenues by segment for the three and nine months ended ~~November~~September 30, ~~2016~~2017 and ~~November~~September 30, ~~2015~~2016 were as follows:


	Three months ended						Six months ended						Three months ended						Nine months ended
	November 30, 2016			November 30, 2015			November 30, 2016			November 30, 2015			September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)						($ in thousands)						($ in thousands)						($ in thousands)
Revenues
Services	$	132,418		$	150,463		$	259,108		$	287,868		$	137,194		$	127,153		$	397,565		$	395,089
International	42,230			38,425			79,748			75,284			38,200			37,922			106,360			105,275
Products and Systems	6,686			7,791			12,853			16,477			6,268			6,807			16,925			19,955
Corporate and eliminations	(4,692		)	(1,893		)	(6,624		)	(4,990		)	(2,092		)	(3,071		)	(7,524		)	(5,713		)
	$	176,642		$	194,786		$	345,085		$	374,639		$	179,570		$	168,811		$	513,326		$	514,606

Three Months

In the ~~second quarter of fiscal~~three months ended September 30, 2017, Services segment revenues ~~decreased 12%~~increased 8% due to a combination of acquisition growth and low ~~double~~single digit favorable impacts of foreign exchange rates and organic ~~decline,~~growth. The organic growth was achieved despite the negative impact of the 2017 hurricanes and continued weakness in a challenged region that includes a fairly large customer contract. International segment revenues increased 1%, driven by low single digit favorable impacts of foreign exchange rates, offset by a ~~small amount of acquisition growth.~~low single digit organic decline. Products and Systems segment revenues decreased by ~~14%~~8% driven by lower sales volume. ~~International segment revenues increased by 10%, driven by mid-teens organic growth, offset by a mid-single digit unfavorable impact of foreign exchange rates.~~

Oil and gas customer revenues comprised approximately 54% and ~~53%~~56% of total Company revenues infor the ~~second quarters of fiscal~~three months ended September 30, 2017 and ~~fiscal~~ 2016, respectively. The Company’s top ten customers comprised approximately ~~37% and~~ 36% of total revenues infor the ~~second quarter of fiscal~~three months ended September 30, 2017, ~~and fiscal 2016, respectively.~~as compared to 38% for the three months ended September 30, 2016. One customer, BP plc., accounted for approximately ~~12%~~10% and 14% of ~~our~~ total revenues, respectively, for the ~~second quarter of fiscal 2017. No customer accounted for more than 10% of our revenues in the second quarter of fiscal~~three months ended September 30, 2017 and three months ended September 30, 2016.

~~Six~~Nine Months

In the ~~first six~~nine months ~~of fiscal~~ended September 30, 2017, Services segment revenues ~~decreased 10% due to~~increased 1%, as acquisition growth slightly offset a low ~~double~~single digit organic ~~decline, offset by a small amount of acquisition growth. Products and Systems segment revenues decreased by 22% driven by lower sales volume.~~decline. International segment revenues increased ~~by 6% due to high~~1%, as low single digit organic growth slightly offset ~~by mid-single~~a low single digit unfavorable impact of foreign exchange rates. Products segment revenues decreased 15% due to lower sales volume.

Oil and gas revenues comprised approximately ~~55%~~58% and ~~54%~~57% of total Company revenues for the ~~first six months of fiscal~~nine month periods ended September 30, 2017 and ~~fiscal~~September 30, 2016, respectively. The Company’s top ten customers comprised approximately ~~37% and 33%~~38% of total revenues in

for both the ~~first six months of fiscal~~nine month periods ended September 30, 2017 and ~~fiscal 2016, respectively.~~September 30, 2016. One customer, BP plc., accounted for approximately ~~13%~~11% of our total revenues for the ~~first half of fiscal 2017. No customer accounted~~nine months ended September 30, 2017 and 12% for ~~more than 10% of our revenues in~~ the ~~first half of fiscal~~nine months ended September 30, 2016.

Gross Profit

Gross profit decreased by ~~$4.8~~$2.8 million, or 9%5%, in the ~~second quarter~~three months ended September 30, 2017, despite a sales increase of ~~fiscal~~6%. During the nine month period ended September 30, 2017, gross profit had a year-on-year decrease of $8.8 million, or 6%, on a sales decline of ~~9%. Gross profit decreased by $6.1 million, or 6%, in the first six months of fiscal 2017, on a sales decline of 8%~~less than 1%.

Gross profit by segment for the three and ~~six~~nine months ended ~~November~~September 30, ~~2016~~2017 and ~~November~~September 30, ~~2015~~2016 was as follows:


	Three months ended						Six months ended						Three months ended						Nine months ended
	November 30, 2016			November 30, 2015			November 30, 2016			November 30, 2015			September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)						($ in thousands)						($ in thousands)						($ in thousands)
Gross profit
Services	$	34,184		$	41,118		$	68,629		$	77,687		$	34,729		$	33,704		$	100,432		$	102,652
% of segment revenue	25.8		%	27.3		%	26.5		%	27.0		%	25.3		%	26.5		%	25.3		%	26.0		%
International	14,837			12,106			27,224			22,886			10,432			13,133			29,720			33,673
% of segment revenue	35.1		%	31.5		%	34.1		%	30.4		%	27.3		%	34.6		%	27.9		%	32.0		%
Products and Systems	3,230			3,833			6,326			7,755			2,753			3,686			7,313			9,475
% of segment revenue	48.3		%	49.2		%	49.2		%	47.1		%	43.9		%	54.2		%	43.2		%	47.5		%
Corporate and eliminations	(175		)	(132		)	(47		)	(129		)	(17		)	128			(73		)	356
	$	52,076		$	56,925		$	102,132		$	108,199		$	47,897		$	50,651		$	137,392		$	146,156
% of total revenue	29.5		%	29.2		%	29.6		%	28.9		%	26.7		%	30.0		%	26.8		%	28.4		%

Three months

~~As a percentage of revenues, gross~~Gross profit margin was ~~29.5%~~26.7% and ~~29.2%~~30.0% for the ~~second quarters of fiscal~~three month periods ended September 30, 2017 and 2016, respectively. ~~Service~~Services segment gross profit margins ~~decreased~~had a year-on-year decline of 120 basis points to ~~25.8%~~25.3% in the ~~second quarter~~three months ended September 30, 2017, driven primarily by an adverse impact from the 2017 summer hurricanes, which reduced revenues by

more than $1 million while labor costs were largely unchanged, as the Company chose to pay its technicians who were unable to work due to these events. International segment gross margins had a year-on-year decline of ~~fiscal 2017 compared~~730 basis points to 27.3% in the ~~second quarter of fiscal 2016. The 150 basis point decrease~~three months ended September 30, 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 UK. Products and Systems segment gross margin declined by 1030 basis points for the three months ended September 30, 2017 to 43.9%, driven by lower sales ~~volume~~volumes.

Nine months

Gross profit margin was 26.8% and 28.4% for the nine months ended September 30, 2017 and 2016, respectively. Services segment gross profit margins declined by 70 basis points to 25.3% in the nine months ended September 30, 2017, driven primarily by the aforementioned 2017 hurricane impact and also by a ~~less favorable sales mix.~~weak spring 2017 turnaround season which adversely impacted utilization of technicians. International segment gross margins ~~increased~~declined by 410 basis points to ~~35.1%~~27.9% in the ~~second quarter of fiscal~~nine months ended September 30, 2017, ~~compared with 31.5%~~driven primarily by lower revenues in the ~~prior year. The 360 basis point increase was due to improvement across our largest country locations, driven by double digit organic growth, improvements in~~Company’s German subsidiary, as well poor margins on a large contract and lower utilization of technical labor ~~utilization, sales mix and overhead utilization.~~in the UK. Products and Systems segment gross margin decreased by 90430 basis points to ~~48.3% compared with 49.2% in the prior year.~~

~~Six months~~

~~As a percentage of revenues, gross profit was 29.6% and 28.9%~~43.2% for the ~~first six~~nine months ~~of fiscal~~ended September 30, 2017, and 2016, respectively. Service segment gross profit margins decreased to 26.5% in the first six months of fiscal 2017 compared to 27.0% in the first six months of fiscal 2016. The 50 basis point decrease was primarily driven by lower sales volume and a less favorable sales mix. International segment gross margins increased to 34.1% in the first six months of fiscal 2017 compared with 30.4% in the prior year. The 370 basis point increase was due to improvement across our largest country locations, driven by organic revenue growth, improvements in technical labor utilization, sales mix and overhead utilization. Products and Systems segment gross margin improved by 210 basis points to 49.2% compared with 47.1% in the prior year.volumes.

Income (Loss) from Operations

The following table shows a reconciliation of the income (loss) from operations to income (loss) before special items for each of the Company's three ~~operating~~ segments ~~the Corporate segment~~ and for the Company in total:


	Three months ended						Six months ended						Three months ended						Nine months ended
	November 30, 2016			November 30, 2015			November 30, 2016			November 30, 2015			September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)						($ in thousands)						($ in thousands)						($ in thousands)
Services:
Income from operations	$	12,172		$	18,815		$	24,641		$	34,214		$	11,699		$	12,221		$	31,211		$	30,932
Litigation charges													—			—			—			6,320
Bad debt provision for a customer bankruptcy													—			—			1,200			—
Severance costs	34			$	188		77			188			163			43			493			43
Asset write-offs and lease terminations													—			—			123			—
Acquisition-related expense (benefit), net	19			337			364			(593		)	(126		)	345			(48		)	(123		)
Income before special items	12,225			19,340			25,082			33,809			11,736			12,609			32,979			37,172
International:
Income from operations	6,717			3,971			11,375			5,789			1,023			5,751			3,866			8,925
Severance costs	112			115			201			174			379			89			455			799
Acquisition-related expense (benefit), net	11			(487		)	21			(457		)	—			11			(501		)	(53		)
Income before special items	6,840			3,599			11,597			5,506			1,402			5,851			3,820			9,671
Products and Systems:
Income from operations	152			1,055			289			2,239
Income (loss) from operations													(15,573		)	806			(16,913		)	560
Impairment charges													15,810			—			15,810			—
Severance costs	14			17			14			17			—			—			—			17
Acquisition-related expense (benefit), net	—			—			—			—			—			—			—			—
Income before special items	166			1,072			303			2,256
Income (loss) before special items													237			806			(1,103		)	577
Corporate and Eliminations:
Loss from operations	(6,533		)	(4,272		)	(12,641		)	(9,741		)	(7,524		)	(6,662		)	(20,287		)	(17,816		)
Litigation charges													1,200			—			1,200			—
Severance costs	—			—			133			—			—			133			—			133
Acquisition-related expense (benefit), net	167			75			206			79			(122		)	28			(40		)	77
Loss before special items	(6,366		)	(4,197		)	(12,302		)	(9,662		)	(6,446		)	(6,501		)	(19,127		)	(17,606		)
Total Company
Income from operations	$	12,508		$	19,569		$	23,664		$	32,501
Income (loss) from operations													$	(10,375	)	$	12,116		$	(2,123	)	$	22,601
Litigation charges													1,200			—			1,200			6,320
Impairment charges													15,810			—			15,810			—
Bad debt provision for a customer bankruptcy													—			—			1,200			—
Severance costs	$	160		$	320		$	425		$	379		542			265			948			992
Asset write-offs and lease terminations													—			—			123			—
Acquisition-related expense (benefit), net	$	197		$	(75	)	$	591		$	(971	)	(248		)	384			(589		)	(99		)
Income before special items	$	12,865		$	19,814		$	24,680		$	31,909		$	6,929		$	12,765		$	16,569		$	29,814

Three months

For the three months ended ~~November~~September 30, ~~2016,~~2017, income from operations (GAAP) decreased ~~$7.1~~$22.5 million, or ~~36%~~186%, compared with the three months ended September 30, 2016, while income before special items (non-GAAP) decreased $5.8 million, or

46%. As a percentage of revenues, income before special items declined by 370 basis points to 3.9% in the three months ended September 30, 2017 from 7.6% in the three months ended September 30, 2016.

Operating expenses increased $19.7 million during the three months ended September 30, 2017, driven primarily by the $15.8 million impairment charges, after completion of the analysis described above, for the Products and Systems segment, during the three months ended September 30, 2017 (See Notes 7 and 8). In addition, there was a $1.1 million increase in foreign currency transactional expenses, $1.2 million of additional operating expenses pertaining to Services segment acquisitions and $0.7 in Corporate segment expenses, primarily professional fees.

Nine months

For the nine months ended September 30, 2017, income from operations (GAAP) decreased $24.7 million, or 109% compared with the prior ~~year’s second quarter,~~year, and income before special items (non-GAAP) decreased ~~$6.9~~$13.2 million, or ~~35%~~44%. As a percentage of revenues, income before special items decreased by ~~290~~260 basis points to ~~7.3%~~3.2% in the ~~second quarter of fiscal~~nine months ended September 30, 2017, ~~from 10.2%~~as compared to 5.8% in the ~~second quarter of fiscal~~nine months ended September 30, 2016.

Operating expenses increased ~~$2.2~~$16.0 million ~~compared with~~during the ~~prior year’s second quarter,~~nine months ended September 30, 2017, driven primarily by ~~$2.1~~the $15.8 million ~~increase~~impairment charges in recurring expenses and an increase in special items of $0.1 million. The recurring expenses were primarily driven by a $1.4 million increase in professional fees and personnel for the Corporate segment compared to the second quarter of fiscal 2016. Services, International and the Products and Systems ~~segments were flat from the second quarter of fiscal 2017 to fiscal 2016.~~

~~Six months~~

For the six months ended November 30, 2016, income from operations (GAAP) decreased $8.8 million, or 27%, compared with the prior year, and income before special items (non-GAAP) decreased $7.2 million, or 23%. As a percentage of revenues, income before special items decreased by 130 basis points to 7.2% in the first six months of fiscal 2017 from 8.5% in the first six months of fiscal 2016.

~~Operating expenses increased $2.8 million compared with the prior year’s first six months, driven by a $1.2 million increase in recurring expenses and a $1.6 million increase in special items, which~~segment. In addition, there was ~~primarily due to acquisition-related expense. The recurring expenses were primarily driven by~~ a $2.0 million increase in ~~professional fees and personnel~~foreign currency transaction expenses for the Company, $2.3 million of additional operating expenses pertaining to Services segment acquisitions and $0.8 million of Corporate segment ~~which was~~expenses, primarily professional fees. These increases were primarily offset by ~~the International segment, which decreased $1.8~~a $5.1 million ~~primarily due to foreign currency gains. The Services and the Products and Systems segments were flat~~decrease in litigation expenses for the ~~first six months of fiscal 2017 to fiscal 2016.~~respective periods.

Interest Expense

Interest expense was approximately ~~$0.9~~$1.1 million and ~~$1.3~~$0.8 million for the ~~second quarters of fiscal~~three months ended September 30, 2017 and 2016, ~~respectively. Interest expense was approximately $1.7~~respectively, and $3.1 million and ~~$3.3~~$2.2 million for the ~~first six~~nine months ~~of fiscal~~ended September 30, 2017 and ~~2016, respectively. These decreases~~2016. The increases were ~~primarily related~~due to increased borrowings on the ~~repayment~~Company's revolving line of ~~seller notes related to acquisitions.~~credit.

Income Taxes

The Company’s effective income tax rate was approximately ~~37%~~39% and 36% for the ~~second quarters of fiscal~~three months ended September 30, 2017 and ~~2016.~~2016, respectively. The Company's effective tax rate was approximately ~~37%~~42% and ~~38%~~34% for the ~~first six~~nine months ~~of fiscal~~ended September 30, 2017 and 2016, respectively. The ~~decrease~~increase in the income tax rate for these respective periods was ~~primarily~~ due to a discrete item related to the ~~impact~~impairment of ~~favorable discrete items.~~goodwill and intangible assets in the Products and Systems reporting unit. Excluding this item, the effective income tax rate would have been 35% and 36%, respectively, for the three and nine months ended September 30, 2017.

Liquidity and Capital Resources

~~Cash Flows Table~~

Cash flows are summarized in the table below:


	Six months ended						Nine months ended
	November 30, 2016			November 30, 2015			September 30, 2017			September 30, 2016
	($ in thousands)						($ in thousands)
Net cash provided by (used in):
Operating activities	$	25,969		$	26,524		$	35,226		$	52,109
Investing activities	(15,042		)	(9,623		)	(22,516		)	(12,487		)
Financing activities	(4,344		)	(16,644		)	(7,114		)	(32,491		)
Effect of exchange rate changes on cash	(1,510		)	(233		)	2,113			(221		)
Net change in cash and cash equivalents	$	5,073		$	24		$	7,709		$	6,910

Cash Flows from Operating Activities

During the ~~six~~nine months ended ~~November~~September 30, ~~2016,~~2017, cash provided by operating activities was ~~$26.0~~$35.2 million, representing a year-on-year decrease of ~~$0.6~~$16.9 million, or 2%32%. The decrease was primarily attributable to a lower level of net income, as well as movements in working capital, including the 2017 payment of a $6.3 million legal settlement and the timing of ~~collections, accrued expenses and other payables~~.collections.

Cash Flows from Investing Activities

During the ~~six~~nine months ended ~~November~~September 30, ~~2016,~~2017, cash used in investing activities was ~~$15.0~~$22.5 million, compared with a use of cash ~~outflow~~ of ~~$9.6~~$12.5 million in the comparable period of the prior year. The first ~~six~~nine months of ~~fiscal~~ 2017 included ~~$8.2~~increased outflows of $7.2 million ~~outflow~~ related to acquisitions ~~compared with $1.7~~and an increase of $3.0 million ~~for the comparable period in fiscal 2016. Cash used~~ for capital expenditures, as the Company was ~~$7.4 million and $8.2 million~~ in the ~~first six months~~midst of ~~fiscal 2017 and 2016, respectively.~~

its build-out in France to service an important new customer contract.

Cash Flows from Financing Activities

Net cash used byin financing activities was ~~$4.3~~$7.1 million for the ~~six~~nine months ended ~~November~~September 30, ~~2016, which was primarily for~~2017. The Company borrowed $11.5 million, net, on its Credit Agreement, to help fund the ~~repurchase~~purchase of ~~$7.0~~$15.9 million of treasury stock and towards the ~~Company's stock under its stock repurchase plan.~~funding of $8.4 million for acquisitions. For the comparable period in ~~fiscal~~ 2016, ~~the Company utilized most of the $18.3~~net cash used in financing activities was $32.5 million, of ~~free cash flow~~which $28.9 million was to reduce ~~its~~the Company's debt and capital lease ~~obligations by $15.2 million.~~obligations.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

The effect of exchange rate changes on our cash and cash equivalents was a net ~~reduction~~increase of ~~$1.5~~$2.1 million in the first ~~six~~nine months of ~~fiscal~~ 2017, compared to a $0.2 million decrease for the first ~~six~~nine months of ~~fiscal 2016, primarily driven by exchange rates for fiscal 2017, notably the impact of the United Kingdom's exit from the European Union.~~2016.

Cash Balance and Credit Facility Borrowings

The terms of our Credit Agreement have not changed from those set forth in Part II, Item 7 of our 2016 ~~Annual~~Transition Report under the Section “Liquidity and Capital Resources”, under the heading “Cash Balance and Credit Facility Borrowings,” and Note 10 - Long-Term Debt to these condensed consolidated financial statements in this ~~report,~~Quarterly Report, under the heading “Senior Credit Facility.”

As of ~~November~~September 30, ~~2016,~~2017, we had cash and cash equivalents totaling ~~$26.3~~$26.9 million and available borrowing capacity of ~~$81.3~~$74.9 million under our Credit Agreement with borrowings of ~~$88.0~~$95.1 million and ~~$5.7~~$5.0 million of letters of credit outstanding. We finance 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.

As of ~~November~~September 30, ~~2016,~~2017, we were in compliance with the terms of the Credit Agreement, and we will continuously monitor our compliance with the covenants contained in our Credit Agreement.

Contractual Obligations

There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2016 ~~Annual~~Transition Report.

Off-balance Sheet Arrangements

During the ~~six~~nine months ended ~~November~~September 30, ~~2016,~~2017, 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

There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the 2016 ~~Annual~~Transition Report.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no significant changes to the Company’s quantitative and qualitative disclosures about market risk as discussed in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” included in the 2016 ~~Annual~~Transition Report.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of ~~November~~September 30, ~~2016,~~2017, 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 required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s quarter ended ~~November~~September 30, ~~2016~~2017 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. ��Legal Proceedings

~~See Note 12 -~~ ~~Commitments and Contingencies~~ ~~to the condensed consolidated financial statements included in this report for a description of our legal proceedings.~~ There have been no material developments with regard to any matters disclosed under Part I, Item 3 “Legal Proceedings” in our 2016 ~~Annual~~Transition Report, except as ~~set forth~~disclosed in Note ~~12.~~12 (see below).

See Note 12 - Commitments and Contingencies to the condensed consolidated financial statements included in this Quarterly Report for a description of our legal proceedings.

ITEM 1.A. Risk Factors

In addition to the other information set forth in this ~~report,~~Quarterly Report, you should carefully consider the risk factors discussed under the “Risk Factors” section included in our 2016 ~~Annual~~Transition Report. There have been no material changes to the risk factors previously disclosed in the 2016 ~~Annual~~Transition Report.

ITEM 2. Unregistered Sale of Equity Securities and Use of Proceeds

(a) Sales of Unregistered Securities

None.

(b) Use of Proceeds from Public Offering of Common Stock

None.

The following table sets forth the shares of our common stock we acquired during the quarter pursuant to our publicly announced share repurchase plan and as a result of the surrender of shares by employees to satisfy ~~the minimum~~ tax withholding obligations in connection with the vesting of restricted stock ~~units as well as shares from the Company's share repurchase plan.~~units.

Fiscal Month Ending
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 ⁽¹⁾
September 30, 2016 33,315
$ 24.56
—
$ 50,000,000
October 31, 2016 239,763
$ 21.55
231,483
$ 45,004,530
November 30, 2016 98,721
$ 20.89
95,980
$ 43,004,307



Month Ending	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⁾
July 31, 2017	94,877	$	21.08	94,877	$	27,004,569
August 31, 2017	139,276	$	20.20	90,490	$	25,081,657
September 30, 2017	—	$	—	—	$	25,081,657

(1) - 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. On August 17, 2016, the Company entered into an agreement with its founder, Chairman and Chief Executive Officer, Dr. Sotirios Vahaviolos, which provides 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. All of the amounts in this column ~~include~~represent the purchases from Dr. Vahaviolos during the third quarter of ~~85,234 shares in October and 95,980 shares in November.~~2017.

(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.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

ITEM 6. Exhibits



Exhibit No.		Description

~~3.1~~ 31.1		~~Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation~~

~~31.1~~		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Schema Document

101.CAL		XBRL Calculation Linkbase Document

101.LAB		XBRL Labels Linkbase Document

101.PRE		XBRL Presentation Linkbase Document

101.DEF		XBRL Definition Linkbase Document

Signatures

Pursuant to the requirements 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.



	MISTRAS GROUP, INC.

	By:	/s/ Jonathan H. Wolk
		Jonathan H. Wolk
		Senior Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer and duly authorized officer)

Date: ~~January 10,~~November 9, 2017

3231



	November 30, 2016
	Level 1		Level 2		Level 3		Total
Liabilities:
Contingent consideration	$	—	$	—	$	3,237	$	3,237
Total Liabilities	$	—	$	—	$	3,237	$	3,237



Fiscal Month Ending	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 ⁽¹⁾
September 30, 2016	33,315	$	24.56	—	$	50,000,000
October 31, 2016	239,763	$	21.55	231,483	$	45,004,530
November 30, 2016	98,721	$	20.89	95,980	$	43,004,307