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Business Context and Reporting Period

Company: Mistras Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2009 (Second Quarter of Fiscal Year 2010)
Business Overview: Mistras is a global provider of technology-enabled asset protection solutions, including non-destructive testing (NDT) and mechanical integrity services, primarily for the oil and gas, power generation, and industrial infrastructure sectors.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 21% year-over-year for the quarter and 20% for the six-month period. Growth was driven by a 29.5% increase in the Services segment, partially offset by declines in the International segment due to foreign exchange rates.
• Margin Compression: Gross margin decreased approximately 430-450 basis points year-over-year. This was attributed to a higher mix of lower-margin Services revenue, start-up costs on new contracts, and reduced volume in profitable pipeline work.
• Debt Reduction: Following an Initial Public Offering (IPO) in October 2009, the Company repaid its entire senior credit facility (term loan and revolver), reducing total debt significantly from $66.3 million at May 31, 2009, to $16.3 million at November 30, 2009.
• Equity Structure: All outstanding preferred stock converted to common stock upon the IPO. The Company also executed a 13-for-1 stock split in September 2009.
• Legal Settlement: A $2.1 million legal settlement provision recorded in the prior year was reduced by $0.3 million in the current period, resulting in a net benefit to income.

Guidance, Outlook, and Risks

• Outlook: Management expects continued revenue growth driven by the expansion of its "toolbox" of asset protection solutions and acquisitions. While the global economic downturn has caused some customers to delay projects, the Company believes its recurring service contracts provide stability.
• Liquidity: The Company holds $14.6 million in cash and has access to a $55 million revolving credit facility (currently unutilized). Management believes existing cash and operating cash flows are sufficient for the next 12 months.
• Risks:
  • Customer Concentration: One major customer accounted for approximately 19% of revenues for the six months ended November 30, 2009.
  • Foreign Exchange: A strengthening U.S. dollar negatively impacted the International segment's reported revenues and margins.
  • Acquisition Integration: The Company continues to integrate recent acquisitions, which may impact short-term margins.
• Unusual Items: The "Net income attributable to common stockholders" includes a significant non-cash accretion of preferred stock ($6.5 million) which was reversed upon conversion to common stock, resulting in a reported net income of $10.1 million for the quarter despite a net income attributable to Mistras Group, Inc. of $3.6 million.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the amended credit agreement covenants (minimum EBITDA, debt service coverage ratio) following the IPO and debt repayment.
• Customer Concentration: Assess the risk associated with the top customer representing ~19% of revenue and the impact of their bankruptcy proceedings on receivables.
• Acquisition Performance: Monitor the integration and revenue contribution of the three businesses acquired in the first half of fiscal 2010.
• Foreign Exchange Exposure: Evaluate the sensitivity of the International segment to U.S. dollar fluctuations, as no hedging contracts are currently in place.
• Stock Compensation: Review the impact of the new 2009 Long-Term Incentive Plan on future operating expenses.