News Column

MISTRAS GROUP, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

August 8, 2014

The following Management's Discussion and Analysis ("MD&A") provides a narrative of our results of operations for the years ended May 31, 2014, 2013 and 2012, respectively, and our financial position as of May 31, 2014 and 2013, respectively. The MD&A should be read together with our consolidated financial statements and related notes included in Item 8 in this Annual Report on Form 10-K. In this annual report, our fiscal years, which end on May 31, are identified according to the calendar year in which they end (e.g., the fiscal year ended May 31, 2014 is referred to as "fiscal 2014"), and unless otherwise specified or the context otherwise requires, "Mistras," "the Company," "we," "us" and "our" refer to Mistras Group, Inc. and its consolidated subsidiaries. The MD&A includes the following sections:

† Forward-Looking Statements † Overview † Consolidated Results of Operations † Segment Results of Operations † Liquidity and Capital Resources † Critical Accounting Estimates † Recent Accounting Pronouncements Forward-Looking Statements



This report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (Securities Act), and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. See "Forward-Looking Statements" at the beginning if Item 1 of this Report.

Overview



We offer our customers "one source for asset protection solutions" ® and are a leading global provider of technology-enabled asset protection solutions used to evaluate the structural integrity and reliability of critical energy, industrial and public infrastructure. We combine industry-leading products and technologies, expertise in mechanical integrity (MI), Non-Destructive Testing (NDT), Destructive Testing (DT) and predictive maintenance (PdM) services, process and fixed asset engineering and consulting services, proprietary data analysis and its world class enterprise inspection database management and analysis software-PCMS to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity management and assessments. These mission critical solutions enhance our customers' ability to comply with governmental safety and environmental regulations, extend the useful life of their assets, increase productivity, minimize repair costs, manage risk and avoid catastrophic disasters. Our operations consist of three reportable segments: Services, International and Products and Systems.

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

† International offers services, products and systems similar to those of the other segments to global markets, principally in Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment. South America consists of our Brazil operations.

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

Given the role our solutions play in ensuring the safe and efficient operation of infrastructure, we have historically provided a majority of our services to our customers on a regular, recurring basis. We serve a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas (downstream, midstream, upstream and petrochemical), natural gas, fossil and nuclear power, transmission and distribution, alternative and renewable energy, public infrastructure, chemicals, aerospace and defense, transportation, primary metals and metalworking, pharmaceutical/biotechnology, food processing industries and research and engineering institutions. As of May 31, 2014, we had approximately 5,300 employees, including approximately 40 Ph.D.'s and 150 other degreed engineers and certified Level III technicians, in approximately 105 offices across 16 countries. We have established long-term relationships as a critical solutions provider to many of the leading companies in our target markets.

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For the last several years, we have focused on introducing our advanced asset protection solutions to our customers using proprietary, technology-enabled software and testing instruments, including those developed by our Products and Systems segment. During this period, the demand for outsourced asset protection solutions, in general, has increased, creating demand from which our entire industry has benefited. We believe continued growth can be realized in all of our target markets. Concurrent with this growth, we have worked to build our infrastructure to profitably absorb additional growth and have made a number of acquisitions in an effort to leverage our fixed costs, grow our base of experienced, certified personnel, expand our product and technical capabilities and increase our geographical reach.

We have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the integration of acquired companies. These acquisitions have provided us with additional products, technologies, resources and customers that we believe will enhance our advantages over our competition.

The global economy continues to be fragile. Global financial markets continue to experience uncertainty, including tight liquidity and credit availability, relatively low consumer confidence, slow economic growth, persistently high unemployment rates and volatile currency exchange rates. However, we believe these conditions have allowed us to selectively hire new talented individuals that otherwise might not have been available to us, to acquire and develop new technologies in order to aggressively expand our proprietary portfolio of customized solutions, and to make acquisitions of complementary businesses at reasonable valuations.

Consolidated Results of Operations

The following table summarizes our consolidated statements of operations for fiscal 2014, 2013 and 2012: For the year ended May 31, 2014 2013 2012 ($ in thousands) Revenues $ 623,447$ 529,282$ 436,875 Gross profit 172,943 148,371 129,690 Gross profit as a % of Revenue 28 % 28 % 30 % Total operating expenses 134,648 120,817 93,592 Operating expenses as a % of Revenue 22 % 23 % 21 % Income from operations 38,295 27,554 36,098 Income from operations as a % of Revenue 6 % 5 % 8 % Interest expense 3,192 3,288 3,132 Gain on extinguishment of long-term debt - - (671 ) Income before provision for income taxes 35,103 24,266 33,637 Provision for income taxes 12,528 12,627 12,291 Net income 22,575 11,639 21,346 Less: net (income) loss attributable to noncontrolling interests, net of taxes (57 ) 7 7 Net income attributable to Mistras Group, Inc. $ 22,518$ 11,646$ 21,353 33



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Our EBITDA and Adjusted EBITDA, non-GAAP measures explained below, for the years ended May 31, 2014, 2013 and 2012:

For the year ended May 31, 2014 2013 2012 ($ in thousands) Net income attributable to Mistras Group, Inc. $ 22,518 $ 11,646 $ 21,353 Interest expense 3,192 3,288 3,132 Provision for income taxes 12,528 12,627 12,291 Depreciation and amortization 28,429 26,647 22,024 EBITDA $ 66,667 $ 54,208 $ 58,800 Share-based compensation expense 6,261 6,285 5,097 Acquisition-related expense, net (2,657 ) (2,141 ) 1,980 Goodwill impairment - 9,938 Gain on extinguishment of debt - - (671 ) Adjusted EBITDA $ 70,271 $ 68,290 $ 65,206 Note about Non-GAAP Measures



EBITDA and Adjusted EBITDA are performance measures used by management that are not calculated in accordance with U.S. generally accepted accounting principles (GAAP). EBITDA is defined in this Report as net income attributable to Mistras Group, Inc. plus: interest expense, provision for income taxes and depreciation and amortization. Adjusted EBITDA is defined in this Report as net income attributable to Mistras Group, Inc. plus: interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense, and certain acquisition-related costs (including transaction due diligence costs and adjustments to the fair value of contingent consideration) and certain non-recurring items (which items are listed in the reconciliation table above).

Our management uses EBITDA and Adjusted EBITDA as a measure of operating performance to assist in comparing performance from period to period on a consistent basis, as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations. Adjusted EBITDA is also used as a performance evaluation metric for our executive and employee incentive compensation programs.

Later in this report, the non-GAAP financial performance measures "Segment and Total Company Income from Operations before Acquisition-Related Expense (Benefit), net" is used, with tables reconciling the measures to financial measures under GAAP. These non-GAAP measures exclude from the GAAP measures income from operations (a) transaction expenses related to acquisitions, such as professional fees and due diligence costs and (b) the net changes in the fair value of acquisition-related contingent consideration liabilities. These items have been excluded from the GAAP measures because these expenses and credits are not related to the Company's or Segment's core business operations and are related solely to the Company's or Segment's acquisition activities. Changes in the fair value of acquisition-related contingent consideration liabilities can be a net expense or credit in any given period, and fluctuate based upon the then current value of cash consideration the Company expects to pay in the future for prior acquisitions, without impacting cash generated from the Company's business operations.

We believe investors and other users of our financial statements benefit from the presentation of EBITDA, Adjusted EBITDA and "Segment and Total Company Income from Operations before Acquisition-Related Expense (Benefit), net" in evaluating our operating performance because it provides additional tools to compare our operating performance on a consistent basis and measure underlying trends and results in our business. EBITDA and Adjusted EBITDA remove the impact of certain items that management believes do not directly reflect our core operations. For instance, Adjusted EBITDA generally excludes interest expense, taxes and depreciation and amortization, each of which can vary substantially from company to company depending upon accounting methods and the book value and age of assets, capital structure, capital investment cycles and the method by which assets were acquired. It also eliminates share-based compensation, which is a non-cash expense and is excluded by management when evaluating the underlying performance of our business operations. Similarly, we believe that Segment and Total Company Income from Operations before Acquisition-Related Expense (Benefit), net, provides investors with useful information and more meaningful period over period comparisons by identifying and excluding these acquisition-related costs so that the performance of the core business operations can be identified and compared.

While Adjusted EBITDA is a term and financial measurement commonly used by investors and securities analysts, it has limitations. As a non-GAAP measurement, Adjusted EBITDA has no standard meaning and, therefore, may not be comparable with similar

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measurements for other companies. Adjusted EBITDA is generally limited as an analytical tool because it excludes charges and expenses we do incur as part of our operations. For example, Adjusted EBITDA excludes income taxes, but we generally incur significant U.S. federal, state and foreign income taxes each year and the provision for income taxes is a necessary cost. EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for analyzing our results as reported under U.S. generally accepted accounting principles. In addition, acquisitions are a part of our growth strategy, and therefore acquisition-related items are a necessary cost of the Company's business. Segment and Total Company Income from Operations before Acquisition-Related Expense (Benefit), net, are not metrics used to determine incentive compensation for executives or employees.

Revenues



Our revenues by segment for fiscal 2014, 2013 and 2012 were as follows:

For the year ended May 31, 2014 2013 2012 ($ in thousands) Revenues Services $ 443,229$ 380,851$ 349,793 International 161,395 126,840 59,466 Products and Systems 33,544 33,301 40,083



Corporate and eliminations (14,721 ) (11,710 ) (12,467 )

$ 623,447$ 529,282$ 436,875



Our growth rates for fiscal 2014, 2013 and 2012 were as follows:

For the year ended May 31, 2014 2013 2012 ($ in thousands) Revenue growth $ 94,165$ 92,407$ 98,286 % Growth over prior year 17.8 % 21.2 % 29.0 % Comprised of: % of organic growth 8.5 % 3.1 % 15.6 % % of acquisition growth 9.0 % 18.7 % 13.2 %



% foreign exchange increase (decrease) 0.3 % (0.6 )% 0.2 %

17.8 % 21.2 % 29.0 % Fiscal 2014



Our fiscal 2014 revenue was $623.5 million, an increase of $94.2 million or 18% compared to fiscal 2013 primarily as a result of growth in our Service and International segments. We estimate that our organic growth rate was approximately 9% in fiscal 2014 and growth from acquisitions was also 9%. In fiscal 2014, we estimate that organic growth by segment was approximately 12% for our Services segment, 3% for our International segment and 1% for our Products and Systems segment. We completed the acquisition of six companies in fiscal 2014 compared to three companies in fiscal 2013. We estimate our growth from acquisitions was approximately 5% for our Services segment and 23% for our International segment.

We continued to experience growth in many of our target markets in fiscal 2014. Our largest target market was oil and gas which represented approximately 49% and 50% of revenues in fiscal 2014 and 2013, respectively. Oil and gas revenues grew by 15% in fiscal 2014, led by growth in the downstream section of the industry. We also experienced growth in several of our other target markets outside of oil and gas, including aerospace and defense, power generation, industrial, process industries which include chemical and pharmaceutical, and infrastructure. Taken as a group, revenues for all target markets other than oil and gas grew approximately 20% over the prior year. Our top ten customers represented approximately 38% of our revenues for fiscal 2014 compared to 34% in fiscal 2013. No customer accounted for 10% or more of our revenues in fiscal 2014.

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Table of Contents Fiscal 2013



Our fiscal 2013 revenue was $529.3 million, an increase of $92.4 million or 21% compared to fiscal 2012, primarily as a result of growth in our Service and International segments. We estimate that our organic growth rate, as compared to growth driven by acquisitions, was approximately 3% and 16% in fiscal 2013 and 2012, respectively. In fiscal 2013, we estimate that organic growth by segment was approximately 6% for our Services segment, 2% for our International segment and (24%) for our Products and Systems segment, where a large non-recurring military order was shipped in 2012. In fiscal 2013, we estimate that growth from acquisitions was approximately $81.7 million, or approximately 19%, compared to approximately $44.6 million, or approximately 13%, in fiscal 2012. We completed the acquisition of three companies in fiscal 2013 compared to eleven companies in fiscal 2012.

We continued to experience growth in many of our target markets in fiscal 2013. Our largest target market was oil and gas which represented approximately 50% and 54% of revenues in fiscal 2013 and 2012, respectively. Oil and gas revenues grew by 11% in fiscal 2013, led by growth in the midstream section of the industry. We also experienced growth in several of our other target markets outside of oil and gas, including aerospace and defense, industrial, process industries which include chemical and pharmaceutical, power generation, and infrastructure markets. Taken as a group, revenues for all target markets other than oil and gas grew approximately 34% over the prior year. Our top ten customers represented approximately 34% of our revenues for fiscal 2013 compared to 39% in fiscal 2012. Our largest customer in both periods accounted for approximately 11% and 16% of our revenues in fiscal 2013 and 2012, respectively. No other customer accounted for 10% or more of our revenues in fiscal 2013 or 2012.

Gross Profit. Our gross profit by segment for fiscal 2014, 2013 and 2012 was as follows: For the year ended May 31, 2014 2013 2012 ($ in thousands) Gross profit Services $ 114,182$ 98,907$ 94,413 International 44,893 32,319 19,106 Products and Systems 14,495 16,947 18,578 Corporate and eliminations (627 ) 198 (2,407 ) $ 172,943$ 148,371$ 129,690 Fiscal 2014



Gross profit increased $24.6 million, or 17% in fiscal 2014 compared to fiscal 2013. As a percentage of revenues, our gross profit was approximately 28% in both fiscal 2014 and 2013.

The slight 2014 decrease of 30 basis points in gross profit as a percentage of revenues was primarily attributable to several events that impacted the Company during its third quarter ("Q3 Items"), including bad weather conditions in North America that affected our customers and our entire industry, as well as costs to prepare to serve a large new customer in Alaska and an important new contract with a major integrated energy company with significant operations in the Canadian oil sands region. Additionally, the Company incurred staffing costs which preceded revenues pertaining to market share gains in France. The cumulative adverse impact of these Q3 Items aggregated approximately $3 million, approximately $2 million of which reduced gross profit and the remainder increased operating expenses during fiscal 2014. In addition, Advanced NDT services decreased as a percentage of total revenue to 14% of our Services segment revenues in fiscal 2014 compared to approximately 15% in fiscal 2013.

Fiscal 2013



Gross profit increased $18.7 million, or 14% in fiscal 2013 compared to fiscal 2012. As a percentage of revenues, gross profit was approximately 28% in fiscal 2013 and 30% in 2012.

The 170 basis point decrease in gross profit as a percentage of revenues was primarily attributable to several international acquisitions made during fiscal 2013 that reduced the International Segment's gross margin rate from 32% in fiscal 2012 to 25% in fiscal 2013.

Income from Operations. The following table shows a reconciliation of the segment income from operations before acquisition-related (benefit) expense, net, to income from operations for fiscal 2014, 2013 and 2012:

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Table of Contents For the year ended May 31, 2014 2013 2012 ($ in thousands) Services: Income from operations before acquisition-related expense, net $ 44,846$ 41,750$ 40,506 Acquisition-related expense, net 1,625 1,425 574 Income from operations 43,221 40,325 39,932



International:

Income from operations before acquisition-related (benefit) expense, net and goodwill impairment $ 6,786$ 2,596$ 3,944 Acquisition-related (benefit) expense, net and goodwill impairment (3,452 ) 10,842 682 Income from operations 10,238 (8,246 ) 3,262 Products and Systems: Income from operations before acquisition-related (benefit), net $ 1,517$ 4,883$ 7,648 Acquisition-related (benefit), net (1,035 ) (2,403 ) (623 ) Income from operations 2,552 7,286 8,271 Corporate and Eliminations: Income from operations before acquisition-related expense (benefit), net $ (17,511 )$ (13,878 )$ (14,020 ) Acquisition-related expense (benefit), net 205 (2,067 ) 1,347 Income from operations (17,716 ) (11,811 ) (15,367 ) Total Company Income from operations before acquisition-related (benefit) expense, net and goodwill impairment $ 35,638$ 35,351$ 38,078 Acquisition-related (benefit) expense, net and goodwill impairment $ (2,657 )$ 7,797$ 1,980 Income from operations $ 38,295$ 27,554$ 36,098 Fiscal 2014



Income from operations, exclusive of acquisition-related items, but inclusive of the impact of the Q3 Items, was $35.6 million for fiscal 2014, a $0.3 million increased compared to fiscal 2013, which also excluded a goodwill impairment charge. As a percentage of revenues, our income from operations excluding acquisition-related items was approximately 6% and 7% in fiscal 2014 and fiscal 2013, respectively.

Operating expenses for fiscal 2014 increased $13.8 million, or 11%. Excluding acquisition related expense, operating expenses increased $24.3 million, or 21% during fiscal 2014. Operating expenses related to acquisitions accounted for $8.7 million of the total increase, while compensation and benefits increased $7.3 million due to normal compensation increases, incentive compensation and additional management and corporate staff to support growth. Depreciation and amortization expense increased by $1.8 million compared to fiscal 2013, while research and engineering expense increased by $0.5 million.

Our acquisition-related expense, net for fiscal 2014 decreased by $0.5 million, primarily attributed to adjustments to the estimated fair value of certain acquisition-related contingent consideration liabilities. The adjustments to the estimated fair value of certain acquisition-related contingent consideration liabilities in fiscal 2014 resulted in an increase to income from operations of $3.9 million. This was offset by approximately $1.3 million related to professional fees and other expenses in connection with our fiscal 2014 acquisition activity.

Fiscal 2013



Income from operations decreased $8.5 million, or 24% compared to fiscal 2012. The decrease was primarily due a goodwill impairment charge in the fourth quarter of fiscal 2013 which is further discussed in Note 8 - Goodwill to our consolidated financial

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statements. As a percentage of revenues, our income from operations was approximately 5% and 8% in fiscal 2013 and fiscal 2012, respectively.

Operating expenses for fiscal 2013 increased $27.2 million, or 29%. Acquisitions accounted for approximately $16.2 million of the increase, while compensation and benefit expenses rose by $3.3 million driven by normal compensation increases, including incentive compensation, as well as additional management and corporate staff to support growth. Depreciation and amortization rose by $2.3 million.

Our acquisition-related expense, net for fiscal 2013 decreased by $4.1 million, which was attributed to adjustments to the estimated fair value of certain acquisition-related contingent consideration liabilities. The fiscal 2013 acquisition-related benefit of ($2.1) million consisted of adjustments to the estimated fair value of certain acquisition-related contingent consideration liabilities of $3.7 million, offset by $1.6 million related to professional fees and other expenses in connection with our fiscal 2013 acquisition activity.

Interest Expense



Interest expense was $3.2 million in fiscal 2014, $3.3 million in fiscal 2013 and $3.1 million in fiscal 2012. The small changes primarily related to small changes in our effective interest rate and our average borrowings outstanding under our revolver agreement.

Income Taxes



Our effective income tax rate was approximately 36% for fiscal 2014 compared to 52% for fiscal 2013. The effective tax rate for fiscal 2013 was significantly impacted by the goodwill impairment charge that is not deductible for tax purposes. Excluding the impact of the impairment charge, our annual effective rate was approximately 37% for fiscal 2013. The decrease is primarily due to higher foreign income which is taxed at lower rates, offset by the impact of acquisition contingent consideration.

Segment Results of Operations

Services Segment Selected financial information for the Services segment was as follows for fiscal 2014, 2013 and 2012: For the years ended May 31, 2014 2013 2012 ($ in thousands) Services segment Revenues $ 443,229$ 380,851$ 349,793 Gross profit $ 114,182$ 98,907$ 94,413 as a % of segment revenue 26 % 26 % 27 % Operating Expenses $ 70,961$ 58,582$ 54,481 Income from operations $ 43,221$ 40,325$ 39,932 as % of segment revenue 10 % 11 % 11 % Income from operations before acquisition-related expense, net $ 44,846$ 41,750$ 40,506 as % of segment revenue 10 % 11 % 12 % Total depreciation and amortization $ 17,794$ 18,296$ 17,763 Revenues



In fiscal 2014, our Services revenues increased $62.4 million, or 16% compared to fiscal 2013. The increase was attributable to organic growth of approximately 12% and growth from acquisitions of approximately 5%. The industries primarily contributing to growth were oil and gas, industrial and chemical, and power generation. Customers in the oil and gas industry accounted for approximately 62% of our Services segment revenues in fiscal 2014. We experienced growth in most of our other target markets due

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to strong demand, the addition of new customers and increased revenues from existing customers. We increased revenues to existing customers by increasing our penetration on existing service offerings and providing different types of asset protection solutions. Our top ten customers accounted for approximately 48% and 44% of our Services segment revenues during fiscal 2014 and 2013, respectively. Revenues from our two largest customers represented approximately 11% and 10%, respectively, of our revenues for our Services segment in fiscal 2014. Revenues from these two customers as well as most of our larger oil and gas customers, are generated from numerous contracts at multiple sites.

In fiscal 2013, our Services revenues increased $31.1 million, or 9% compared to fiscal 2012. The increase was attributable to organic growth of approximately 6% and growth from acquisitions of approximately 3%. The industries primarily contributing to growth were oil and gas, and industrial and chemical. Customers in the oil and gas industry accounted for approximately 62% of our Services segment revenues in fiscal 2013 and 2012, respectively. One customer represented approximately 15% of our revenues for our Services segment in fiscal 2013.

Gross Profit



Our Services segment gross profit margin was 26% of segment revenues in both fiscal years 2014 and 2013. Services gross profit increased by $15.3 million or 15% over fiscal 2013. The 20 basis point decrease in our segment gross profit margin was driven by the Q3 Items, which more than offset other improvements.

Our Services segment gross profit margin was 27% of segment revenues in fiscal 2012. The 100 basis point decrease that occurred during fiscal 2013 was attributed primarily to a lower mix of advanced services margins and higher unbillable direct labor.

Income from Operations



Services segment income from operations was $43.2 million in fiscal 2014, an increase of $2.9 million or 7% compared to fiscal 2013. Our operating income as a percentage of segment revenues was approximately 10% in fiscal 2014.

Segment operating expenses rose by $12.4 million in fiscal 2014, or 21%. Operating expenses related to acquisitions drove approximately $3.4 million of the increase, while increased staffing levels and occupancy costs to support U.S and Canadian growth were $5.3 million and $1.5 million, respectively.

Services segment income from operations was $40.3 million in fiscal 2013, an increase of $0.4 million or 1% compared to fiscal 2012. Income from operations as a percentage of segment revenues was approximately 11% in fiscal 2013, excluding acquisition-related expense.

Operating expenses in our Services segment increased $4.1 million or 8% during fiscal 2013. Operating expenses related to acquisitions accounted for approximately $1.8 million of the increase, while compensation and benefit expenses rose by $2.1 million to support increased staffing.

International Segment



Selected financial information for our International segment was as follows for fiscal 2014, 2013 and 2012:

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Table of Contents For the years ended May 31, 2014 2013 2012 ($ in thousands) International segment Revenues $ 161,395 126,840 59,466 Gross profit $ 44,893 32,319 19,106 as % of segment revenue 28 % 25 % 32 % Operating Expenses $ 34,655$ 40,565$ 15,844 Income (loss) from operations $ 10,238$ (8,246 ) 3,262 as % of segment revenue 6 % (7 )% 5 % Income from operations before acquisition-related expense, net $ 6,786$ 2,596$ 3,944 as % of segment revenue 4 % 2 % 7 % Total depreciation and amortization $ 8,065$ 6,200$ 2,342 Revenues



Our International segment revenues rose by $34.6 million, or 27% during fiscal 2014. Acquisition growth was 23%, driven by the year-over-year growth from two acquisitions made during fiscal 2013, while organic growth was 3%, driven by the addition of new contracts and increased demand for our services and products with existing customers. Our largest customer concentrations in our International segment in fiscal 2014 were aerospace and defense (38%), industrials (15%) and oil and gas (15%).

International segment revenues increased $67.4 million, or 113% during fiscal 2013 due entirely to acquisition growth. Fiscal 2013 organic growth was approximately 2% due to the addition of new contracts and increased demand for our services and products with existing customers. Our largest customer concentrations in our International segment in fiscal 2013 were aerospace and defense (28%), industrials (21%) and oil and gas (18%).

Gross Profit



International segment gross profit for fiscal 2014 was $44.9 million, or 28% of segment revenues, an increase of $12.6 million or 39% compared to fiscal 2013. The increase in gross profit margin was primarily attributable to several large product sales which typically have higher margins.

Our International segment gross profit for fiscal 2013 was $32.3 million, or 25% of segment revenues, an increase of $13.2 million when compared to fiscal 2012, which was $19.1 million, or 32% of segment revenues. The decrease in gross profit margin was driven by acquisitions made during fiscal 2013 and 2012, driven by integration costs and a shift to lower margin business.

Income (loss) from Operations

International segments income from operations was $10.2 million in fiscal 2014 compared to a loss from operations of $8.2 million in fiscal 2013. The fiscal 2013 loss from operations was primarily due to a goodwill impairment charge in our Brazil operations which is further described in Note 8 - Goodwill to our consolidated financial statements. Income from operations in fiscal 2014 was $6.8 million, excluding acquisition-related items, compared with $2.6 million in fiscal 2013. As a percentage of segment revenues, our income from operations, adjusted for the impairment charge and acquisition-related items, was 4% in fiscal 2014 and 2% in fiscal 2013.

Segment operating expenses were $34.7 million and $40.6 million in fiscal 2014 and 2013, respectively. Excluding the impairment charge and acquisition-related items, segment operating expenses in fiscal 2014 and 2013 were $38.1 million and $29.7 million, respectively. Operating expense, adjusted for the impairment charge and acquisition-related items, increased $8.4 million, primarily attributable to the 2013 acquisitions.

In fiscal 2013, our International segment recognized a loss from operations of $8.2 million compared income from operations of $3.3 million in fiscal 2012. The fiscal 2013 loss from operations was primarily due to the goodwill impairment charge in our Brazil

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operations. Excluding the goodwill impairment charge and acquisition-related items, income from operations from our International segment was $2.6 million for fiscal 2013, a $1.3 million decrease from fiscal 2012. This reduction was driven by integration costs of our fiscal 2013 acquistions and a decline in profitability experienced by our Brazilian operations.

Products and Systems Segment

Selected financial information for the Products and Systems segment was as follows for fiscal 2014, 2013 and 2012:

For the years ended May 31, 2014 2013 2012 ($ in thousands) Products and Systems segment Revenues $ 33,544$ 33,301$ 40,083 Gross profit $ 14,495$ 16,947$ 18,578 as % of segment revenue 43 % 51 % 46 % Operating Expenses $ 11,943$ 9,661$ 10,307 Income from operations $ 2,552$ 7,286$ 8,271 as % of segment revenue 8 % 22 % 21 % Income from operations before acquisition-related expense, net $ 1,517$ 4,883$ 7,648 as % of segment revenue 5 % 15 % 19 % Total depreciation and amortization $ 2,373$ 2,229$ 1,831 Revenues



Products and Systems segment revenues for fiscal 2014 were $33.5 million, an increase of $0.2 million or 1% compared to fiscal 2013. The increase in revenue is a result of the sale of several digital radiography systems to a customer in the aerospace industry offset by lower sales in our Acoustic Emission and Boiler Leak Detection product lines.

Products and Systems segment revenues decreased $6.8 million or 17% in fiscal 2013. The decrease in revenue was driven by a large non-recurring military order that occurred during fiscal 2012 as well as lower sales in the Acoustic Emission product line. These decreases were offset in part by the expansion of our Boiler Leak Detection product line.

Gross Profit



Products and Systems segment gross profit decreased by $2.5 million, or 14% compared to fiscal 2013. As a percentage of segment revenues, our gross profit margin was approximately 43% and 51% in fiscal 2014 and 2013, respectively. The gross profit margin decrease of 770 basis points in fiscal 2014 was attributable to an adverse sales mix of revenues, as sales of ultrasonic NDT solutions requiring more custom product engineering and large components increased during fiscal 2014.

Products and Systems segment gross profit decreased $1.6 million, or 9% in fiscal 2013 compared to fiscal 2012. As a percentage of segment revenues, our gross profit margin was approximately 51% and 46% in fiscal 2013 and 2012, respectively. The gross profit margin percentage decrease of 450 basis points in fiscal 2013 was attributable to the absence of the non-recurring military order from fiscal 2012.

Income from Operations



Products and Systems income from operations for fiscal 2014 decreased $4.7 million, or 65% compared to fiscal 2013. Excluding acquisition-related items, income from operations declined by $3.4 million in fiscal 2014, or 69% compared to fiscal 2013. Excluding acquisition-related items, our operating income as a percentage of segment revenues was approximately 5% in fiscal 2014 and 15% in fiscal 2013.

Products and Systems segment operating expenses increased by $2.3 million during fiscal 2014. Excluding acquisition-related expenses, segment operating expenses in fiscal 2014 increased by $0.9 million or 8% compared to fiscal 2013. The increase was

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primarily attributed to higher research and engineering expenses of $0.5 million and higher compensation and benefit expenses of $0.4 million. Research and engineering expenses represented approximately 9% and 7% of our Products and Systems segment revenues for fiscal 2014 and fiscal 2013, respectively.

Our income from operations from our Products and Systems segment of $7.3 million for fiscal 2013 decreased $1.0 million, or 12% compared to fiscal 2012. Excluding acquisition-related items, income from operations was $4.9 million in fiscal 2013, a decrease of $2.8 million or 36% compared to $7.6 million in fiscal 2013. Excluding acquisition-related items, our operating income as a percentage of segment revenues was approximately 15% in fiscal 2013 and 19% in fiscal 2012.

Segment operating expenses were $9.7 million in fiscal 2013, and $10.3 million in fiscal 2012. Excluding acquisition-related expenses, segment operating expenses in fiscal 2013 were $12.1 million an increase of $1.1 million or 10% compared to $10.9 million in fiscal 2012. The largest increase in these costs was attributed to an acquisition, which accounted for $0.9 million of operating expenses in fiscal 2013. Research and engineering expenses increased 19% to $2.4 million in fiscal 2013 compared to $2.1 million in fiscal 2012. These costs represented approximately 7% and 5% of Products and Systems segment revenues for fiscal 2013 and fiscal 2012, respectively.

Corporate and Eliminations



The elimination of revenues and cost of revenues primarily relates to the elimination in consolidation of revenues from sales of our Products and Systems segment to our International and Services segments. The other major item in the Corporate and eliminations grouping are the general and administrative costs not allocated to the other segments. These costs primarily include those for non-segment management, accounting and auditing, legal, human resources, acquisition transactional costs, and certain other costs. As a percentage of our total revenues, these costs have generally remained consistent over the last three fiscal years, consisting of approximately 3% of total revenues for each of the fiscal years ended 2014, 2013 and 2012, respectively. The increase in operating expenses in fiscal 2014 and 2013 primarily related to higher compensation and additional staff to support our growth and other increases in general expenses at our corporate offices.

Liquidity and Capital Resources

Overview



We have funded our operations through cash provided from operations, bank borrowings, stock offerings and capital lease financing transactions. We have used these proceeds to fund our operations, develop our technology, expand our sales and marketing efforts to new markets and acquire small companies or assets, primarily to add certified technicians and enhance our capabilities and geographic reach. We believe that our existing cash and cash equivalents, our anticipated cash flows from operating activities, and our available borrowings under our credit agreement will be sufficient to meet our anticipated cash needs over the next 12 months.

Cash Flows Table



The following table summarizes our cash flows for fiscal 2014, 2013 and 2012:

Fiscal year 2014 2013 2012 ($ in thousands) Net cash provided by (used in): Operating Activities $ 36,873$ 43,503$ 31,402 Investing Activities (38,005 ) (45,479 ) (37,512 ) Financing Activities 3,262 1,144 2,009



Effect of exchange rate changes on cash 88 224 1,632 Net change in cash and cash equivalents $ 2,218$ (608 )$ (2,469 )

Cash Flows from Operating Activities

Cash provided by our operating activities in fiscal 2014 was $36.9 million, a decrease of $6.6 million over the prior fiscal year. Operating cash flow from net income excluding non-cash expenses rose by approximately $3.8 million in 2014. However, changes in operating assets used an incremental $10.4 million in cash during fiscal 2014. The incremental cash use was driven primarily by

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growth in accounts receivable of approximately $28.6 million that was driven by increased sales. A net increase in cash provided by increased accounts payable and accrued expenses of approximately $20.0 million partially offset the growth in accounts receivable.

Cash provided by our operating activities in fiscal 2013 was $43.5 million, an increase of $12.1 million over the prior fiscal year. Positive operating cash flow was primarily attributable to our net income excluding depreciation, amortization and other non-cash items of $53.2 million offset by $9.7 million of cash utilized to fund an increase in our working capital, which primarily related to an increase in accrued expenses and payables, partially offset by a decrease in trade accounts receivable.

Cash Flows from Investing Activities

Net cash used in investing in activities was $38.0 million in fiscal 2014, principally to fund acquisitions of $21.9 million, net of cash acquired and capital expenditures of $16.9 million.

Net cash used in investing in activities was $45.5 million in fiscal 2013, principally to fund acquisitions of $33.1 million, net of cash acquired and capital expenditures of $12.5 million.

Cash Flows from Financing Activities

Net cash provided by financing activities in fiscal 2014 was $3.3 million, a decrease of $2.1 million from fiscal 2013. Net cash provided by financing activities related primarily to net borrowings under our revolving credit facility of $21.6 million, offset by repayments of our long-term debt and capital lease obligations of $8.8 million and $8.1 million, respectively.

Net cash provided by financing activities in fiscal 2013 was $1.1 million, a decrease of $0.9 million from fiscal 2012. Net cash provided by financing activities related primarily to net borrowings under our revolving credit facility of $14.6 million, offset by repayments of our capital lease obligations and long-term debt of $7.0 million and $5.1 million, respectively.

Effect of Exchange Rate on Changes in Cash

For fiscal 2014, 2013 and 2012, exchange rate changes increased our cash by $0.1 million, $0.2 million and $1.6 million, respectively.

Cash Balance and Credit Facility Borrowings

As of May 31, 2014, we had cash and cash equivalents totaling $10.0 million and available borrowing capacity of up to $60.4 million under our credit agreement (as defined below). There were borrowings of $61.1 million and a total of $3.5 million of letters of credit outstanding under the existing agreement as of May 31, 2014. We finance our operations primarily through our existing cash balances, cash collected from operations, bank borrowings and capital lease financing. We believe these sources are sufficient to fund our operations for the foreseeable future.

In December 2011, we entered into a Third Amended and Restated Credit Agreement (Credit Agreement), with Bank of America, N.A., as agent for the lenders and a lender, and JPMorgan Chase Bank, N.A., Keybank National Association and TD Bank, N.A., as lenders. The Credit Agreement provides us with a $125 million revolving line of credit, which, under certain circumstances, can be increased to $150 million. The Credit Agreement has a maturity date of December 20, 2016 and permits us to borrow up to $30 million in non-US dollar currencies and to use up to $10 million of the credit limit for the issuance of letters of credit. Loans under the Credit Agreement bear interest at LIBOR plus an applicable LIBOR margin ranging from 1% to 2%, or a base rate margin less a margin of 0.25% to 1.25%, at our option, or based upon our Funded Debt Leverage Ratio. Funded Debt Leverage Ratio is generally the ratio of (1) all outstanding indebtedness for borrowed money and other interest-bearing indebtedness as of the date of determination to (2) EBITDA (which is (a) net income, less (b) income (or plus loss) from discontinued operations and extraordinary items, plus (c) income tax expenses, plus (d) interest expense, plus (e) depreciation, depletion, and amortization (including non-cash loss on retirement of assets), plus (f) stock compensation expense, less (g) cash expense related to stock compensation, plus or minus certain other adjustments) for the period of four consecutive fiscal quarters immediately preceding the date of determination. We have the benefit of the lowest margin if our Funded Debt Leverage Ratio is equal to or less than 0.5 to 1, and the margin increases as the ratio increases, to the maximum margin if the ratio is greater than 2.5 to 1. We will also bear additional costs for market disruption, regulatory changes effecting the lenders' funding costs, and default pricing of an additional 2% interest rate margin if the Funded Debt Leverage Ratio exceeds 3.0 to 1. Amounts borrowed under our Credit Agreement are secured by liens on substantially all of our assets.

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The Credit Agreement contains financial covenants requiring that we maintain a Funded Debt Leverage Ratio of less than 3.0 to 1 and an Interest Coverage Ratio of at least 3.0 to 1. Interest Coverage Ratio means the ratio, as of any date of determination, of (a) EBITDA for the 12 month period immediately preceding the date of determination, to (b) all interest, premium payments, debt discount, fees, charges and related expenses of us and our subsidiaries in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, paid during the 12 month period immediately preceding the date of determination. The Credit Agreement also limits our ability to, among other things, create liens, make investments, incur more indebtedness, merge or consolidate, make dispositions of property, pay dividends and make distributions to stockholders, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements. The Credit Agreement does not limit our ability to acquire other businesses or companies except that the acquired business or company must be in our line of business, we 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 May 31, 2014, we were in compliance with the terms of the credit agreement, and we will continuously monitor our compliance with the covenants contained in our credit agreement.

Liquidity and Capital Resources Outlook

Future Sources of Cash



We expect our future sources of cash to include cash flow generated from our operating activities and borrowings under our revolving credit facility. Our revolving credit facility is available for cash advances required for working capital and for letters of credit to support our operations. We are currently funding our acquisitions through our available cash, borrowings under our revolving credit facility and seller notes. We have an effective shelf registration statement with the SEC for the issuance of up to approximately $64.2 million of securities, including shares of common and preferred stock, debt securities, warrants and units. Accordingly, we may also seek to obtain capital through the issuance of debt or equity securities, or a combination of both. As of August 1, 2014, there were outstanding borrowings of approximately $65.8 million and approximately $4.0 million letters of credit outstanding under our under credit agreement.

Future Uses of Cash



We expect our future uses of cash will primarily be for acquisitions, international expansion, purchases or manufacture of field testing equipment to support growth, additional investments in technology and software products and the replacement of existing assets and equipment used in our operations. We often make purchases to support new sources of revenues, particularly in our Services segment. In addition, we will need to fund a certain amount of replacement equipment, including our fleet vehicles. We historically spend approximately 3% to 4% of our total revenues on capital expenditures, excluding acquisitions, and expect to fund these expenditures through a combination of cash and lease financing. Our cash capital expenditures, excluding acquisitions, for fiscal 2014, 2013 and 2012 were approximately 3%, 2% and 2% of revenues, respectively.

Our future acquisitions may also require capital. We acquired six companies in fiscal 2014 and three companies in fiscal 2013, with an initial cash outlay of $57.2 million. In some cases, additional equipment will be needed to upgrade the capabilities of these acquired companies. In addition, our future acquisition and capital spending may increase as we pursue growth opportunities. Other investments in infrastructure, training and software may also be required to match our growth, but we plan to continue using a disciplined approach to building our business. In addition, we will use cash to fund our operating leases, capital leases and long-term debt repayments and various other obligations as they arise.

We also expect to use cash to support our working capital requirements for our operations, particularly in the event of further growth and due to the impacts of seasonality on our business. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new solutions and enhancements to existing solutions and our expansion of sales and marketing and product development activities. To the extent that our cash and cash equivalents and future cash flows from operating activities are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements, public or private equity financings, or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products that will complement our existing operations. In the event additional funding is required, we may not be able to obtain bank credit arrangements or effect an equity or debt financing on terms acceptable to us or at all.

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Table of Contents Contractual Obligations



We generally do not enter into long-term minimum purchase commitments. Our principal commitments, in addition to those related to our long-term debt discussed below, consist of obligations under facility leases for office space and equipment leases and contingent consideration obligations in connection with our acquisitions.

The following table summarizes our outstanding contractual obligations as of May 31, 2014: Fiscal Fiscal Fiscal Fiscal Fiscal 2020 & ($ in thousands) Total 2015 2016 2017 2018 2019 Beyond Long-term debt (1) $ 76,648$ 8,058$ 5,901$ 62,182$ 140$ 335$ 32 Capital lease obligations (2) 22,227 8,246 6,256 4,161 2,448 994 122 Operating lease obligations 33,364 8,141 6,317 5,027 3,689 3,401 6,789 Contingent consideration obligations 14,146 4,770 4,464 2,671 2,241 - - Total $ 146,385$ 29,215$ 22,938$ 74,041$ 8,518$ 4,730$ 6,943



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(1) Consists primarily of borrowings from our senior credit



facility and seller notes payable in connection with our acquisitions and includes the current portion outstanding.

(2) Includes estimated cash interest to be paid over the



remaining terms of the leases.

(3) Consists of payments deemed reasonably likely to occur in



connection with our acquisitions

Off-Balance Sheet Arrangements

During fiscal 2014, 2013 and 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. The accounting policies that we believe require more significant estimates and assumptions include: revenue recognition, valuations of accounts receivable, long-lived assets, goodwill, and deferred tax assets and uncertain tax positions. We base our estimates and assumptions on historical experience, known or expected trends and various other assumptions that we believe to be reasonable. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates, which may cause our future results to be significantly affected.

We believe that the following critical accounting policies comprise the more significant estimates and assumptions used in the preparation of our consolidated financial statements.

Revenue Recognition



Revenue is generally recognized when persuasive evidence of an arrangement exists, services have been rendered or products have been delivered, the fee is fixed or determinable, and collectability is reasonably assured, as summarized below.

Services



Revenue is primarily derived from providing services on a time and material basis. Service arrangements generally consist of inspection professionals working under contract for a fixed period of time or on a specific customer project. Revenue is generally recognized when the service is performed in accordance with terms of each customer arrangement, upon completion of the earnings process and when collection is reasonably assured. At the end of any reporting period, revenue is accrued for services that have been earned which have not yet been billed. Reimbursable costs, including those related to travel and out-of-pocket expenses, are included in revenue, and equivalent amounts of reimbursable costs are included in cost of services.

Products and Systems



Sales of products and systems are recorded when the sales price is fixed and determinable and the risks and rewards of ownership are transferred (generally upon shipment) and when collectability is reasonably assured.

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These arrangements generally contain multiple elements or deliverables, such as hardware, software (that is essential to the functionality of the hardware) and related services. We recognize revenue for delivered elements as separate units of accounting, when the delivered elements have standalone value, uncertainties regarding customer acceptance are resolved and there are no refund or return rights for the delivered elements. We establish the selling prices for each deliverable based on our vendor-specific objective evidence ("VSOE"), if available, third-party evidence, if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor third-party evidence is available. We establish VSOE of selling price using the price charged for a deliverable when sold separately and, in rare instances, using the price established by management having the relevant authority. Third-party evidence of selling price is established by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. We determine ESP by considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle. Consideration is also given to market conditions such as competitor pricing strategies and industry technology life cycles. When determining ESP, we apply management judgment to establish margin objectives and pricing strategies and to evaluate market conditions and product life cycles. Changes in the aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangements and therefore may change the pattern and timing of revenue recognition for these elements, but will not change the total revenue recognized for the arrangement.

A portion of our revenue is generated from engineering and manufacturing of custom products under long-term contracts that may last from several months to several years, depending on the contract. Revenues from long-term contracts are recognized on the percentage-of-completion method of accounting. Under the percentage-of-completion method of accounting revenues are recognized as work is performed. The percentage of completion at any point in time is generally based on total costs or total labor dollars incurred to date in relation to the total estimated costs or total labor dollars estimated at completion. The percentage of completion is then applied to the total contract revenue to determine the amount of revenue to be recognized in the period. Application of the percentage-of-completion method of accounting requires the use of estimates of costs to be incurred for the performance of the contract. Contract costs include all direct materials, direct labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and all costs associated with operation of equipment. The cost estimation process is based upon the professional knowledge and experience of our engineers, project managers and financial professionals. Factors that are considered in estimating the work to be completed include the availability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in our project performance and the recoverability of any claims. Whenever revisions of estimated contract costs and contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.

Accounts Receivable



Accounts receivable arise from services provided or products and systems sold to the Company's customers. The Company records an allowance for doubtful accounts to provide for losses on accounts receivable due to a customer's inability to pay. The allowance is typically estimated based on an analysis of the historical rate of credit losses or write-offs, specific concerns and known or expected trends. Such analysis is inherently subjective. The Company's earnings will be impacted in the future to the extent that actual credit loss experience differs from amounts estimated. Changes in the financial condition of the Company's customers or adverse developments in negotiations or legal proceedings to obtain payment could result in the actual loss exceeding the estimated allowance.

Long-Lived Assets



We perform a review of long-lived assets for impairment when events or changes in circumstances indicate the carrying value of such assets may not be recoverable. If an indication of impairment is present, we compare the estimated undiscounted future cash flows to be generated by the asset to its carrying amount. If the undiscounted future cash flows are less than the carrying amount of the asset, we record an impairment loss equal to the excess of the asset's carrying amount over its fair value. We estimate fair value based on valuation techniques such as a discounted cash flow analysis or a comparison to fair values of similar assets. As of May 31, 2014 and 2013, we had $77.8 million and $68.4 million in net property, plant and equipment, respectively, and $57.9 million and $52.4 million in intangible assets, net, respectively. There were no long-lived asset impairment charges recorded during the years ended May 31, 2014, 2013 or 2012.

Long-lived assets, net, outside of the U.S. totaled $124.8 million and $113.4 million as of May 31, 2014 and 2013, respectively.

Goodwill



Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets. We test the carrying value of 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), using a two-step approach, annually as of March 1, or 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. 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

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be impaired. In this case, a second step is performed to allocate the fair value of the reporting unit to the assets and liabilities of the reporting unit as if it had just been acquired in a business combination, and as if the purchase price was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is referred to as the implied fair value of goodwill. The implied fair value of the reporting unit's goodwill is then compared to the actual carrying value of goodwill. If the implied fair value is less than the carrying value, we would be required to recognize an impairment loss for that excess. We consider the income and market approaches to estimating the fair value of our reporting units, which requires significant judgment in evaluation of, among other things, economic and industry trends, estimated future cash flows, discount rates and other factors.

As of May 31, 2014, the carrying amount of our goodwill was approximately $130.5 million, of which approximately $43.6 million relates to our International segment. A significant portion of our international operations are concentrated in our Europe and Brazil reporting units. The economic environments in Europe and Brazil were difficult in 2013, with signs of recovery especially in Europe in fiscal 2014. As a result of a contraction in the Brazilian economy (specifically in the oil and gas industry), in the fourth quarter of fiscal 2013 we recognized goodwill impairment in our Brazil reporting unit of approximately $9.9 million. Significant deterioration in industry or economic trends, disruptions to our business, inability to effectively integrate acquired businesses, or other factors, may cause further impairment charges to goodwill in future periods. We believe that the estimated fair values of each of our reporting units were substantially in excess of their respective carrying amounts as of May 31, 2014.

Income Taxes



Income taxes are accounted for under the asset and liability method. This process requires that we assess temporary differences between the book and tax basis of assets resulting from differing treatment between book and tax of certain items, such as depreciation. Deferred income tax assets and liabilities are recognized based on 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 carryforwards. 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 the deferred income tax assets will not be realized. We consider all available evidence, both positive and negative, to determine whether, based on the weight of the evidence, a valuation allowance is needed. Evidence used includes information about our current financial position and our results of operations for the current and preceding years, as well as all currently available information about future years, including our anticipated future performance, the reversal of deferred tax liabilities and tax planning strategies.

As of May 31, 2014 and 2013, we had a net deferred income tax benefit of $0.5 million and $1.4 million, respectively. With the exception of certain state and foreign deferred tax assets, we believe that it is more likely than not that we will have sufficient future taxable income to allow us to realize the benefits of our deferred tax assets. As of May 31, 2014 the Company had Federal net operating loss carry forwards (NOL's) in the amount of approximately $0.4 million which may be utilized subject to limitation under Internal Revenue code section 382. In addition, as of May 31, 2014 the Company had state and foreign net operating loss carry forwards (NOLs) available to offset future income of $2.6 million and $11.0 million, respectively. The deferred tax asset related to these NOL's is approximately $3.7 million. The Company maintains a valuation allowance of approximately $2.6 million at May 31, 2014 of which approximately $1.9 million relates to our state and foreign NOL's.

Our effective income tax rate was approximately 36%, 52% and 37% for fiscal 2014, 2013 and 2012, respectively. Excluding the goodwill impairment charge in fiscal 2013, our effective income tax rate was approximately 37% for fiscal 2013. Income tax expense varies as a function of pre-tax income and the level of non-deductible expenses, such as certain amounts of meals and entertainment expense, valuation allowances, and other permanent differences. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. Our effective income tax rate may fluctuate significantly over the next few years due to many variables including the amount and future geographic distribution of our pre-tax income, changes resulting from our acquisition strategy, and increases or decreases in our permanent differences.

Recent Accounting Pronouncements

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements

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and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which expands the disclosure requirements for amounts reclassified out of accumulated other comprehensive income. The update requires an entity to present either parenthetically on the face of the financial statement where net income is presented or in the notes to the financial statements, the effect of significant items reclassified in their entirety from accumulated other comprehensive income and identification of the respective line items effecting net income for instances when reclassification is required under GAAP. For items that are not required by GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures as required by GAAP. The update does not change the current requirements for reporting net income or other comprehensive income in financial statements and is effective for annual and interim reporting periods beginning after December 15, 2012. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, that is intended to reduce the cost and complexity of the impairment test for indefinite-lived intangible assets by providing an entity with the option to first assess qualitatively whether it is necessary to perform the quantitative impairment test that is currently in place. An entity would not be required to quantitatively calculate the fair value of an indefinite-lived intangible asset unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. ASU 2012-02 is effective for annual and interim impairment test beginning after September 15, 2012. The adoption of this pronouncement did not have a material impact on the Company's consolidated financial statements.


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