Exhibit 99.3
Mistras Group, Inc.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
On December 13, 2018, Mistras Group, Inc. ("Mistras" or "the Company") completed the acquisition (the "Acquisition") of all of the equity interests of Onstream Holdings, Inc. (“Onstream”), the 100% parent company of Onstream Pipeline Inspection Services Inc. Prior to the execution of the Acquisition Agreement, there were no material relationships between Mistras and Onstream or its shareholders.
The closing consideration for the acquired equity interests consisted of $188.9 million CAD ($143.1 million USD as of the acquisition date of December 13, 2018), exclusive of cash acquired or working capital adjustments yet to be finalized. The purchase price was comprised of cash borrowed from the Company's Fifth Amended and Restated Credit Agreement ("Credit Agreement") dated as of December 13, 2018. The Credit Agreement is incorporated by reference to our Current Report on Form 8-K filed on December 13, 2018.
Because the selected unaudited pro forma condensed combined financial information is based upon Onstream's operating results during the period when Onstream was not under the control, influence or management of Mistras, the information presented may not be indicative of the results for the year ended December 31, 2017 or the nine months ended September 30, 2018 that would have actually occurred had the transaction been completed on January 1, 2017, nor is it necessarily indicative of our future operating results of the combined entity.
Onstream historical financial statements were prepared in accordance with U.S. Generally Accepted Accounting Principles ("US GAAP") and presented in Canadian dollars. For purposes of preparing the unaudited pro forma condensed combined financial statements, Onstream's historical consolidated statement of operations for the year ended December 31, 2017 was translated from Canadian dollars ("CAD") into U.S. dollars ("USD") at an average rate for the period of 1.2980 CAD : 1.0 USD. Onstream's historical condensed consolidated statement of operations for the nine months ended September 30, 2018 was translated from CAD into USD at an average rate for the period of 1.2873 CAD : 1.0 USD, and Onstream's historical consolidated balance sheet as of September 30, 2018 was translated from CAD into USD at the closing rate on September 30, 2018 of 1.2902 CAD : 1.0 USD.
The unaudited pro forma condensed combined financial information is based on certain assumptions and adjustments described in the notes to such pro forma information, which are preliminary and have been made solely for the purposes of developing such pro forma statements. While some reclassifications of prior periods have been included in the unaudited pro forma combined financial statements, further reclassifications may be necessary.
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, with Mistras treated as the acquiring entity. Accordingly, consideration paid by Mistras related to the acquisition of Onstream will be allocated to Onstream’s respective assets and liabilities, based on their estimated values as of the date of completion of their acquisition. The allocation is dependent upon certain valuations and other studies by Mistras management that have not been finalized. A final determination of the fair value of Onstream’s respective assets and liabilities will be based on the actual net tangible and intangible assets of Onstream that exist as of the date of completion of their acquisition. Accordingly, the pro forma purchase price adjustments are preliminary and subject to further adjustment as additional information becomes available upon completion of the determinations described above. Increases or decreases in the fair value of relevant balance sheet amounts will result in adjustments to the balance sheet and/or statements of operations. There can be no assurance that the final determination will not result in material changes from these preliminary amounts.
The unaudited pro forma condensed combined financial information should be read in conjunction with the audited historical consolidated financial statements and accompanying disclosures contained in Mistras' December 31, 2017 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and the unaudited Quarterly Report on Form 10-Q as of and for the nine months ended September 30, 2018.
The unaudited pro forma condensed combined financial information should also be read in conjunction with the audited historical consolidated financial statements and accompanying disclosures contained in Onstream's December 31, 2017 consolidated financial statements as well as the unaudited historical financial statements and accompanying disclosures as of and for the nine months ended September 30, 2018 within this Form 8-K/A.
Mistras Group, Inc. and Subsidiaries Unaudited Condensed Combined Statement of Income For the Year Ended December 31, 2017 (in thousands, except per share data) | |||||||||||||||
Mistras | Onstream | Pro Forma | Pro Forma | ||||||||||||
Historical | Historical | Adjustments | Combined | ||||||||||||
Revenue | $ | 700,970 | $ | 26,851 | $ | — | $ | 727,821 | |||||||
Cost of revenue | 492,238 | 8,193 | — | 500,431 | |||||||||||
Depreciation | 21,020 | — | — | 21,020 | |||||||||||
Gross profit | 187,712 | 18,658 | — | 206,370 | |||||||||||
Selling, general and administrative expenses | 153,025 | 5,747 | — | 158,772 | |||||||||||
Impairment charges | 15,810 | — | — | 15,810 | |||||||||||
Research and engineering | 2,272 | 159 | — | 2,431 | |||||||||||
Depreciation and amortization | 10,363 | 4,331 | 2,355 | (f) | 17,049 | ||||||||||
Acquisition-related expense (benefit), net | 482 | — | — | 482 | |||||||||||
Litigation charges | 1,600 | — | — | 1,600 | |||||||||||
Income (loss) from operations | 4,160 | 8,421 | (2,355 | ) | 10,226 | ||||||||||
Interest expense | 4,386 | 2,343 | 4,094 | (g) | 10,823 | ||||||||||
(Loss) income before provision (benefit) for income taxes | (226 | ) | 6,078 | (6,449 | ) | (597 | ) | ||||||||
Provision (benefit) for income taxes | 1,942 | 1,523 | (2,022 | ) | (h) | 1,443 | |||||||||
Net (loss) income | (2,168 | ) | 4,555 | (4,427 | ) | (2,040 | ) | ||||||||
Less: net income attributable to non-controlling interests, net of taxes | 7 | — | — | 7 | |||||||||||
Net (loss) income attributable to Mistras Group, Inc. | $ | (2,175 | ) | $ | 4,555 | $ | (4,427 | ) | $ | (2,047 | ) | ||||
Loss per common share: | |||||||||||||||
Basic | $ | (0.08 | ) | $ | — | $ | — | $ | (0.07 | ) | |||||
Diluted | $ | (0.08 | ) | $ | — | $ | — | $ | (0.07 | ) | |||||
Weighted average common shares outstanding: | |||||||||||||||
Basic | 28,422 | — | — | 28,422 | |||||||||||
Diluted | 28,422 | — | — | 28,422 |
Mistras Group, Inc. and Subsidiaries Unaudited Pro Forma Condensed Combined Balanced Sheet September 30, 2018 (in thousands) | ||||||||||||||||
Mistras | Onstream | Pro Forma | Pro Forma | |||||||||||||
Historical | Historical | Adjustments | Combined | |||||||||||||
ASSETS | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 17,073 | $ | 360 | $ | — | $ | 17,433 | ||||||||
Accounts receivable, net | 155,615 | 5,970 | — | 161,585 | ||||||||||||
Inventories | 11,133 | — | — | 11,133 | ||||||||||||
Prepaid expenses and other current assets | 15,613 | 177 | — | 15,790 | ||||||||||||
Total current assets | 199,434 | 6,507 | — | 205,941 | ||||||||||||
Property, plant and equipment, net | 86,410 | 6,294 | 1,797 | (b) | 94,501 | |||||||||||
Intangible assets, net | 56,515 | 15,926 | 45,312 | (b) | 117,753 | |||||||||||
Goodwill | 199,625 | 31,368 | 53,503 | (a) | 284,496 | |||||||||||
Deferred income taxes | 1,534 | — | — | 1,534 | ||||||||||||
Other assets | 4,630 | — | 140 | (c) | 4,770 | |||||||||||
Total Assets | $ | 548,148 | $ | 60,095 | $ | 100,752 | $ | 708,995 | ||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable | $ | 12,937 | $ | 2,244 | $ | — | 15,181 | |||||||||
Accrued expenses and other current liabilities | 73,425 | — | — | 73,425 | ||||||||||||
Current portion of long-term debt | 2,225 | 1,744 | 3,256 | (d) | 7,225 | |||||||||||
Current portion of capital lease obligations | 5,085 | — | — | 5,085 | ||||||||||||
Income taxes payable | 1,536 | 90 | — | 1,626 | ||||||||||||
Total current liabilities | 95,208 | 4,078 | 3,256 | 102,542 | ||||||||||||
Long-term debt, net of current portion | 147,926 | 42,462 | 99,714 | (d) | 290,102 | |||||||||||
Obligations under capital leases, net of current portion | 8,426 | — | — | 8,426 | ||||||||||||
Deferred income taxes | 11,827 | 884 | 12,001 | (c) | 24,712 | |||||||||||
Other long-term liabilities | 6,482 | 415 | — | 6,897 | ||||||||||||
Total Liabilities | 269,869 | 47,839 | 114,971 | 432,679 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Equity | ||||||||||||||||
Preferred stock | — | 4,650 | (4,650 | ) | (e) | — | ||||||||||
Common stock | 284 | — | — | 284 | ||||||||||||
Additional paid-in capital | 226,054 | 412 | (412 | ) | (e) | 226,054 | ||||||||||
Retained earnings | 72,614 | 7,307 | (9,270 | ) | (e) | 70,651 | ||||||||||
Accumulated other comprehensive loss | (20,856 | ) | (113 | ) | 113 | (e) | (20,856 | ) | ||||||||
Total Mistras Group, Inc. stockholders’ equity | 278,096 | 12,256 | (14,219 | ) | 276,133 | |||||||||||
Non-controlling interests | 183 | — | — | 183 | ||||||||||||
Total Equity | 278,279 | 12,256 | (14,219 | ) | 276,316 | |||||||||||
Total Liabilities and Equity | $ | 548,148 | $ | 60,095 | $ | 100,752 | $ | 708,995 |
Mistras Group, Inc. and Subsidiaries Unaudited Condensed Combined Statement of Income For the Nine Months Ended September 30, 2018 (in thousands, except per share data) | |||||||||||||||
Mistras | Onstream | Pro Forma | Pro Forma | ||||||||||||
Historical | Historical | Adjustments | Combined | ||||||||||||
Revenue | $ | 561,592 | $ | 22,114 | $ | — | $ | 583,706 | |||||||
Cost of revenue | 389,131 | 7,754 | — | 396,885 | |||||||||||
Depreciation | 16,902 | — | — | 16,902 | |||||||||||
Gross profit | 155,559 | 14,360 | — | 169,919 | |||||||||||
Selling, general and administrative expenses | 122,232 | 5,258 | — | 127,490 | |||||||||||
Pension withdrawal expense | 5,886 | — | — | 5,886 | |||||||||||
Gain on sale of subsidiary | (2,384 | ) | — | — | (2,384 | ) | |||||||||
Research and engineering | 2,414 | 125 | — | 2,539 | |||||||||||
Depreciation and amortization | 8,834 | 3,091 | 1,965 | (f) | 13,890 | ||||||||||
Acquisition-related expense (benefit), net | (1,143 | ) | — | — | (1,143 | ) | |||||||||
Income (loss) from operations | 19,720 | 5,886 | (1,965 | ) | 23,641 | ||||||||||
Interest expense | 5,581 | 2,041 | 2,827 | (g) | 10,449 | ||||||||||
Income (loss) before provision (benefit) for income taxes | 14,139 | 3,845 | (4,792 | ) | 13,192 | ||||||||||
Provision (benefit) for income taxes | 6,229 | 955 | (1,247 | ) | (h) | 5,937 | |||||||||
Net income (loss) | 7,910 | 2,890 | (3,545 | ) | 7,255 | ||||||||||
Less: net income attributable to non-controlling interests, net of taxes | 13 | — | — | 13 | |||||||||||
Net income (loss) attributable to Mistras Group, Inc. | $ | 7,897 | $ | 2,890 | $ | (3,545 | ) | $ | 7,242 | ||||||
Earnings (loss) per common share: | |||||||||||||||
Basic | $ | 0.28 | $ | — | $ | — | $ | 0.26 | |||||||
Diluted | $ | 0.27 | $ | — | $ | — | $ | 0.25 | |||||||
Weighted average common shares outstanding: | |||||||||||||||
Basic | 28,360 | — | — | 28,360 | |||||||||||
Diluted | 29,447 | — | — | 29,447 |
Mistras Group, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. Basis of Presentation
The unaudited pro forma condensed combined financial statements of Mistras are based on the historical consolidated financial statements of Mistras and Onstream, and have been prepared to illustrate the effect of Mistras' acquisition of Onstream. The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting in accordance with Accounting Standards Codification ("ASC") Topic 805. The unaudited pro forma condensed combined statements of operations is presented as though the acquisition occurred on January 1, 2017. The unaudited pro forma condensed combined balance sheet is presented as though the acquisition occurred on September 30, 2018.
2. Pro Forma Adjustments Related to the Acquisition
The following adjustments were applied to the historical consolidated financial statements of Mistras and Onstream to arrive at the unaudited pro forma condensed combined financial statements.
(a) - To record goodwill created by the acquisition. The total consideration transferred, and the allocation of the consideration transferred to recognized assets and liabilities are summarized as follows:
Fair value of the total consideration transferred is $143.1 million as of December 13, 2018, which is based on an exchange rate from Canadian dollars ("CAD") into U.S. dollars ("USD") of 1.3266 CAD : 1.0 USD.
Allocated to:
Preliminary allocation of purchase price | Amount (in thousands) | |||
Current assets | $ | 9,381 | ||
Property and equipment | 7,868 | |||
Other assets | 136 | |||
Goodwill | 82,542 | |||
Technology | 53,652 | |||
Customer Relationships | 3,594 | |||
Tradenames | 1,705 | |||
Non-compete agreements | 607 | |||
Liabilities assumed, including deferred tax liabilities | (16,346 | ) | ||
Total | $ | 143,139 |
(b) - To reflect the step-up in property, plant and equipment values to acquisition-date fair value based on appraisals performed
and to record separately the acquisition-date fair value of identified intangibles.
(c) - To reflect estimated net deferred income tax liabilities and other income tax related items arising from the acquisition.
(d) - To reflect the fair value of the debt issued to finance the transaction.
(e) - To reflect the elimination of the shareholders' equity accounts of Onstream.
(f) - To reflect the increase in 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.
(g) - To reflect the increase in interest expense resulting from the issuance of debt to finance the consideration exchanged. The interest rate on the new debt of $143.1 million is assumed to be 4.4%, which is the interest rate as of December 31, 2018. A change in 1/8% in the interest rate would result in a annual change in interest expense and net income of $0.2 million.
(h) - To reflect the income tax effect of the increased interest and depreciation expense at an effective tax rate of 31% as of December 31, 2017 and 26% as of September 30, 2018.