Notes to Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
1. Summary of Significant Accounting Policies and Practices
Description of Business
Mistras Group, Inc. and subsidiaries (the Company) is a leading “one source” global provider of technology-enabled asset protection solutions used to evaluate the structural integrity and reliability of critical energy, industrial and public infrastructure. The Company combines industry-leading products and technologies, expertise in mechanical integrity (MI), non-destructive testing (NDT) and mechanical services and proprietary data analysis software to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity assessments and management. These mission critical solutions enhance customers’ ability to extend the useful life of their assets, increase productivity, minimize repair costs, comply with governmental safety and environmental regulations, manage risk and avoid catastrophic disasters. The Company serves a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas, commercial aerospace and defense, fossil and nuclear power, alternative and renewable energy, public infrastructure, chemicals, transportation, primary metals and metalworking, pharmaceutical/biotechnology and food processing industries and research and engineering institutions.
Principles of Consolidation
The accompanying audited consolidated financial statements include the accounts of Mistras Group, Inc. and its wholly and majority-owned subsidiaries. For subsidiaries in which the Company’s ownership interest is less than 100%, the non-controlling interests are reported in stockholders’ equity in the accompanying consolidated balance sheets. The non-controlling interests in net income, net of tax, is classified separately in the accompanying consolidated statements of income. All significant intercompany accounts and transactions have been eliminated in consolidation.
On January 3, 2017, the Company's Board of Directors approved a change in the Company's fiscal year from May 31 to December 31, effective December 31, 2016. In connection with this change, the Company previously filed a Transition Report on Form 10-K to report the results of the seven-month transition period from June 1, 2016 to December 31, 2016. In this Annual Report, the periods presented are the years ended December 31, 2018 and 2017, the seven-month transition period from June 1, 2016 to December 31, 2016 and the year ended May 31, 2016. The Company has also included unaudited data for the year ended December 31, 2016 and for the seven months ended December 31, 2015 (See Note 21).
For fiscal 2016, Mistras Group, Inc.’s and its subsidiaries’ fiscal years ended on May 31 except for the subsidiaries in the International segment, which ended on April 30. Accordingly, the Company’s International segment subsidiaries were consolidated on a
one
-month lag. Therefore, in the quarter and year of acquisition, results of acquired subsidiaries in the International segment were generally included in consolidated results for
one
less month than the actual number of months from the acquisition date to the end of the reporting period. Effective December 31, 2016, the Company's International segment is no longer consolidated on a one month lag, and such change for the seven month transition period ended December 31, 2016 was not material.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the Company's financial condition or results of operations as previously reported.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires that the Company make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date of financial statements. The Company bases its estimates and assumptions on historical experience, known or expected trends and various other assumptions that it believes to be reasonable. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates, which may cause the Company’s future results to be significantly affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are stated net of an allowance for doubtful accounts and sales allowances. Outstanding accounts receivable balances are reviewed periodically, and allowances are provided at such time that management believes it is probable that such balances will not be collected within a reasonable period of time, to the extent reasonably estimable. The Company extends credit to its customers based upon credit evaluations in the normal course of business, primarily with 30-day terms. Bad debts are provided for based on historical experience and management’s evaluation of outstanding accounts receivable. Accounts are written off when they are deemed uncollectible under GAAP accounting standards.
Concentration of Credit Risk
No customer accounted for 10% or more of our revenues for the year ended December 31, 2018. One customer accounted for
11%
and
12%
of our revenues for the year ended December 31, 2017 and the transition period ended December 31, 2016, which primarily were generated from the Services segment. One customer accounted for
10%
of our revenues in
fiscal 2016
, which primarily were generated from the Services segment.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At times, cash deposits may exceed the limits insured by the Federal Deposit Insurance Corporation. The Company believes it is not exposed to any significant credit risk or risk of nonperformance of financial institutions.
Inventories
Inventories are stated at the lower of cost, as determined by using the first-in, first-out method, or market. Work in process and finished goods inventory include material, direct labor, variable costs and overhead.
Purchased and Internal-Use Software
The Company capitalizes certain costs that are incurred to purchase or to create and implement internal-use software, which includes software coding, installation and testing. Capitalized costs are amortized on a straight-line basis over
three years
, the estimated useful life of the software.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is computed utilizing the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed utilizing the straight-line method over the shorter of the remaining lease term or estimated useful life. Repairs and maintenance costs are expensed as incurred.
Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets. The Company tests goodwill for impairment at a “reporting unit” level (which for the Company is represented by (i) our Services segment, (ii) our Products and Systems segment, and (iii) the European component and (iv) Brazilian component of our International segment). Our annual impairment test is conducted on the first day of our fourth quarter, which is October 1. Goodwill is also tested for impairment whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the third quarter of 2017, there was a triggering event in the Products and Systems segment that resulted in a
$13.2 million
goodwill impairment charge. See Note 8 for further details.
If the fair value of a reporting unit is less than its carrying value, this is an indicator that the goodwill assigned to that reporting unit may be impaired. As a result of the Company adopting ASU 2017-04, impairment will be recorded in the amount that fair value is less than carrying value, as the ASU eliminated step two of the goodwill impairment process. The Company considers the income and market approaches to estimating the fair value of our reporting units, which requires significant judgment in evaluation of economic and industry trends, estimated future cash flows, discount rates and other factors.
Impairment of Long-lived Assets
The Company reviews the recoverability of its long-lived assets (or asset groups) on a periodic basis in order to identify indicators of a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future undiscounted cash flows. If the total expected future undiscounted cash flows are less than the carrying amount of the assets, a loss is recognized for the difference between fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets. During the third quarter of 2017, there was a triggering event in the Products and Systems segment that resulted in a
$2.6 million
impairment charge of long-lived assets. See Note 9 for further details.
Acquisitions
The Company allocates the purchase price of acquired businesses to their identifiable tangible assets and liabilities as well as identifiable intangible assets, such as customer relationships, technology, non-compete agreements and trade names. Certain estimates and judgments are required in the application of the fair value techniques, including estimates of the respective acquisition's future performance and related cash flows, selection of a discount rate and economic lives, and use of Level 3 measurements as defined in Accounting Standards Update ("ASC") 820
Fair Value Measurements and Disclosure.
Deferred taxes are recorded for any differences between the assigned values and tax bases of assets and liabilities.
Research and Engineering
Research and product development costs are expensed as incurred.
Advertising, Promotions and Marketing
The costs for advertising, promotion and marketing programs are expensed as incurred and are included in selling, general and administrative expenses. Advertising expense was approximately
$2.1 million
,
$1.9 million
,
$1.2 million
and
$1.8 million
for the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 and fiscal 2016, respectively.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other financial current assets and liabilities approximate fair value based on the short-term nature of the items.
Foreign Currency Translation
The financial position and results of operations of the Company’s foreign subsidiaries are measured using their functional currencies, which are their local currencies. Assets and liabilities of foreign subsidiaries are translated into the U.S. Dollar at the exchange rates in effect at the balance sheet date. Income and expenses are translated at the average exchange rate during the period. Translation gains and losses are reported as a component of other comprehensive (loss) income for the period and included in accumulated other comprehensive (loss) income within stockholders’ equity.
Foreign currency (gains) and losses arising from transactions denominated in currencies other than the functional currency are included in net income, reported in SG&A expenses, and were approximately
$1.3 million
,
$0.6 million
,
$(0.7) million
and
$(0.1) million
for the years ended December 31, 2018 and 2017, transition period ended December 31, 2016 and fiscal
2016
, respectively.
Self-Insurance
The Company is self-insured for certain losses relating to workers’ compensation and health benefit claims. The Company maintains third-party excess insurance coverage for all workers' compensation and health benefit claims in excess of approximately
$0.3 million
per occurence to reduce its exposure from such claims. Self-insured losses are accrued when it is probable that an uninsured claim has been incurred but not reported and the amount of the loss can be reasonably estimated at the balance sheet date.
Share-based Compensation
The value of services received from employees and directors in exchange for an award of an equity instrument is measured based on the grant-date fair value of the award. Such value is recognized as a non-cash expense on a straight-line basis over the
period the individual provides services, which is typically the vesting period of the award with the exception of awards with graded vesting that contain an internal performance measure where each tranche is recognized on a straight-line basis over its vesting period subject to the probability of meeting the performance requirements and adjusted for the number of shares expected to be earned. As share-based compensation expense is based on awards ultimately expected to vest, the amount of expense is reduced for estimated forfeitures. The cost of these awards is recorded in selling, general and administrative expense in the Company’s consolidated statements of income.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided if it is more likely than not that some or all of a deferred income tax asset will not be realized. Financial accounting standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. These standards also provide guidance on de-recognition, measurement, and classification of amounts relating to uncertain tax positions, accounting for and disclosure of interest and penalties, accounting in interim periods and disclosures required. Interest and penalties related to unrecognized tax positions are recognized as incurred within “provision for income taxes” in the consolidated statements of income.
Recent Accounting Pronouncements
In August 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,
which defers the effective date of ASU 2014-09 for all entities by one year. This update is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU 2014-09 became effective for the Company on January 1, 2018. The ASU permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The ASU also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.
The Company adopted ASU 2014-09 along with the related additional ASUs on Topic 606 on January 1, 2018, utilizing the cumulative catch-up method. The result of adoption is immaterial to the Company's consolidated financial statements, largely because most of our projects are short-term in nature and billed on a time and material basis. The Company utilized a practical expedient that provides for revenue to be recognized in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. The Company's additional required disclosures under Topic 606 are disclosed in Note 2.
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. In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 832), Targeted Improvements
. The amendments in this update provide an optional transition method to the modified retrospective method that was part of the initial ASC 842 guidance. The optional transition method allows entities to apply the leasing standard as of January 1, 2019 and recognize a cumulative-effect adjustment to the opening balance of retained earnings. ASC 842 also requires expanded financial statement disclosures on leasing activities. These changes will become effective for the Company on January 1, 2019.
The Company’s cross-functional team has determined the scope of arrangements that will be subject to this standard and continues to evaluate the impact of Topic 842 and its impacts on the Company’s business processes, systems and internal controls. The Company’s lease portfolio primarily includes buildings, machinery and equipment, vehicles and computer equipment. In adopting ASC 842, the new standard provides for several optional practical expedients in transition. The Company will adopt ASC 842 using the following practical expedients:
|
|
•
|
The optional transition method set forth in ASU 2018-11 in connection with the adoption of ASC 842 on January 1, 2019.
|
|
|
•
|
The “package of practical expedients,” which permits the Company not to reassess under the new standard prior conclusions on lease identification, lease classification and initial direct costs.
|
|
|
•
|
The practical expedient not to separate lease and non-lease components within the lease and account for all lease components as a single lease component.
|
The Company has estimated the impact of a right-to-use asset and liability on the consolidated balance sheet related to operating leases of between
$35 million
and
$40 million
, while the accounting for capital leases will remain unchanged. The adoption of ASC 842 is not expected to result in significant impacts to our statements of income or cash flows.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230).
This amendment provides 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 adopted ASU 2016-15 in the first quarter of 2018, which did not have a material impact on the Company's consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350).
This amendment eliminates Step Two of the goodwill impairment test. Under the amendments in this update, entities should perform the annual goodwill impairment test by comparing the carrying value of their reporting units to their fair value. An entity should record an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Tax deductibility of goodwill should be considered in evaluating any reporting unit's impairment loss to be taken. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company early adopted ASU 2017-04 in the third quarter of 2017 for its consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting.
This amendment provides guidance concerning which changes to the terms or conditions of a share-based payment require an entity to apply modification accounting. Certain changes to stock awards, notably administrative changes, do not require modification accounting. There are three specific criteria that need to be met in order to prove that modification accounting is not required. ASU 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2017-09 in the first quarter of 2018, which did not have any impact on the Company's consolidated financial statements and related disclosures.
In December 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. As of December 31, 2018, the Company has completed the accounting for the tax effects of all of the provisions of the Tax Act. (See Note 14 for further details.)
2. Revenue
The majority of the Company's revenues are derived from providing services on a time and material basis and are short-term in
nature. The Company accounts for revenue in accordance with ASC Topic 606,
Revenue from Contracts with Customers
, which was adopted on January 1, 2018, using the cumulative catch-up transition method. The adoption of ASC Topic 606 did not impact the Company's consolidated financial statements, other than the new disclosure requirements below.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. The Company provides highly integrated and bundled inspection services to its customers. Some of our contracts have multiple performance obligations, most commonly due to the contract providing both goods and services. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each
performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is a relative selling price based on price lists.
Contract modifications are not routine in the performance of our contracts. Generally, when contracts are modified, the modification is to account for changes in scope to the goods and services that are provided. In most instances, contract modifications are for goods or services that are distinct, and, therefore, are accounted for as a separate contract.
Our performance obligations are satisfied over time as work progresses or at a point in time. The majority of our revenue recognized over time as work progresses is related to our service deliverables, which includes providing testing, inspection and mechanical services to our customers. Revenue is recognized over time based on time and material incurred to date which best portrays the transfer of control to the customer. The Company also utilizes an available practical expedient that provides for revenue to be recognized in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. Fixed fee arrangements are determined based on expected labor, material, and overhead to be consumed on fulfillment of such services. Revenue is recognized on a cost-to-cost method tracked on an input basis.
The majority of our revenue recognized at a point in time is related to product sales when the customer obtains control of the asset, which is generally upon shipment to the customer. Contract costs include labor, material and overhead.
The Company expects any significant remaining performance obligations to be satisfied within
one
year.
Contract Estimates
The majority of our revenues are short-term in nature. The Company has many Master Service Agreements (MSAs) that specify an overall framework and terms of contract when the Company and customers agree upon services or products to be provided. The actual contracting to provide services or furnish products are triggered by a work order, purchase order, or some similar document issued pursuant to a MSA which sets forth the scope of services and/or identifies the products to be provided. From time-to-time, the Company may enter into long-term contracts, which can range from several months to several years. Revenue on such long-term contracts is recognized as work is performed based on total costs incurred to date in relation to the total estimated costs for the performance of the contract at completion. This includes contract estimates of costs to be incurred for the performance of the contract. Cost estimation is based upon the professional knowledge and experience of our project managers, engineers and financial professionals. Factors that are considered in estimating the work to be completed include the availability of materials, the effect of any delays in our project performance and the recoverability of any claims. Whenever revisions of estimates, contract costs and/or contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.
Revenue by category
The following series of tables present our disaggregated revenues:
Revenue by industry was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
Services
|
|
International
|
|
Products
|
|
Corp/Elim
|
|
Total
|
Oil & Gas
|
$
|
378,904
|
|
|
$
|
37,953
|
|
|
$
|
1,255
|
|
|
$
|
—
|
|
|
$
|
418,112
|
|
Aerospace & Defense
|
50,500
|
|
|
54,853
|
|
|
2,355
|
|
|
—
|
|
|
107,708
|
|
Industrials
|
60,594
|
|
|
26,209
|
|
|
3,097
|
|
|
—
|
|
|
89,900
|
|
Power generation & Transmission
|
30,687
|
|
|
8,522
|
|
|
4,904
|
|
|
—
|
|
|
44,113
|
|
Other Process Industries
|
26,425
|
|
|
9,497
|
|
|
124
|
|
|
—
|
|
|
36,046
|
|
Infrastructure, Research & Engineering
|
11,283
|
|
|
9,032
|
|
|
5,246
|
|
|
—
|
|
|
25,561
|
|
Other
|
16,226
|
|
|
7,382
|
|
|
6,445
|
|
|
(9,139
|
)
|
|
20,914
|
|
Total
|
$
|
574,619
|
|
|
$
|
153,448
|
|
|
$
|
23,426
|
|
|
$
|
(9,139
|
)
|
|
$
|
742,354
|
|
Revenue per key geographic location was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
Services
|
|
International
|
|
Products
|
|
Corp/Elim
|
|
Total
|
United States
|
$
|
478,853
|
|
|
$
|
568
|
|
|
$
|
11,493
|
|
|
$
|
(3,500
|
)
|
|
$
|
487,414
|
|
Other Americas
|
90,823
|
|
|
7,995
|
|
|
1,068
|
|
|
(1,638
|
)
|
|
98,248
|
|
Europe
|
4,252
|
|
|
138,948
|
|
|
3,958
|
|
|
(3,846
|
)
|
|
143,312
|
|
Asia-Pacific
|
691
|
|
|
5,937
|
|
|
6,907
|
|
|
(155
|
)
|
|
13,380
|
|
Total
|
$
|
574,619
|
|
|
$
|
153,448
|
|
|
$
|
23,426
|
|
|
$
|
(9,139
|
)
|
|
$
|
742,354
|
|
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the consolidated balance sheet. Amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, generally at periodic intervals (e.g., weekly, bi-weekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from our customers before revenue is recognized, resulting in contract liabilities. These assets and liabilities are aggregated on an individual contract basis and reported on the consolidated balance sheet at the end of each reporting period.
Revenue recognized in 2018, that was included in the contract liability balance at the beginning of the year was
$5.3 million
. Changes in the contract asset and liability balances during the year ended December 31, 2018, were not impacted by any other factors. The Company has elected to utilize a practical expedient to expense incremental costs incurred related to obtaining a contract.
3. Earnings per Share
Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to common shareholders by the sum of (1) the weighted average number of shares of common stock outstanding during the period, and (2) the dilutive effect of assumed conversion of equity awards using the treasury stock method. With respect to the number of weighted average shares outstanding (denominator), diluted shares reflects: (i) only the exercise of options to acquire common stock to the extent that the options’ exercise prices are less than the average market price of common shares during the period and (ii) the pro forma vesting of restricted stock units.
The following table sets forth the computations of basic and diluted earnings per share:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the transition period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Mistras Group, Inc.
|
$
|
6,836
|
|
|
$
|
(2,175
|
)
|
|
$
|
9,568
|
|
|
$
|
24,654
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
28,406
|
|
|
28,422
|
|
|
28,989
|
|
|
28,856
|
|
Basic earnings (loss) per share
|
$
|
0.24
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.33
|
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Mistras Group, Inc.
|
$
|
6,836
|
|
|
$
|
(2,175
|
)
|
|
$
|
9,568
|
|
|
$
|
24,654
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
28,406
|
|
|
28,422
|
|
|
28,989
|
|
|
28,856
|
|
Dilutive effect of stock options outstanding
|
683
|
|
|
—
|
|
|
791
|
|
|
712
|
|
Dilutive effect of restricted stock units outstanding
|
338
|
|
|
—
|
|
|
345
|
|
|
323
|
|
|
29,427
|
|
|
28,422
|
|
|
30,125
|
|
|
29,891
|
|
Diluted earnings (loss) per share
|
$
|
0.23
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.32
|
|
|
$
|
0.82
|
|
The following potential common shares were excluded from the computation of diluted earnings per share, as the effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the transition period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
Potential common stock attributable to stock options outstanding
|
5
|
|
|
810
|
|
(1
|
)
|
—
|
|
|
5
|
|
Potential common stock attributable to restricted stock units (RSUs) and performance stock units (PSUs) outstanding
|
1
|
|
|
353
|
|
(2
|
)
|
2
|
|
|
24
|
|
Total
|
6
|
|
|
1,163
|
|
|
2
|
|
|
29
|
|
(1) -
805
shares related to stock options were excluded from the calculation of diluted EPS due to the net loss for the period.
(2) -
351
shares related to RSUs and PSUs were excluded from the calculation of diluted EPS due to the net loss for the period.
4. Accounts Receivable, net
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
2018
|
|
2017
|
Trade accounts receivable
|
$
|
152,511
|
|
|
$
|
141,952
|
|
Allowance for doubtful accounts
|
(4,187
|
)
|
|
(3,872
|
)
|
Accounts receivable, net
|
$
|
148,324
|
|
|
$
|
138,080
|
|
The Company had
$16.1 million
and
$14.4 million
of unbilled revenues accrued as of
December 31, 2018
and December 31, 2017, respectively, which is included within the trade accounts receivable balance above. Unbilled revenues as of
December 31, 2018
are expected to be billed in the first quarter of
2019
.
As of December 31, 2018, the Company’s Services Division had
$5.6 million
of accounts receivables due from one customer for services provided in North America. This customer has been having cash flow issues recently attributable to a working capital deterioration and the accounts receivable balance was beginning to age as of December 31, 2018. After the end of 2018, the customer expressed to the Company its desire to establish a payment plan that would pay in full all amounts due to the Company before the end of 2019. The Company has established a reserve of approximately
12%
of the receivable balance based upon available information about the customer, the timing and likelihood of expected payments, and the Company’s historical reserve experience. The Company will continue to monitor the account and assess any change in circumstances, including any failure to meet the payment plan which may result in the need for additional reserves.
5. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
2018
|
|
2017
|
Raw materials
|
$
|
6,975
|
|
|
$
|
5,105
|
|
Work in progress
|
1,019
|
|
|
1,192
|
|
Finished goods
|
2,640
|
|
|
2,746
|
|
Consumable supplies
|
2,419
|
|
|
1,460
|
|
Inventory
|
$
|
13,053
|
|
|
$
|
10,503
|
|
6. Property, Plant and Equipment, net
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
Useful Life
|
|
2018
|
|
2017
|
|
(Years)
|
|
|
|
|
Land
|
|
|
$
|
2,680
|
|
|
$
|
2,414
|
|
Building and improvements
|
30-40
|
|
24,338
|
|
|
24,003
|
|
Office furniture and equipment
|
5-8
|
|
16,170
|
|
|
14,230
|
|
Machinery and equipment
|
5-7
|
|
208,245
|
|
|
191,721
|
|
|
|
|
251,433
|
|
|
232,368
|
|
Accumulated depreciation and amortization
|
|
|
(157,538
|
)
|
|
(145,225
|
)
|
Property, plant and equipment, net
|
|
|
$
|
93,895
|
|
|
$
|
87,143
|
|
Depreciation expense was approximately
$24.2 million
,
$22.4 million
,
$14.0 million
and
$22.9 million
for the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 and fiscal 2016, respectively.
7. Acquisitions and Dispositions
Acquisitions
During the year ended December 31, 2018, the Company completed
one
acquisition that performs inline inspection services, with headquarters in Canada and a location in the U.S. The acquired company primarily provides services to the midstream area within the oil and gas industry. In this acquisition, the Company acquired
100%
of the equity interests of the Canadian and U.S. entities in exchange for aggregate consideration of
$143.1 million
in cash.
During the year ended December 31, 2017, the Company completed
three
acquisitions,
one
that performs mechanical services at height, located in Canada, a company located in the U.S. that primarily performs chemical and specialty process services and a company in the U.S. that performs a wide variety of non-destructive testing services. Both U.S. companies primarily provide services to the aerospace industry. In these acquisitions, the Company acquired
100%
of the equity interests of the entity based in Canada and one of the entities based in the U.S. in exchange for aggregate consideration of
$79.5 million
in cash, contingent consideration up to
$2.4 million
to be earned based upon the acquired business achieving specific performance metrics over the initial
three
years of operations from the acquisition date and
$0.2 million
for working capital adjustments that were finalized during 2018. The Company acquired the assets of
one
of the U.S. based entities noted above in exchange for aggregate consideration of
$4.5 million
in cash and contingent consideration up to
$3.5 million
to be earned based upon the acquired business achieving specific performance metrics over the initial
three
years of operations from the acquisition date.
The Company accounted for these transactions in accordance with the acquisition method of accounting for business combinations. Assets and liabilities of the acquired businesses were included in the consolidated balance sheet as of
December 31, 2018
and December 31, 2017 based on their respective estimated fair value on the date of acquisition as determined in a purchase price allocation, using available information and making assumptions management believes are reasonable. The Company is still in the process of completing its valuation of the assets, both tangible and intangible, and liabilities acquired for the acquisition completed during the year ended December 31, 2018. Goodwill of
$83.2 million
primarily relates to expected synergies and assembled workforce, which is
no
t deductible for tax purposes. Other intangible assets, primarily related to technology, customer relationships and covenants not to compete, were
$59.6 million
. The results of operations of each of the acquisitions completed during the years ended December 31, 2018 and 2017 are included in each respective operating segment’s results of operations from the date of acquisition. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed, the Company's allocation of purchase price and any subsequent adjustments made during the years ended December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
Year ended December 31, 2017
|
Number of entities
|
1
|
|
|
3
|
|
|
|
|
|
Cash paid
|
$
|
143,139
|
|
|
$
|
83,963
|
|
Working capital adjustments
|
—
|
|
|
150
|
|
Notes payable
|
—
|
|
|
—
|
|
Contingent consideration
|
—
|
|
|
3,407
|
|
Consideration paid
|
$
|
143,139
|
|
|
$
|
87,520
|
|
|
|
|
|
Current net assets
|
$
|
9,381
|
|
|
$
|
7,165
|
|
Other assets
|
136
|
|
|
—
|
|
Debt and other liabilities
|
(4,976
|
)
|
|
(2,848
|
)
|
Property, plant and equipment
|
8,549
|
|
|
11,115
|
|
Deferred tax liability
|
(12,672
|
)
|
|
(1,278
|
)
|
Intangibles
|
59,558
|
|
|
31,671
|
|
Goodwill
|
83,163
|
|
|
41,695
|
|
Net assets acquired
|
$
|
143,139
|
|
|
$
|
87,520
|
|
The amortization period for intangible assets acquired ranges from
two
to
fourteen years
. The Company recorded
$83.2 million
and
$41.7 million
of goodwill in connection with its acquisitions for the years ended December 31, 2018 and 2017, respectively, reflecting the strategic fit and revenue and earnings growth potential of these businesses.
For the period subsequent to the closing of the transaction, revenue included in the consolidated statement of income for the year ended December 31,
2018
from the business acquired in 2018 was approximately
$0.3 million
and is included in the Services segment from the date of acquisition. Aggregate loss from operations included in the consolidated statement of income for the year ended December 31,
2018
from this acquisition for the period subsequent to the closing of the transaction was
$2.0 million
, inclusive of
$1.3 million
of acquisition-related expense.
Dispositions
During the fourth quarter of 2017, the Company began the process of marketing
one
of its subsidiaries in the Products and Systems segment for sale. During the third quarter of 2018, substantially all of the assets and liabilities of the aforementioned
subsidiary were sold for approximately
$4.3 million
, inclusive of a
$0.5 million
post-closing adjustment that was paid December 2018. For the year ended December 31, 2018, the Company recognized a gain of approximately
$2.4 million
related to the sale, which is included in its own line on the consolidated income statement. The sale also included a
three
-year agreement to purchase products from the buyer, with a cumulative commitment of
$2.3 million
, of which
$2.1 million
is remaining as of December 31, 2018. The agreement is based on third party pricing and the Company's planned purchase requirements over the next three years to meet the minimum purchases, and as a result, the Company concluded that the timing of the gain was appropriate for the year ended December 31, 2018.
The Company determined that the classification of being held for sale has been met as of December 31, 2017. For the year ended December 31, 2017, this subsidiary represented
0.6%
of consolidated revenues and loss from operations was
$3.5 million
, inclusive of a
$2.6 million
impairment charge for long-lived assets (See Note 9). In the aggregate, the assets and liabilities of this subsidiary represent
0.4%
and
0.2%
of consolidated assets and liabilities, respectively, and are included in their natural classifications on the consolidated balance sheet as of December 31, 2017.
Acquisition-Related expense
In the course of its acquisition activities, the Company incurs costs in connection with due diligence, professional fees, and other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a quarterly basis. These amounts are recorded as acquisition-related (benefit) expense, net, on the consolidated statements of
income and were as follows for the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 and fiscal 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the Transition Period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
Due diligence, professional fees and other transaction costs
|
$
|
1,248
|
|
|
$
|
945
|
|
|
$
|
231
|
|
|
$
|
629
|
|
Adjustments to fair value of contingent consideration liabilities
|
(716
|
)
|
|
(463
|
)
|
|
265
|
|
|
(2,082
|
)
|
Acquisition-related (benefit) expense, net
|
$
|
532
|
|
|
$
|
482
|
|
|
$
|
496
|
|
|
$
|
(1,453
|
)
|
The Company’s contingent consideration liabilities are recorded on the balance sheet in accrued expenses and other liabilities.
Unaudited Pro Forma Financial Information
The following table provides unaudited pro forma financial information for the years ended December 31, 2018 and 2017 as if the acquisition of Onstream had occurred on January 1, 2017. (Information in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2018
|
|
2017
|
Total revenue
|
$
|
770,222
|
|
|
$
|
727,821
|
|
Net income (loss)
|
6,602
|
|
|
(2,180
|
)
|
|
|
|
|
Net income (loss) per common share: basic
|
$
|
0.23
|
|
|
$
|
(0.08
|
)
|
Net income (loss) per common share: diluted
|
$
|
0.22
|
|
|
$
|
(0.08
|
)
|
The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of Mistras and Onstream. The supplemental pro forma financial information reflects primarily the following pro forma adjustments:
|
|
•
|
The pro forma financial information assumes that the acquisition related transaction fees and costs for Onstream were removed from the year ended December 31, 2018 and were assumed to have been incurred prior to acquisition;
|
|
|
•
|
Additional interest expense resulting from the issuance of debt to finance the consideration exchanged for the acquisition.
|
|
|
•
|
Additional depreciation and amortization expense due to (1) the amortization of identifiable intangibles with a definitive life using the straight-line method over a weighted average useful life of
12.6 years
, and (2) increase in depreciation resulting from the step-up of property, plant and equipment depreciated on a straight-line basis over their useful life of
5 years
; and
|
|
|
•
|
Adjustments were tax effected at an effective tax rate of
26%
as of December 31, 2018 and
31%
as of December 31, 2017.
|
The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the combined operations of Mistras and Onstream. Accordingly, these unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved.
8. Goodwill
The changes in the carrying amount of goodwill by segment is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
International
|
|
Products and Systems
|
|
Total
|
Balance at December 31, 2016
|
$
|
123,392
|
|
|
$
|
33,351
|
|
|
$
|
13,197
|
|
|
$
|
169,940
|
|
Goodwill acquired during the year
|
41,695
|
|
|
—
|
|
|
—
|
|
|
41,695
|
|
Impairment charge
|
—
|
|
|
—
|
|
|
(13,197
|
)
|
|
(13,197
|
)
|
Adjustments to preliminary purchase price allocations
|
(211
|
)
|
|
—
|
|
|
—
|
|
|
(211
|
)
|
Foreign currency translation
|
925
|
|
|
4,286
|
|
|
—
|
|
|
5,211
|
|
Balance at December 31, 2017
|
$
|
165,801
|
|
|
$
|
37,637
|
|
|
$
|
—
|
|
|
$
|
203,438
|
|
Goodwill acquired during the year
|
83,163
|
|
|
—
|
|
|
—
|
|
|
83,163
|
|
Adjustments to preliminary purchase price allocations
|
(1,977
|
)
|
|
—
|
|
|
—
|
|
|
(1,977
|
)
|
Foreign currency translation
|
(3,511
|
)
|
|
(1,854
|
)
|
|
—
|
|
|
(5,365
|
)
|
Balance at December 31, 2018
|
$
|
243,476
|
|
|
$
|
35,783
|
|
|
$
|
—
|
|
|
$
|
279,259
|
|
During the second quarter of 2017, there were pending Products and Systems contract bids which management assessed as having a reasonable chance of success. During the third quarter of 2017, these contract bids were not awarded to the Company. As a result of this missed opportunity, the annual forecasting process was accelerated, resulting in lower expected future operating profits and cash flows. As such, during the third quarter of 2017, there were indicators that the carrying amount of the goodwill for the Products and Systems reporting unit may not have been recoverable due to the decline in the projected future cash flows.
Due to the above, the Company performed an analysis to determine any impairment of goodwill as well as long-lived assets (see Note 9). For the goodwill analysis, the Company used income and market approaches to estimate the fair value of the reporting unit, which required significant judgment in evaluation of economic and industry trends, estimated future cash flows, discount rates and other factors, and compared that fair value to the carrying value, and determined that the fair value of the reporting unit was less than the carrying value. The Company recorded an impairment charge of
$13.2 million
, based on the difference between the fair value and the carrying value of the reporting unit, which resulted in an impairment of the entire amount of goodwill for the Products and Systems reporting unit.
The Company performed an impairment test of its remaining reporting units as of October 1, 2018 and concluded that there was
no
impairment.
F
or the year ended December 31, 2018, the Company reviewed goodwill for impairment on a reporting unit basis. As of
December 31, 2018
, the Company did not identify any changes in circumstances that would indicate the remaining carrying value of goodwill may not be recoverable.
The Company's cumulative goodwill impairment as of
December 31, 2018
and December 31, 2017 was
$23.1 million
, of which
$13.2 million
related to the Products and Systems segment and
$9.9 million
related to the International segment.
9. Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
Useful Life
(Years)
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net
Carrying
Amount
|
Customer relationships
|
5-14
|
|
$
|
112,624
|
|
|
$
|
(60,993
|
)
|
|
$
|
51,631
|
|
|
$
|
113,299
|
|
|
$
|
(58,107
|
)
|
|
$
|
(170
|
)
|
|
$
|
55,022
|
|
Software/Technology
|
3-15
|
|
67,240
|
|
|
(13,319
|
)
|
|
53,921
|
|
|
19,523
|
|
|
(14,133
|
)
|
|
(2,411
|
)
|
|
2,979
|
|
Covenants not to compete
|
2-5
|
|
12,593
|
|
|
(10,825
|
)
|
|
1,768
|
|
|
12,510
|
|
|
(10,438
|
)
|
|
—
|
|
|
2,072
|
|
Other
|
2-12
|
|
10,317
|
|
|
(6,242
|
)
|
|
4,075
|
|
|
10,109
|
|
|
(6,411
|
)
|
|
(32
|
)
|
|
3,666
|
|
Total
|
|
|
$
|
202,774
|
|
|
$
|
(91,379
|
)
|
|
$
|
111,395
|
|
|
$
|
155,441
|
|
|
$
|
(89,089
|
)
|
|
$
|
(2,613
|
)
|
|
$
|
63,739
|
|
Amortization expense for the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 and the year ended May 31, 2016 was approximately
$10.2 million
,
$9.0 million
,
$5.2 million
and
$9.6 million
, respectively, including amortization of software/technology for these periods of
$1.4 million
,
$1.2 million
,
$0.5 million
and
$1.0 million
, respectively.
As described in Note 8, in 2017 the Company performed an analysis to determine whether there was any impairment of long-lived assets for the Products and Systems reporting unit. The Company used income and market approaches to estimate the fair value of the long-lived assets, which requires significant judgment in evaluation of the useful lives of the assets, economic and industry trends, estimated future cash flows, discount rates, and other factors. The result of the analysis was an impairment of
$2.4 million
to software/technology,
$0.2 million
to customer relationships and less than
$0.1 million
to other intangibles, which are included in the impairment charges line on the consolidated statements of income for the year ended December 31, 2017.
Amortization expense in each of the five years and thereafter subsequent to
December 31, 2018
related to the Company’s intangible assets is expected to be as follows:
|
|
|
|
|
|
Expected
Amortization
Expense
|
|
|
|
2019
|
$
|
13,735
|
|
2020
|
12,368
|
|
2021
|
11,292
|
|
2022
|
10,722
|
|
2023
|
9,946
|
|
Thereafter
|
53,332
|
|
Total
|
$
|
111,395
|
|
10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Accrued salaries, wages and related employee benefits
|
$
|
29,959
|
|
|
$
|
27,185
|
|
Contingent consideration
|
1,687
|
|
|
3,430
|
|
Accrued workers' compensation and health benefits
|
5,086
|
|
|
5,181
|
|
Deferred revenues
|
5,046
|
|
|
6,338
|
|
Legal settlement accrual
|
—
|
|
|
1,600
|
|
Pension accrual
|
5,585
|
|
|
—
|
|
Other accrued expenses
|
26,532
|
|
|
21,827
|
|
Total accrued expenses and other current liabilities
|
$
|
73,895
|
|
|
$
|
65,561
|
|
11. Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Senior credit facility
|
$
|
181,656
|
|
|
$
|
156,948
|
|
Senior secured term loan, net of debt issuance costs of $0.1 million
|
99,897
|
|
|
—
|
|
Notes payable
|
68
|
|
|
228
|
|
Other
|
8,999
|
|
|
9,702
|
|
Total debt
|
290,620
|
|
|
166,878
|
|
Less: Current portion
|
(6,833
|
)
|
|
(2,358
|
)
|
Long-term debt, net of current portion
|
$
|
283,787
|
|
|
$
|
164,520
|
|
Senior Credit Facility
On December 13, 2018, the Company entered into a Fifth Amended and Restated Credit Agreement (“Credit Agreement”). The Credit Agreement increased the Company’s revolving line of credit from
$250 million
to
$300 million
and provides that under certain circumstances the line of credit can be increased to
$450 million
. In addition, the Credit Agreement provided the Company with a
$100 million
senior secured term loan A facility. Both the revolving line of credit and the term loan A facility under the Credit Agreement have a maturity date of December 12, 2023. The Company may continue to borrow up to
$100 million
in non-U.S. Dollar currencies and use up to
$20 million
of the credit limit for the issuance of letters of credit. At
December 31, 2018
, the Company had borrowings of
$281.7 million
and letters of credit of
$5.4 million
were outstanding under the Credit Agreement. The Company has capitalized costs of
$1.1 million
associated with debt modifications as of December 31, 2018, included in other long-term assets within the accompanying consolidated balance sheet.
Loans under the Credit Agreement bear interest at
LIBOR
plus an applicable LIBOR margin ranging from
1%
to
2%
, or a
base rate
less a margin of
1.25%
to
0.375%
, at the option of the Company, based upon the Company’s Funded Debt Leverage Ratio. Funded Debt Leverage Ratio is generally the ratio of (1) all outstanding indebtedness for borrowed money and other interest-bearing indebtedness as of the date of determination to (2) EBITDA (which is (a) net income, less (b) income (or plus loss) from discontinued operations and extraordinary items, plus (c) income tax expenses, plus (d) interest expense, plus (e) depreciation, depletion, and amortization (including non-cash loss on retirement of assets), plus (f) stock compensation expense, less (g) cash expense related to stock compensation, plus (h) certain amounts of EBITDA of acquired business for the prior twelve months, plus (i) certain expenses related to the closing of the Credit Agreement, plus (j) non-cash expenses which do not (in the current or any future period) represent a cash item (excluding non-cash gains which increase net income), plus (k) non-recurring charges (not to exceed
$10 million
in the
four
consecutive quarters immediately preceding the date of determination) for items such as severance, lease termination charges, asset write-offs and litigation settlements paid, and multi-employer pension plan withdrawal liabilities, all determined for the period of
four
consecutive fiscal quarters immediately preceding the date of determination of EBITDA. The Company has the benefit of the lowest margin if its Funded Debt Leverage Ratio is equal to or less than
1.0
to 1, and the margin increases as the ratio increases, to the maximum margin if the ratio is greater than
3.25
to 1. The Company will also bear additional costs for market disruption, regulatory changes effecting the lenders’ funding costs, and default pricing of an additional
2%
interest rate margin on any amounts not paid when due. Amounts borrowed under the Credit Agreement are secured by liens on substantially all of the assets of the Company and is guaranteed by some of our subsidiaries.
The Credit Agreement contains financial covenants requiring that the Company maintain a Funded Debt Leverage Ratio of no greater than
4.25
to 1 through December 31, 2018, reducing to a maximum permitted ratio of
3.50
to 1 as of March 31, 2020 and all quarterly periods thereafter, and a Fixed Charge Coverage Ratio of at least
1.25
to 1. Fixed Charge Coverage Ratio means the ratio, as of any date of determination, of (a) (i) EBITDA for the
12
month period immediately preceding the date of determination, taken together as one accounting period, less (ii) the aggregate amount of all capital expenditures made during the period, less (iii) taxes paid in cash during the period, less (iv) Restricted Payments (as defined in the Credit Agreement) paid in cash during the period, -to- (b) the sum of (i) all interest, premium payments, debt discount, fees, charges and related expenses of us and our subsidiaries in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case, to the extent treated as interest in accordance with U.S. generally accepted accounting principles ("GAAP") and to the extent paid in cash during the period, (ii) the aggregate principal amount of all redemptions or similar acquisitions for value of outstanding debt for borrowed money or regularly scheduled principal payments made during the period, but excluding any such payments to the extent refinanced through the incurrence of additional Indebtedness otherwise expressly permitted under the Credit Agreement, and (iii) payments made during the period under all leases that have been or should be, in accordance with GAAP as in effect for the Company's 2017 audited financial statement, recorded as capitalized leases. Beginning in 2020, the Company can elect to increase the maximum Funded Debt Leverage Ratio to
4.0
to 1 for
four
fiscal quarters immediately following the fiscal quarter in which the Company acquires another business, with the maximum permitted ratio reducing back to
3.5
to 1 in the fifth fiscal quarter following such acquisition. The Company can make this election twice during the term of the Credit Agreement.
The Credit Agreement also limits the Company’s ability to, among other things, create liens, make investments, incur more indebtedness, merge or consolidate, make dispositions of property, pay dividends and make distributions to stockholders or repurchase our stock, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements. The Credit Agreement does not limit the Company’s ability to acquire other businesses or companies except that the acquired business or company must be in the Company's line of business, the Company must be in compliance with the financial covenants on a pro forma basis after taking into account the acquisition, and, if the acquired business is a separate subsidiary, in certain circumstances the lenders will receive the benefit of a guaranty of the subsidiary and liens on its assets and a pledge of its stock.
As of
December 31, 2018
, the Company was in compliance with the terms of the Credit Agreement, and has undertaken to continuously monitor compliance with these covenants.
Notes Payable and Other Debt
In connection with certain of its acquisitions, the Company issued subordinated notes payable to the sellers. The maturity of the notes that remain outstanding are
three
years from the date of acquisition, expiring through 2019, and bear interest at the prime rate for the Bank of Canada, currently
3.95%
as of December 31, 2018. Interest expense is recorded in the consolidated statements of income.
The Company's other debt includes local bank financing provided at the local subsidiary levels used to support working capital requirements and fund capital expenditures. At December 31, 2018, there was approximately
$9.0 million
outstanding, payable at various times from 2019 to 2029. Monthly payments range from
$1 thousand
to
$17 thousand
. Interest rates range from
0.6%
to
6.2%
.
Scheduled principal payments due under all borrowing agreements in each of the five years and thereafter subsequent to
December 31, 2018
are as follows:
|
|
|
|
|
2019
|
$
|
6,831
|
|
2020
|
6,515
|
|
2021
|
8,750
|
|
2022
|
11,030
|
|
2023
|
255,043
|
|
Thereafter
|
2,451
|
|
Total
|
$
|
290,620
|
|
12. Fair Value Measurements
The Company performs fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a three level hierarchy that prioritizes the inputs used to measure fair value. The three levels of the hierarchy are defined as follows:
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 — Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.
Level 3 — Unobservable inputs reflecting the Company’s own assumptions about inputs that market participants would use in pricing the asset or liability based on the best information available.
Financial instruments measured at fair value on a recurring basis
The fair value of contingent consideration liabilities was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the applicable acquisition agreements.
The following table represents the changes in the fair value of Level 3 contingent consideration:
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
3,094
|
|
Acquisitions
|
|
3,407
|
|
Payments
|
|
(560
|
)
|
Accretion of liability
|
|
272
|
|
Revaluation
|
|
(735
|
)
|
Foreign currency translation
|
|
30
|
|
Balance at December 31, 2017
|
|
$
|
5,508
|
|
Acquisitions
|
|
—
|
|
Payments
|
|
(2,277
|
)
|
Accretion of liability
|
|
175
|
|
Revaluation
|
|
(891
|
)
|
Foreign currency translation
|
|
(150
|
)
|
Balance at December 31, 2018
|
|
$
|
2,365
|
|
Financial instruments not measured at fair value on a recurring basis
The Company has evaluated current market conditions and borrower credit quality and has determined that the carrying value of its long-term debt approximates fair value. The fair value of the Company’s notes payable and capital lease obligations approximates their carrying amounts based on anticipated interest rates which management believes would currently be available to the Company for similar issuances of debt.
13. Share-Based Compensation
The Company has share-based incentive awards outstanding to its eligible employees and Directors under
three
employee stock ownership plans: (i) the 2007 Stock Option Plan (the 2007 Plan), (ii) the 2009 Long-Term Incentive Plan (the 2009 Plan) and (iii) the 2016 Long-Term Incentive Plan.
No
further awards may be granted under either the 2007 Plan or the 2009 Plan, although awards granted under the 2007 Plan and 2009 Plan remain outstanding in accordance with their terms. Awards granted under the 2016 Plan may be in the form of stock options, restricted stock units and other forms of share-based incentives, including performance restricted stock units, stock appreciation rights and deferred stock rights. The 2016 Plan allows for the grant of awards of up to approximately
1,700,000
shares of common stock, of which
1,143,000
shares were available for future
grants as of
December 31, 2018
. As of
December 31, 2018
, there was an aggregate of approximately
2,105,000
stock options outstanding and approximately
452,000
unvested restricted stock units outstanding under the 2009 Plan and the 2007 Plan.
Stock Options
For the years ended December 31, 2018 and 2017 and the transition period ended December 31, 2016, the Company did
no
t have any share-based compensation expense related to stock option awards. For the year ended May 31, 2016, the Company recognized share-based compensation expense related to stock option awards of less than
$0.1 million
.
No
stock options were granted during the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 or the year ended May 31, 2016. As of
December 31, 2018
,
no
unrecognized compensation costs remained related to stock option awards. Cash proceeds from, and the intrinsic value of, stock options exercised during the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 and the year ended May 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the Transition Period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
Cash proceeds from options exercised
|
$
|
273
|
|
|
$
|
275
|
|
|
$
|
604
|
|
|
$
|
543
|
|
Aggregate intrinsic value of options exercised
|
277
|
|
|
580
|
|
|
993
|
|
|
658
|
|
A summary of the stock option activity, weighted average exercise prices, and options outstanding and exercisable as of
December 31, 2018
and 2017, the transition period ended December 31, 2016 and the year ended May 31, 2016 is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
For the Transition Period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
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 year:
|
2,130
|
|
|
$
|
13.43
|
|
|
2,167
|
|
|
$
|
13.33
|
|
|
2,232
|
|
|
$
|
13.21
|
|
|
2,287
|
|
|
$
|
13.13
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
(25
|
)
|
|
$
|
10.75
|
|
|
(37
|
)
|
|
$
|
7.39
|
|
|
(65
|
)
|
|
$
|
9.27
|
|
|
(55
|
)
|
|
$
|
9.87
|
|
Expired or forfeited
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at end of year:
|
2,105
|
|
|
$
|
13.47
|
|
|
2,130
|
|
|
$
|
13.43
|
|
|
2,167
|
|
|
$
|
13.33
|
|
|
2,232
|
|
|
$
|
13.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Total
Options
Outstanding
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
$10.00-$10.00
|
|
10
|
|
|
0.3
|
|
$
|
10.00
|
|
|
10
|
|
|
$
|
10.00
|
|
$13.46-$22.35
|
|
2,095
|
|
|
0.7
|
|
$
|
13.48
|
|
|
2,095
|
|
|
$
|
13.48
|
|
|
|
2,105
|
|
|
|
|
|
|
|
2,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Intrinsic Value
|
|
$
|
1,965
|
|
|
|
|
|
|
|
$
|
1,965
|
|
|
|
|
Restricted Stock Unit Awards
Restricted Stock Units generally vest ratably on each of the first four anniversary dates of issuance. The Company recognized approximately
$4.2 million
and
$4.5 million
of share-based compensation for the years ended December 31, 2018 and 2017,
$2.6 million
of share-based compensation for the transition period ended December 31, 2016 and
$4.4 million
of share-based compensation in
fiscal 2016
related to restricted stock unit awards. As of
December 31, 2018
, there were approximately
$6.8 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
2.4 years
.
A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows: (awards in thousands, fair value in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the Transition Period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
Restricted stock awards vested
|
258
|
|
|
185
|
|
|
207
|
|
|
223
|
|
Fair value of awards vested
|
$
|
5.3
|
|
|
$
|
3.4
|
|
|
$
|
5.1
|
|
|
$
|
3.5
|
|
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.
A summary of the fully-vested common stock the Company issued to its
five
non-employee directors, in connection with its non-employee director compensation plan, is as follows: (awards in thousands, fair value in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the Transition Period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
Awards issued
|
19
|
|
|
21
|
|
|
10
|
|
|
28
|
|
Grant date fair value of awards issued
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
0.3
|
|
|
$
|
0.5
|
|
A summary of the Company's outstanding, non-vested restricted share units is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the transition period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
2017
|
|
2016
|
|
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:
|
532
|
|
|
$
|
21.05
|
|
569
|
|
|
$
|
20.81
|
|
|
575
|
|
|
$
|
18.85
|
|
|
564
|
|
|
$
|
20.47
|
|
Granted
|
211
|
|
|
$
|
19.20
|
|
183
|
|
|
$
|
21.26
|
|
|
219
|
|
|
$
|
24.48
|
|
|
264
|
|
|
$
|
16.73
|
|
Released
|
(258
|
)
|
|
$
|
20.48
|
|
(185
|
)
|
|
$
|
20.49
|
|
|
(207
|
)
|
|
$
|
19.40
|
|
|
(223
|
)
|
|
$
|
20.40
|
|
Forfeited
|
(42
|
)
|
|
$
|
20.52
|
|
(35
|
)
|
|
$
|
21.45
|
|
|
(18
|
)
|
|
$
|
19.55
|
|
|
(30
|
)
|
|
$
|
19.26
|
|
Outstanding at end of period:
|
443
|
|
|
$
|
20.55
|
|
532
|
|
|
$
|
21.05
|
|
|
569
|
|
|
$
|
20.81
|
|
|
575
|
|
|
$
|
18.85
|
|
Performance Restricted Stock Units
The Company maintains Performance Restricted Stock Units (PRSUs) that have been granted to select executives and senior officers whose ultimate payout is based on the Company’s performance over a
one
-year period based on three metrics, as defined: (1) Operating Income, (2) Adjusted EBITDAS and (3) Revenue. There is a discretionary portion of the PRSUs based
on individual performance, at the discretion of the Compensation Committee (Discretionary PRSUs). PRSUs and Discretionary PRSUs generally vest ratably on each of the first
four
anniversary dates upon completion of the performance period, for a total requisite service period of up to
five
years and have no dividend rights.
PRSUs are equity-classified and compensation costs are initially measured using the fair value of the underlying stock at the date of grant, assuming that the target performance conditions will be achieved. Cumulative compensation costs related to the PRSUs are subsequently adjusted for changes in the expected outcomes of the performance conditions.
Discretionary PRSUs are liability-classified and adjusted to fair value (with a corresponding adjustment to compensation expense) based upon the targeted number of shares to be awarded and the fair value of the underlying stock each reporting period until approved by the Compensation Committee, at which point they are classified as equity.
A summary of the Company's PRSU activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the transition period ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
|
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:
|
278
|
|
|
$
|
17.00
|
|
|
290
|
|
|
$
|
16.01
|
|
|
328
|
|
|
$
|
17.02
|
|
Granted
|
129
|
|
|
$
|
19.46
|
|
|
128
|
|
|
$
|
20.42
|
|
|
105
|
|
|
$
|
24.90
|
|
Performance condition adjustments, net
|
(50
|
)
|
|
$
|
19.48
|
|
|
(68
|
)
|
|
$
|
20.55
|
|
|
(54
|
)
|
|
$
|
24.49
|
|
Released
|
(68
|
)
|
|
$
|
16.03
|
|
|
(72
|
)
|
|
$
|
15.82
|
|
|
(89
|
)
|
|
$
|
24.50
|
|
Forfeited
|
(12
|
)
|
|
$
|
16.16
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding at end of period:
|
277
|
|
|
$
|
17.80
|
|
|
278
|
|
|
$
|
17.00
|
|
|
290
|
|
|
$
|
16.01
|
|
In
fiscal 2014
, the Company granted
one
-year,
two
-year and
three
-year PRSUs to its executive and certain other senior officers. These units had requisite service periods of
three years
and have no dividend rights. The actual payout of these units, before the fiscal 2016 modification as described below, was based on the Company’s performance over one, two and three-year periods (based on pre-established targets) and a market condition modifier based on total shareholder return (TSR) compared to an industry peer group. The
one
-year and
two
-year performance conditions of the
fiscal 2014
awards were evaluated before modification of the awards and not achieved. The
one
-year and
two
-year market conditions of the
fiscal 2014
awards were evaluated before modification of the awards and achieved. Compensation costs related to the TSR conditions for the one-year and two-year 2014 awards described above were fixed at the measurement date, and not subsequently adjusted. The
one
-year and
two
-year awards related to market conditions were paid at
170%
and
105%
, respectively, of target, upon vesting during the transition period ended December 31, 2016. The
three
-year performance and market condition awards were surrendered as part of the fiscal 2016 modification described below.
In fiscal
2015
, the Company granted PRSUs to its executive and certain other senior officers. These units have requisite service periods of
three years
and have no dividend rights. The actual payout of these units, before the fiscal 2016 modification as described below, was based on the Company’s performance over the
three
-year period (based on pre-established targets) and a market condition modifier based on (TSR) compared to an industry peer group. The 2015 awards were surrendered as part of the fiscal 2016 modification described below.
In the first quarter of fiscal 2016, the Company modified its equity compensation program and granted
154,000
PRSUs to its executive and certain other senior officers. As a condition for receiving any awards under the revised fiscal 2016 plan, the executive and senior officers surrendered and released all rights to receive any shares under the
three
-year 2014 awards and
three
-year 2015 awards with a performance or market condition. The Company has accounted for the fiscal 2016 awards as modifications in accordance with ASC 718, Compensation - Stock Compensation. These units have requisite service periods of
five
years and have no dividend rights.
The fiscal 2016 PRSUs increased by approximately
104,000
units to a total of
258,000
units, which represents Company performance above target as well as individual performance, and was approved by the Compensation Committee in August 2016.
For the transition period ended December 31, 2016,
105,000
PRSUs were granted. There was a
73,000
unit reduction to these awards, which represents Company performance below target, during the transition period ended December 31, 2016. As of December 31, 2016, the aggregate liability related to
12,000
outstanding Discretionary PRSUs was less than
$0.1 million
and is classified within accrued expenses and other liabilities on the consolidated balance sheet. The Compensation Committee approved these PRSUs in the first quarter of 2017, which reduced them by
3,000
units. The discretionary portion of these awards were reclassed from a liability to equity on the consolidated balance sheet upon Compensation Committee approval.
For the year ended December 31, 2017,
128,000
PRSUs were granted. There was a
65,000
unit reduction to these awards, which represents Company performance below target, during the year ended December 31, 2017. As of December 31, 2017, the aggregate liability related to
13,000
outstanding Discretionary PRSUs was less than
$0.1 million
and is classified within accrued expenses and other liabilities on the consolidated balance sheet. The Compensation Committee approved these PRSUs in the first quarter of 2018, which increased them by
4,000
units. The discretionary portion of these awards were reclassed from a liability to equity on the consolidated balance sheet upon Compensation Committee approval.
For the year ended December 31, 2018,
129,000
PRSUs were granted. There was a
54,000
unit reduction to these awards, which represents Company performance below target, during the year ended December 31, 2018. As of December 31, 2018, the aggregate liability related to
22,000
outstanding discretionary PRSUs was less than
$0.1 million
and is classified within accrued expenses and other liabilities on the consolidated balance sheet.
Compensation expense related to all PRSUs described above was
$1.5 million
,
$1.7 million
,
$1.7 million
and
$1.6 million
for the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 and the year ended May 31, 2016, respectively. At December 31, 2018, there was
$1.8 million
of total unrecognized compensation costs related to approximately
309,000
nonvested performance restricted stock units. These costs are expected to be recognized over a weighted-average period of approximately
1.9 years
.
For the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 and the year ended May 31, 2016, the income tax benefit recognized on all share based compensation arrangements referenced above was approximately
$1.0 million
,
$2.2 million
,
$1.6 million
and
$2.2 million
, respectively.
14. Income Taxes
Income before provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the Transition Period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
Income (loss) before provision for income taxes from:
|
|
|
|
|
|
|
|
|
U.S. operations
|
$
|
9,853
|
|
|
$
|
(7,303
|
)
|
|
$
|
5,116
|
|
|
$
|
27,772
|
|
Foreign operations
|
4,418
|
|
|
7,077
|
|
|
10,365
|
|
|
10,643
|
|
Earnings (loss) before income taxes
|
$
|
14,271
|
|
|
$
|
(226
|
)
|
|
$
|
15,481
|
|
|
$
|
38,415
|
|
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the Transition Period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
790
|
|
|
$
|
3,558
|
|
|
$
|
1,990
|
|
|
$
|
9,156
|
|
|
States and local
|
533
|
|
|
39
|
|
|
483
|
|
|
1,537
|
|
|
Foreign
|
3,824
|
|
|
3,131
|
|
|
3,569
|
|
|
3,672
|
|
|
Reserve for uncertain tax positions
|
337
|
|
|
71
|
|
|
(39
|
)
|
|
(529
|
)
|
|
Total current
|
5,484
|
|
|
6,799
|
|
|
6,003
|
|
|
13,836
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Federal
|
2,966
|
|
|
(3,857
|
)
|
|
6
|
|
|
82
|
|
|
States and local
|
399
|
|
|
(810
|
)
|
|
(28
|
)
|
|
(51
|
)
|
|
Foreign
|
(2,089
|
)
|
|
(437
|
)
|
|
(514
|
)
|
|
(557
|
)
|
|
Total deferred
|
1,276
|
|
|
(5,104
|
)
|
|
(536
|
)
|
|
(526
|
)
|
|
Net change in valuation allowance
|
666
|
|
|
247
|
|
|
403
|
|
|
455
|
|
|
Net deferred
|
1,942
|
|
|
(4,857
|
)
|
|
(133
|
)
|
|
(71
|
)
|
|
Provision for income taxes
|
$
|
7,426
|
|
|
$
|
1,942
|
|
|
$
|
5,870
|
|
|
$
|
13,765
|
|
|
The provision for income taxes differs from the amount computed by applying the statutory federal tax rate to income tax as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
For the Transition period ended December 31,
|
|
2018
|
2017
|
|
2016
|
Federal tax at statutory rate
|
$
|
2,997
|
|
|
21.0
|
%
|
$
|
(79
|
)
|
|
35.0
|
%
|
|
$
|
5,418
|
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
737
|
|
|
5.1
|
%
|
(502
|
)
|
|
221.6
|
%
|
|
296
|
|
|
1.9
|
%
|
Foreign tax
|
807
|
|
|
5.7
|
%
|
217
|
|
|
(95.8
|
)%
|
|
(573
|
)
|
|
(3.7
|
)%
|
Contingent consideration
|
(6
|
)
|
|
—
|
%
|
(63
|
)
|
|
27.7
|
%
|
|
(4
|
)
|
|
—
|
%
|
Nondeductible compensation
|
183
|
|
|
1.3
|
%
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
US taxation of foreign earnings
|
228
|
|
|
1.6
|
%
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Permanent differences
|
361
|
|
|
2.5
|
%
|
377
|
|
|
(166.4
|
)%
|
|
373
|
|
|
2.4
|
%
|
Transition tax, net of foreign tax credits
|
1,158
|
|
|
8.1
|
%
|
3,942
|
|
|
(1,741.4
|
)%
|
|
—
|
|
|
—
|
%
|
Federal tax rate change due to the Tax Act
|
87
|
|
|
0.6
|
%
|
(1,956
|
)
|
|
864.0
|
%
|
|
—
|
|
|
—
|
%
|
Other
|
208
|
|
|
1.4
|
%
|
(241
|
)
|
|
106.5
|
%
|
|
(43
|
)
|
|
(0.3
|
)%
|
Change in valuation allowance
|
666
|
|
|
4.7
|
%
|
247
|
|
|
(109.1
|
)%
|
|
403
|
|
|
2.6
|
%
|
Total provision for income taxes
|
$
|
7,426
|
|
|
52.0
|
%
|
$
|
1,942
|
|
|
(857.9
|
)%
|
|
$
|
5,870
|
|
|
37.9
|
%
|
On December 22, 2017, the United States enacted fundamental changes to the federal tax law following the passage of the Tax Cuts and Jobs Act (the "Tax Act").
The Tax Act is complex and significantly changes the U.S. corporate tax system by, among other things, (a) reducing the federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, (b) replacing the prior system of taxing corporations on foreign earnings of their foreign subsidiaries when the earnings are repatriated with a partial territorial tax system that provides a 100% dividends-received deduction (DRD) to domestic corporations for foreign-sourced dividends received from 10%-or-more owned foreign corporations, (c) subjecting certain unrepatriated foreign earnings to a mandatory one-time transition tax on post-1986 earnings and profits ("the transition tax"), and (d) further limiting a public entity's ability to deduct compensation in excess of $1 million for covered employees.
For the financial statements for the year ended December 31, 2017, the Company had reasonably estimated the tax effects of the Tax Act. The effect of the change in federal corporate tax rate from 35% to 21% was subject to change based on resolution of estimates used in determining the amounts of deferred tax assets and liabilities that were remeasured.
The Company's calculation of the transition tax was subject to further refinement as more information was gathered from its foreign subsidiaries, estimates used in the calculation were resolved, and as states provided guidance on how the transition tax may or may not apply in their respective jurisdictions. The Company also anticipated that the deferred tax asset related to executive compensation would change based upon actual 2018 compensation as compared to its projections of compensation that were limited. Finally, the Tax Act also imposes a minimum tax on certain foreign income deemed to be in excess of a routine return based on tangible asset investment, which is designed to discourage income shifting by subjecting certain foreign intangibles and other income to current US tax. Effective for tax years beginning after 2017, US shareholders of certain foreign corporations are subject to current U.S. tax on their global intangible low-taxed income (GILTI). As of December 31, 2017, the Company had not yet evaluated its potential liability, if any, under the minimum tax for GILTI in 2018 or future years. Accordingly, the Company had not yet made an accounting policy election either to account for these effects in the future period when the tax arises or to recognize them as part of the deferred taxes. The impact on income tax expense related to the Tax Act for 2017 was
$1.9 million
. This amount reflects a net tax benefit of
$2.3 million
as a result of the Tax Act due to the remeasurement of federal deferred tax assets and liabilities from 35% to 21%. This amount also includes a charge of
$3.9 million
due to the transition tax. Additionally, the Company incurred a charge attributable to reducing its deferred tax assets by
$0.3 million
due to changes made to executive compensation rules pursuant to the Tax Act.
During the year ended December 31, 2018, the Company completed its accounting for the effects of the Tax Act on the period ended December 31, 2017, which resulted in income tax expense of
$1.7 million
. This consisted primarily of
$0.1 million
of an increase in the Company's net deferred tax liabilities due to the reduction in the federal corporate rate from 35% to 21%, an increase of
$1.3 million
in tax expense attributable to the transition tax and a decrease in deferred tax assets of
$0.4 million
due to changes made to executive compensation. Additionally, the Company incurred an increase in income tax expense of
$0.2 million
due to GILTI, and an increase of
$0.3 million
due to additional non-deductible expenses. For GILTI, the Company has made an accounting policy election to account for these effects in the future period when the tax arises.
|
|
|
|
|
|
|
|
|
|
For the year ended May 31,
|
|
2016
|
|
Federal tax at statutory rate
|
$
|
13,445
|
|
|
35.0
|
%
|
|
State taxes, net of federal benefit
|
966
|
|
|
2.5
|
%
|
|
Foreign tax
|
(610
|
)
|
|
(1.6
|
)%
|
|
Contingent consideration
|
(425
|
)
|
|
(1.1
|
)%
|
|
Permanent differences
|
245
|
|
|
0.6
|
%
|
|
Other
|
(311
|
)
|
|
(0.8
|
)%
|
|
Change in valuation allowance
|
455
|
|
|
1.2
|
%
|
|
Total provision for income taxes
|
$
|
13,765
|
|
|
35.8
|
%
|
|
Deferred income tax attributes resulting from differences between financial accounting amounts and income tax basis of assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Deferred income tax assets
|
|
|
|
Allowance for doubtful accounts
|
$
|
951
|
|
|
$
|
838
|
|
Inventory
|
285
|
|
|
265
|
|
Intangible assets
|
1,230
|
|
|
2,255
|
|
Accrued expenses
|
4,408
|
|
|
2,560
|
|
Net operating loss carryforward
|
3,889
|
|
|
3,729
|
|
Capital lease obligations
|
731
|
|
|
1,004
|
|
Capital losses
|
462
|
|
|
463
|
|
Foreign tax credit carryover
|
—
|
|
|
618
|
|
Deferred share-based compensation
|
3,728
|
|
|
4,080
|
|
Other
|
699
|
|
|
484
|
|
Deferred income tax assets
|
16,383
|
|
|
16,296
|
|
Valuation allowance
|
(4,235
|
)
|
|
(4,044
|
)
|
Net deferred income tax assets
|
12,148
|
|
|
12,252
|
|
Deferred income tax liabilities
|
|
|
|
Property and equipment
|
(7,597
|
)
|
|
(6,893
|
)
|
Goodwill
|
(9,302
|
)
|
|
(6,578
|
)
|
Intangible assets
|
(16,459
|
)
|
|
(5,972
|
)
|
Other
|
(8
|
)
|
|
(6
|
)
|
Deferred income tax liabilities
|
(33,366
|
)
|
|
(19,449
|
)
|
Net deferred income taxes
|
$
|
(21,218
|
)
|
|
$
|
(7,197
|
)
|
As of
December 31, 2018
, the Company had federal net operating loss carry forwards (NOLs) in the amount of approximately
$0.3 million
which may be utilized subject to limitation under Internal Revenue Code section 382. The federal NOLs expire at various times from 2031 to 2035. In addition, as of
December 31, 2018
, the Company had state and foreign NOLs of
$25.0 million
and
$11.0 million
, respectively. The state NOLs expire at various times from 2025 to 2038. Approximately
$0.8 million
of the foreign NOLs expire at various times from 2025 to 2038, while the remainder of the Company's foreign NOLs do not expire.
In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Valuation allowances are provided when management believes the Company's deferred tax assets are not recoverable based on an assessment of estimated future taxable income that incorporates ongoing, prudent and feasible tax planning strategies. At
December 31, 2018
and December 31, 2017, the Company has a valuation allowance of approximately
$4.2 million
and
$4.0 million
, respectively, primarily against certain state and foreign NOLs, capital losses generated by the disposals of certain foreign subsidiaries and other specific deferred tax assets. The increase of
$0.2 million
is primarily attributable to an increase against the foreign net operating losses. Except for those deferred tax assets subject to the valuation allowance, management believes that it will realize all deferred tax assets as a result of sufficient future taxable income in each tax jurisdiction in which the Company has deferred tax assets.
The following table summarizes the changes in the Company’s gross unrecognized tax benefits, excluding interest and penalties:
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2018
|
|
2017
|
Balance at beginning of period
|
$
|
156
|
|
|
$
|
267
|
|
Additions for tax positions related to the current fiscal period
|
1
|
|
|
11
|
|
Additions for tax positions related to prior years
|
341
|
|
|
188
|
|
Decreases for tax positions related to prior years
|
(2
|
)
|
|
—
|
|
Current year acquisitions
|
270
|
|
|
—
|
|
Impact of foreign exchange fluctuation
|
—
|
|
|
10
|
|
Settlements
|
(4
|
)
|
|
(198
|
)
|
Reductions related to the expiration of statutes of limitations
|
(39
|
)
|
|
(122
|
)
|
Balance at end of period
|
$
|
723
|
|
|
$
|
156
|
|
The Company has recorded the unrecognized tax benefits in other long-term liabilities in the consolidated balance sheets. As of
December 31, 2018
and December 31, 2017, there were approximately
$0.7 million
and
$0.2 million
of unrecognized tax benefits, respectively, including penalties and interest that if recognized would favorably affect the effective tax rate. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense and are not significant for the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 and the year ended May 31, 2016. The Company anticipates a decrease to its unrecognized tax benefits of less than
$0.5 million
excluding interest and penalties within the next 12 months.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years ending before May 31, 2016 and generally is no longer subject to state, local or foreign income tax examinations by tax authorities for years ending before May 31, 2015.
Net income (loss) of foreign subsidiaries was
$2.0 million
,
$4.1 million
,
$6.9 million
and
$7.5 million
for the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 and fiscal 2016, respectively. Generally, it has been the Company's practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations. As previously noted, the Tax Act made significant changes to the taxation of undistributed earnings, requiring that all previously untaxed earnings and profits of the Company's controlled foreign operations be subjected to the transition tax. Since these earnings have now been subjected to U.S. federal tax they would only be potentially subject to limited other taxes, including foreign withholding and certain state taxes. As of December 31, 2018, the Company has
no
t recognized a deferred tax liability for foreign withholdings and state taxes on its undistributed international earnings or losses of its foreign subsidiaries since it intends to indefinitely reinvest the earnings outside the United States. The Company has estimated that the amount of the unrecorded deferred tax liability related to undistributed international earnings is less than
$1 million
.
15. Employee Benefit Plans
The Company provides a 401(k) savings plan for eligible U.S. based employees. Employee contributions are discretionary up to the IRS limits each year and catch up contributions are allowed for employees
50 years
of age or older. Under the 401(k) plan, employees become eligible to participate on the first day of the month after
three months
of continuous service. Under this plan, the Company matches
50%
of the employee’s contributions up to
6%
of the employee’s annual compensation, as defined by the plan. There is a
five
-year vesting schedule for the Company match. The Company’s contribution to the plan was
$3.9 million
,
$3.7 million
,
$2.0 million
and
$3.5 million
for the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 and the year ended May 31, 2016, respectively.
The Company participates with other employers in contributing to the Boilermaker-Blacksmith National Pension Trust (EIN 48-6168020) (“Boilermakers”) and Plumbers and Pipefitters National Pension Fund (EIN 52-6152779) (“Pipefitters”), multi-employer defined benefit pension plans, which covers certain U.S. based union employees. The plans provide multiple plan benefits with corresponding contribution rates that are collectively bargained between participating employers and their affiliated Boilermakers and Pipefitters local unions. Both the Boilermakers and Pipefitters plans are between 65 percent and 80
percent funded as of the latest Form 5500 filed.
The Company’s contributions to the Boilermakers and Pipefitters plans, collectively, were
$0.6 million
,
$2.4 million
,
$1.5 million
and
$2.5 million
for the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 and the year ended May 31, 2016. These contributions represented less than
five
percent of total contributions made to the plans.
The Company has other benefit plans covering certain employees throughout the Company. Amounts charged to expense under these plans were not significant in any year.
16. Related Party Transactions
On August 17, 2016, the Company entered into an agreement with its then Chairman, CEO and Director, Dr. Sotirios Vahaviolos, to purchase up to
1 million
of his shares, commencing in October 2016. Refer to Note 20 for further details of the treasury stock repurchases from Dr. Vahaviolos.
The Company leases its headquarters under an operating lease from a shareholder and officer of the Company. On August 1, 2014, the Company extended its lease at its headquarters requiring monthly payments through October 2024. Total rent payments made during the year ended December 31, 2018 were approximately
$1.0 million
. See Note 18 for further detail related to operating leases.
The Company has a lease for office space located in France, which is partly owned by a shareholder and officer. Total rent payments made during the year ended December 31,
2018
were approximately
$0.1 million
. During 2018, the shareholder and officer sold his interest in this property, and as a result, is no longer a related party as of December 31, 2018.
The Company has a lease for office space located in Brazil, which is partly owned by a shareholder and officer. Total rent payments made during the year ended December 31, 2018 were approximately
$0.1 million
. During 2018, the shareholder and officer sold his interest in this property, and as a result, is no longer a related party as of December 31, 2018.
The Company receives benefits consulting services from Capital Management Enterprise (“CME”), which is owned by
one
of its non-employee directors, Manuel N. Stamatakis. The Company does not pay any fees directly to CME. Any compensation CME receives is from third-party benefit providers.
17. Obligations under Capital Leases
The Company leases certain office space, and service equipment under capital leases, requiring monthly payments ranging from less than
$1 thousand
to
$63 thousand
, including effective interest rates that range from approximately
1%
to
11%
expiring through June 2029. The net book value of assets under capital lease obligations was
$14.6 million
and
$19.5 million
at
December 31, 2018
and December 31, 2017, respectively.
Scheduled future minimum lease payments subsequent to
December 31, 2018
are as follows:
|
|
|
|
|
2019
|
$
|
4,686
|
|
2020
|
3,489
|
|
2021
|
2,757
|
|
2022
|
1,475
|
|
2023
|
807
|
|
Thereafter
|
773
|
|
Total minimum lease payments
|
13,987
|
|
Less: amount representing interest
|
(990
|
)
|
Present value of minimum lease payments
|
12,997
|
|
Less: current portion of obligations under capital leases
|
(3,922
|
)
|
Obligations under capital leases, net of current portion
|
$
|
9,075
|
|
18. Commitments and Contingencies
Operating Leases
The Company is party to various non-cancelable operating lease agreements, primarily for its international and domestic office and lab space. Future minimum lease payments under noncancelable operating leases in each of the five years and thereafter subsequent to
December 31, 2018
are as follows:
|
|
|
|
|
2019
|
$
|
10,939
|
|
2020
|
8,764
|
|
2021
|
6,327
|
|
2022
|
4,826
|
|
2023
|
4,239
|
|
Thereafter
|
10,667
|
|
Total
|
$
|
45,762
|
|
Total rent expense was
$12.3 million
,
$11.8 million
,
$6.6 million
,
$11.2 million
for the years ended December 31, 2018 and 2017, the transition period ended December 31, 2016 and the year ended May 31, 2016, respectively.
Legal Proceedings and Government Investigations
The Company is subject to periodic lawsuits, investigations and claims that arise in the ordinary course of business. The Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it. Except for the matters described below, the Company does not believe that any currently pending legal proceeding to which the Company is a party will have a material adverse effect on its business, results of operations, cash flows or financial condition. The costs of defense and amounts that may be recovered against the Company may be covered by insurance for certain matters.
Litigation and Commercial Claims
The Company’s subsidiary in France has been involved in a dispute with a former owner of a business in France purchased by the Company’s French subsidiary. The former owner received a judgment in his favor in the amount of approximately
$0.4 million
for payment of the contingent consideration portion of the purchase price for the business. The Company recorded an accrual for this judgment during 2016. The Company's subsidiary appealed the judgment and the entire judgment was overturned on appeal. The appeal process was completed in July 2018 in the Company's favor, and accordingly, the Company reversed the accrual as of June 30, 2018.
The Company was a defendant in a lawsuit, Triumph Aerostructures, LLC d/b/a Triumph Aerostructures-Vought Aircraft Division
v. Mistras Group, Inc
., pending in Texas State district court, 193rd Judicial District, Dallas County, Texas, filed September 2016. The plaintiff alleged that in 2014 Mistras delivered a defective Ultrasonic inspection system and alleged damages of approximately
$2.3 million
, the amount it paid for the system. In January 2018, the Company agreed to settle this matter for a payment of
$1.6 million
and Mistras subsequently obtained ownership of the underlying ultrasonic inspection system. A charge for
$1.6 million
was recorded in 2017 and payment was made in February 2018.
A Company vehicle was involved in an accident in which individuals were injured, property was damaged, and businesses alleged impacted by the accident have claimed economic losses.
One
lawsuit has been filed by one of the injured individuals in the U.S. District Court for the District of Colorado,
McAllister v. Mistras Group, Inc
. The Company has insurance for these types of matters and believes its insurance is sufficient to cover all claims resulting from this accident. However, the possibility exists that the insurance ultimately will not be sufficient to satisfy all claims, in which case the Company would be responsible for the amount of claims in excess of insurance coverage.
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. In addition, the California Department of Toxic Substances Control recently notified the owner of the property that it may perform additional investigation of the property. At this time, the Company is unable to determine whether it has any liability in connection with this matter and if so, the amount or range of any such liability, and accordingly, has not established any reserves for this matter.
Pension Related Contingencies
The workforce of certain of the Company’s subsidiaries are unionized and the terms of employment for these workers are governed by collective bargaining agreements, or CBAs. Under these CBAs, the Company’s subsidiaries are required to contribute to the national pension funds for the unions representing these employees, which are multi-employer pension plans. The Company was notified that a significant project was awarded to another contractor in January 2018, and as a result, one of the Company’s subsidiaries experienced a significant reduction in the number of its employees covered by one of the CBAs. Under certain circumstances, such a reduction in the number of employees participating in multi-employer pension plans pursuant to this CBA could result in a complete or partial withdrawal liability to these multi-employer pension plans under the Employee Retirement Income Security Act of 1974 ("ERISA"). Management explored options to retain a level of union work that would avoid withdrawal liability to the pension plans, but concluded during the third quarter of 2018 that the Company's subsidiaries probably would not obtain sufficient union work to avoid withdrawal liability. Therefore, the Company determined that it is probable that its subsidiary will incur a withdrawal liability related to these multiemployer pension plans and estimated that the total amount of this potential liability is approximately
$5.9 million
and recorded a charge for that amount during the year ended December 31, 2018.
Severance and labor disputes
During the year ended December 31, 2018, the Company recorded approximately
$1.2 million
in charges related to labor claims for its Brazilian subsidiary, which are included within Selling, General and Administrative expenses. These claims related to employees in a company acquired by the Brazilian subsidiary in a prior period. The Company believes it is entitled to indemnification from the sellers of the acquired company for most of these charges, but has not recorded the expected recovery of indemnification for these labor claims as the amount and timing of collection is uncertain as of December 31, 2018.
The Company’s German subsidiary provides employees to customers under temporary staff leasing arrangements. In April 2017, the German Labor Lease Act was passed in Germany limiting the duration of temporary workers to
eighteen
months, or longer as subsequently agreed with by a customer appropriate authority. Since the passing of the German Labor Lease Act, the Company explored selling its staff leasing services and concluded during the third quarter of 2018 that a sale would not be probable. As a result, the Company decided that it will not renew several of these leasing services contracts when they expire beginning in 2019. Due to the cap on the length of service allowed under the German Labor Lease Act, employees will have to be transitioned off the customer contracts. It is expected that the German subsidiary then will either terminate these employees, creating a severance obligation to the terminated employees, or transition them to the Company's other customers. As of December 31, 2018, the Company had over
200
employees under current staff leasing contracts, which expire through 2021. As of December 31, 2018, the Company estimated it would be required to pay approximately
$1.6 million
in severance for these employees not otherwise transitioned, and accordingly recorded an accrual for this amount which is included within Selling, General and Administrative expenses for the year ended December 31, 2018.
Acquisition-related contingencies
The Company is liable for contingent consideration in connection with certain of its acquisitions. As of
December 31, 2018
, total potential acquisition-related contingent consideration ranged from
zero
to
$5.8 million
and would be payable upon the achievement of specific performance metrics by certain of the acquired companies over the next
1.5
years of operations. See Note 7 to these consolidated financial statements for further information with respect to the Company’s acquisitions completed during the years ended December 31, 2018 and 2017.
19. Segment Disclosure
The Company’s
three
operating segments are:
|
|
•
|
Services.
This segment provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of non-destructive testing, and inspection
|
and engineering services that are used to evaluate the structural integrity and reliability of critical energy, industrial and public infrastructure.
|
|
•
|
International.
This segment offers services, products and systems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.
|
|
|
•
|
Products and Systems.
This segment designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States.
|
Costs incurred for general corporate services, including finance, legal, and certain other costs that are provided to the segments are reported within Corporate and eliminations. Sales to the International segment from the Products and Systems segment and subsequent sales by the International segment of the same items are recorded and reflected in the operating performance of both segments. Additionally, engineering charges and royalty fees charged to the Services and International segments by the Products and Systems segment are reflected in the operating performance of each segment. All such intersegment transactions are eliminated in the Company’s consolidated financial reporting.
The accounting policies of the reportable segments are the same as those described in Note 1. Segment income from operations is one of the primary performance measures used by the Chief Executive Officer, who is the chief operating decision maker, to assess the performance of each segment and make decisions as to resource allocations. Certain general and administrative costs such as human resources, information technology and training are allocated to the segments. Segment income from operations excludes interest and other financial charges and income taxes. Corporate and other assets are comprised principally of cash, deposits, property, plant and equipment, domestic deferred taxes, deferred charges and other assets. Corporate loss from operations consists of administrative charges related to corporate personnel and other charges that cannot be readily identified for allocation to a particular segment.
Selected financial information by segment for the periods shown was as follows (intercompany transactions are eliminated in Corporate and eliminations):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the Transition Period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
Revenues
|
|
|
|
|
|
|
|
|
Services
|
$
|
574,619
|
|
|
$
|
543,565
|
|
|
$
|
293,218
|
|
|
$
|
553,279
|
|
International
|
153,448
|
|
|
144,265
|
|
|
104,013
|
|
|
143,025
|
|
Products and Systems
|
23,426
|
|
|
23,297
|
|
|
14,541
|
|
|
30,293
|
|
Corporate and eliminations
|
(9,139
|
)
|
|
(10,157
|
)
|
|
(7,611
|
)
|
|
(7,416
|
)
|
|
$
|
742,354
|
|
|
$
|
700,970
|
|
|
$
|
404,161
|
|
|
$
|
719,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the Transition Period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
Gross profit
|
|
|
|
|
|
|
|
|
Services
|
$
|
151,974
|
|
|
$
|
139,160
|
|
|
$
|
75,784
|
|
|
$
|
145,262
|
|
International
|
45,464
|
|
|
38,974
|
|
|
34,210
|
|
|
43,613
|
|
Products and Systems
|
10,560
|
|
|
9,798
|
|
|
6,920
|
|
|
14,022
|
|
Corporate and eliminations
|
(124
|
)
|
|
(220
|
)
|
|
90
|
|
|
111
|
|
|
$
|
207,874
|
|
|
$
|
187,712
|
|
|
$
|
117,004
|
|
|
$
|
203,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the Transition Period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
Income from operations
|
|
|
|
|
|
|
|
|
Services
|
$
|
47,126
|
|
|
$
|
46,677
|
|
|
$
|
22,411
|
|
|
$
|
52,552
|
|
International
|
3,953
|
|
|
3,537
|
|
|
10,597
|
|
|
9,293
|
|
Products and Systems
|
2,368
|
|
|
(16,991
|
)
|
|
(254
|
)
|
|
2,688
|
|
Corporate and eliminations
|
(31,226
|
)
|
|
(29,063
|
)
|
|
(15,221
|
)
|
|
(21,356
|
)
|
|
$
|
22,221
|
|
|
$
|
4,160
|
|
|
$
|
17,533
|
|
|
$
|
43,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the Transition Period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
Services
|
$
|
24,079
|
|
|
$
|
21,649
|
|
|
$
|
12,765
|
|
|
$
|
22,725
|
|
International
|
8,846
|
|
|
7,768
|
|
|
5,306
|
|
|
7,774
|
|
Products and Systems
|
1,429
|
|
|
2,180
|
|
|
1,372
|
|
|
2,323
|
|
Corporate and eliminations
|
59
|
|
|
(214
|
)
|
|
(244
|
)
|
|
(348
|
)
|
|
$
|
34,413
|
|
|
$
|
31,383
|
|
|
$
|
19,199
|
|
|
$
|
32,474
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Intangible assets, net
|
|
|
|
Services
|
$
|
98,362
|
|
|
$
|
46,864
|
|
International
|
11,143
|
|
|
13,899
|
|
Products and Systems
|
1,438
|
|
|
2,261
|
|
Corporate and eliminations
|
452
|
|
|
715
|
|
|
$
|
111,395
|
|
|
$
|
63,739
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Total assets
|
|
|
|
Services
|
$
|
523,506
|
|
|
$
|
377,585
|
|
International
|
146,535
|
|
|
150,779
|
|
Products and Systems
|
12,264
|
|
|
12,733
|
|
Corporate and eliminations
|
11,732
|
|
|
13,344
|
|
|
$
|
694,037
|
|
|
$
|
554,441
|
|
Revenue and long-lived assets by geographic area was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
For the Transition Period ended December 31,
|
|
For the year ended May 31,
|
|
2018
|
|
2017
|
|
2016
|
|
2016
|
Revenue
|
|
|
|
|
|
|
|
|
United States
|
$
|
487,414
|
|
|
$
|
466,683
|
|
|
$
|
256,926
|
|
|
$
|
519,361
|
|
Other Americas
|
98,248
|
|
|
86,870
|
|
|
41,777
|
|
|
67,809
|
|
Europe
|
143,312
|
|
|
132,421
|
|
|
91,847
|
|
|
118,566
|
|
Asia-Pacific
|
13,380
|
|
|
14,996
|
|
|
13,611
|
|
|
13,445
|
|
|
$
|
742,354
|
|
|
$
|
700,970
|
|
|
$
|
404,161
|
|
|
$
|
719,181
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Long-lived assets
|
|
|
|
United States
|
$
|
230,140
|
|
|
$
|
237,616
|
|
Other Americas
|
177,628
|
|
|
36,011
|
|
Europe
|
76,781
|
|
|
80,693
|
|
|
$
|
484,549
|
|
|
$
|
354,320
|
|
20. Repurchase of Common Stock
On October 7, 2015, the Company's Board of Directors approved a
$50 million
stock repurchase plan. As part of this plan, on August 17, 2016, the Company entered into an agreement with its Chairman and then CEO, Dr. Sotirios Vahaviolos, to purchase up to
1 million
of his shares, commencing in October 2016. Pursuant to the agreement, in general, the Company agreed to purchase from Dr. Vahaviolos up to
$2 million
of shares each month, at a
2%
discount to the average daily price of the Company's common stock for the preceding month. During the transition period ended December 31, 2016, the Company purchased approximately
274,000
shares from Dr. Vahaviolos at an average price of
$21.90
per share and an aggregate cost of
$6.0 million
as well as
146,000
shares in the open market at an average price of
$20.48
per share and an aggregate cost of approximately
$3.0 million
. During the year ended December 31, 2017, the Company purchased approximately
726,000
shares from Dr. Vahaviolos at an average price of
$21.93
per share and an aggregate cost of
$15.9 million
. From the inception of the plan through December 31, 2017, the Company purchased
1,000,000
shares from Dr. Vahaviolos at an average price of
$21.92
per share for an aggregate cost of approximately
$21.9 million
.
The Company retired all of its repurchased shares during the fourth quarter of 2017 and they are not included in common stock issued and outstanding as of December 31, 2017. As of December 31, 2018, approximately
$25.1 million
remained available to repurchase shares under the stock repurchase plan.
21. Twelve Months Ended December 31, 2016 and Seven Months Ended December 31, 2015 Comparative Data (Unaudited)
The condensed consolidated statement of income for the twelve months ended December 31, 2016 and the seven months ended December 31, 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2016
|
|
Seven Months Ended December 31, 2015
|
|
|
(unaudited)
|
Revenues
|
|
$
|
684,762
|
|
|
$
|
427,913
|
|
Cost of revenues
|
|
468,929
|
|
|
292,718
|
|
Depreciation
|
|
21,699
|
|
|
12,005
|
|
Gross profit
|
|
194,134
|
|
|
123,190
|
|
Selling, general and administrative expenses
|
|
148,914
|
|
|
81,117
|
|
Research and engineering
|
|
2,670
|
|
|
1,431
|
|
Depreciation and amortization
|
|
10,689
|
|
|
6,503
|
|
Litigation charges
|
|
6,320
|
|
|
—
|
|
Acquisition-related benefit, net
|
|
(5
|
)
|
|
(959
|
)
|
Income from operations
|
|
25,546
|
|
|
35,098
|
|
Interest expense, net
|
|
3,075
|
|
|
3,672
|
|
Income before provision for income taxes
|
|
22,471
|
|
|
31,426
|
|
Provision for income taxes
|
|
8,008
|
|
|
11,627
|
|
Net income
|
|
14,463
|
|
|
19,799
|
|
Less: Net income (loss) attributable to non-controlling interests
|
|
54
|
|
|
(15
|
)
|
Net income available to Mistras Group, Inc. shareholders
|
|
$
|
14,409
|
|
|
$
|
19,814
|
|
Net income per share: Basic
|
|
$
|
0.50
|
|
|
$
|
0.69
|
|
Net income per share: Diluted
|
|
$
|
0.48
|
|
|
$
|
0.67
|
|
Weighted average shares outstanding:
|
|
|
|
|
Basic
|
|
28,960
|
|
|
28,810
|
|
Diluted
|
|
30,114
|
|
|
29,676
|
|
22. Selected Quarterly Financial Information (unaudited)
The following is a summary of the quarterly results of operations for calendar years 2018, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarter ended
|
|
December 31, 2018
|
|
September 30, 2018
|
|
June 30, 2018
|
|
March 31, 2018
|
Revenues
|
|
$
|
180,762
|
|
|
$
|
182,169
|
|
|
$
|
191,793
|
|
|
$
|
187,630
|
|
Gross Profit
|
|
52,315
|
|
|
52,332
|
|
|
55,083
|
|
|
48,145
|
|
Income from operations
|
|
2,502
|
|
|
3,017
|
|
|
8,409
|
|
|
6,399
|
|
Net income (loss) attributable to Mistras Group, Inc.
|
|
$
|
(1,061
|
)
|
|
$
|
(1,010
|
)
|
|
$
|
6,000
|
|
|
$
|
2,919
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.21
|
|
|
$
|
0.10
|
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.20
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarter ended
|
|
December 31, 2017
|
|
September 30, 2017
|
|
June 30, 2017
|
|
March 31, 2017
|
Revenues
|
|
$
|
187,643
|
|
|
$
|
179,570
|
|
|
$
|
170,439
|
|
|
$
|
163,318
|
|
Gross Profit
|
|
50,319
|
|
|
47,897
|
|
|
46,343
|
|
|
43,153
|
|
Income (loss) from operations
|
|
6,282
|
|
|
(10,375
|
)
|
|
5,003
|
|
|
3,250
|
|
Net income (loss) attributable to Mistras Group, Inc.
|
|
$
|
884
|
|
|
$
|
(6,968
|
)
|
|
$
|
2,217
|
|
|
$
|
1,692
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.08
|
|
|
$
|
0.06
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarter ended
|
|
December 31, 2016
|
|
September 30, 2016
|
|
June 30, 2016
|
|
March 31, 2016
|
Revenues
|
|
$
|
170,156
|
|
|
$
|
168,811
|
|
|
$
|
178,340
|
|
|
$
|
167,455
|
|
Gross Profit
|
|
47,978
|
|
|
50,651
|
|
|
51,535
|
|
|
43,970
|
|
Income from operations
|
|
2,944
|
|
|
12,116
|
|
|
4,840
|
|
|
5,646
|
|
Net income attributable to Mistras Group, Inc.
|
|
$
|
963
|
|
|
$
|
7,238
|
|
|
$
|
2,761
|
|
|
$
|
3,447
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
0.25
|
|
|
$
|
0.10
|
|
|
$
|
0.12
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
0.24
|
|
|
$
|
0.09
|
|
|
$
|
0.11
|
|