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Mistras Group (NYSE:MG)

F4Q10 (Qtr End 05/31/10) Earnings Call

August 11, 2010 9:00 a.m. ET

Executives

Sotirios Vahaviolos – Founder, Chairman, and CEO

Paul "Pete" Peterik – Former CFO

Frank Joyce - CFO

Analysts

William Stein – Credit Suisse

Scott Levine – JP Morgan

Matt Duncan – Stevens Inc.

Fred Buonocore – CJS Securities

Matt Tucker – KeyBanc Capital Markets

Richard Eastman – Robert W. Baird

Jeff Allen – Silvercrest

Operator

Good day ladies and gentlemen, and welcome to the fourth quarter 2010 Mistras Group Inc. earnings conference call. [Operator instructions.] I would now like to turn your presentation over to Sotirios Vahaviolos. Please proceed.

Sotirios Vahaviolos

Good morning to all. Welcome to the Mistras Group earnings conference call to discuss our recent company performance. Again, my name is Sotirios Vahaviolos. I am the founder, chairman, and chief executive officer of Mistras.

Joining me today is Pete Peterik, the CFO of record for fiscal 2010, who is transitioning out of his role after we file the annual report, as well as Frank Joyce, our new company chief financial officer, who joined our team last month. Working together, we are assured of financial continuity as Pete passes the baton to his successor.

The purpose of today’s conference call is to discuss our recently released financial results for the company’s fourth fiscal quarter and annual results that ended May 31, 2010. Our primary objective of this call is to provide you with a clear understanding of our performance and prospects. This discussion is intended to supplement our quarterly earnings release and our filings with the Security & Exchange Commission.

Pete will begin will a brief disclaimer about the information we are providing today and Frank will follow with a summary review of our financial results. I will then follow Frank with remarks and observations about our performance, marketing activity, and prospects. We will then answer any questions you may have. With that, Pete, let me turn it over to you.

Paul Peterik

Thank you Sotirios, first I want to remind everyone that our discussions during this conference call will include forward-looking statements. Actual results could differ materially from those projected and factors that could cause actual results to differ are discussed in the prospectus for our IPO dated October 7, 2009, in our reports on Form 10-Q and Form 8-K.

Also, the discussions during this conference call will include certain financial measures that were not prepared in accordance with U.S. Generally Accepted Accounting Principles. Reconciliations of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the company’s current reports on Form 8-K, dated August 10 and 11, 2010.

These reports are available on our website at www.mistrasgroup.com, in the Investors, SEC Filings, and Reports section and on the website of the Securities & Exchange Commission. Now I’ll turn the call over to Frank, who will present our financial results.

Frank Joyce

Thank you Sotirios and Pete. For the fourth quarter, revenues were $79.8 million as compared to $55.9 million in the fourth quarter of fiscal 2009. The increase of $23.9 million, or 43%, was the result of significant growth in all of our segments, led by our services segment, which had a 45% increase in revenues for the fiscal fourth quarter. For fiscal 2010, our consolidated revenues grew by 30% to $272.1 million, again led by services, which grew by 36%.

Our fourth quarter gross profit was $25.1 million, representing a 39% increase over the fourth quarter of fiscal 2009. Our gross profit margin, which is calculated as a percentage of revenues, was 31.4% in the fourth quarter versus 32.2% in the fourth quarter of 2009. The gross profit margin for all of fiscal 2010 was 30.4% versus 33.1% in the prior fiscal year.

Our fiscal 2010 fourth quarter operating income was $8.2 million, compared to $4.3 million in the fourth quarter of fiscal 2009. Operating income for all of fiscal 2010 was $20.3 million, representing a 37% increase from fiscal 2009. SG&A for the fourth quarter of 2010 represented 18% of revenues as compared to 20% of revenues in the fourth quarter of fiscal 2009. For the fiscal years 2010 and 2009, SG&A expenses represented 20% and 22%, respectively, of revenues. SG&A decreased as a percentage of revenue in fiscal 2010 despite an increase in stock comp expense of $2.5 million.

Net income attributable to Mistras Group was $4.9 million in the fourth quarter, compared to $1.5 million in the fourth quarter of fiscal 2009. Diluted earnings per share were $0.18 versus a loss of $2.48 per share for last year’s fourth quarter. You may recall that last year’s EPS calculation included the impact of preferred stock accretion, which essentially treats increases in preferred stock valuation as a reduction to EPS.

For the 2010 fiscal year, net income attributable to Mistras Group was $10.1 million versus $5.5 million in fiscal 2009. Diluted earnings per share for fiscal 2010 were $0.41 versus a loss of $1.67 per share in fiscal 2009. Again, preferred stock accretion was a significant factor in contributing to the negative EPS in fiscal 2009.

We use adjusted EBITA as a non-GAAP measure to evaluate our performance and we believe this represents an appropriate short term metric given our level of depreciation and amortization expense, acquisition related costs, and stock compensation expense. Adjusted EBITA for the fourth quarter of fiscal 2010 was $13.2 million, or 16.6% of revenues versus $8 million, or 14.3% of revenues in the fourth quarter of fiscal 2009. This represents a 65% increase in adjusted EBITA over the prior quarter. For the fiscal year 2010, adjusted EBITA was $39 million, or 14.3% of revenues, representing a 25% increase over adjusted EBITA in fiscal 2009.

Now I would like to make a few brief comments on our cash flows and balance sheet. The company continues to generate strong free cash flow. When our 10-K is filed in the next few days I expect our statement of cash flows to show that the company generated approximately $6 million in free cash flow in the fourth quarter of fiscal 2010 versus $4 million in the fourth quarter of fiscal 2009. For this calculation free cash flow is defined as net cash provided by operating activities, less capital expenditures. I expect free cash flow for all of fiscal 2010 to be in the $16 million to $17 million range, versus $7 million in fiscal 2009.

Our overall accounts receivable has improved slightly, with approximately 83% of the current year’s balance in the current or 1-30 day category versus 79% in the prior year. DSO at the end of fiscal 2010 was 60 days, versus 61 days in fiscal 2009.

Cash capital expenditures for fiscal 2010 were $2 million, representing 0.7% of revenues versus $5 million in fiscal 2009 or 2.6% of revenues. Total cap ex, including equipment financed through capital leases, was $7.9 million in fiscal 2010 or 2.9% of revenues, versus $12.9 million or 6.1% of revenues in the prior fiscal year.

As of May 31, 2010, our net debt was $10.6 million, versus $75.1 million on May 31, 2009. As of May 31, 2010, the company had cash and cash equivalents of $16 million and an undrawn revolver balance of $55 million.

And with that, Sotirios, I’d like to turn it back over to you.

Sotirios Vahaviolos

Thanks Frank and Pete. I want to especially thank Pete for your past service to Mistras. Now I would like to share with you our perspective, a commentary as to our recent performance and overall business, both as to this most recent fiscal year and for the future.

Once again, I would like to start by reminding you that Mistras is a unique business model of technology-enabled asset protection solutions for the world’s aging industrial and public infrastructure. Our model is to be that of a single-source provider employing industry leading products, services, and software. Our approach emphasizes the outsourcing of services by our customers to Mistras, where we perform daily inspection and plant maintenance on what we refer to either as “run and maintain” or an “evergreen” contract. This model reduces our dependence on capital projects business, which when they occur results in incremental revenues for Mistras.

We’re very pleased with our fiscal 2010 revenue and adjusted EBITA growth. Achieving double-digit growth is both categories. Our fiscal year revenue growth of 30%, a corresponding CAGR of 31% over the last four years, as well as 11 consecutive fiscal years with double digit revenue growth, is a testament to our business model. Our fiscal year 2010 organic growth of 18% was consistent with our average organic growth over the last four years and is quite remarkable given the state of the economy.

It is also noteworthy to report that for the fourth quarter in fiscal 2010 we achieved record revenues which were 43% greater than the fourth quarter of 2009. We’re also pleased with the 25% increase in our adjusted EBITA in fiscal 2010 to $39 million, generating a CAGR of 33% over the last four years. This increase in adjusted EBITA was a result of higher volumes and leveraging our selling general and administrative costs.

Let me say a few words about our revenue growth. We continue to pursue our marketing strategy of obtaining growth primarily from existing customers by offering them more solutions out of our one-source marketing approach as well as pursuing new customers in our target markets. In fiscal 2010 approximately 70% of our growth has been achieved by growth of our top ten customers, with a significant number of contract wins, expanded revenue from acquisitions, and customer acceptance of additional asset protection solutions.

Our large, blue chip customers remain the foundation for our future growth and profitability. In fiscal 2010 we enjoyed robust growth in our power generation and transmission market, which grew 31% and our process industry markets, primarily chemicals, which grew by 19%. Thanks to several orders for equipment to test composites for the joint strike fighter, our aerospace market was up 18%.

Sales of PCMS enterprise software licenses and related software services in our asset integrity management offerings increased by over 70%. All the above are indicative of our market potential, but these increases were overwhelmed by a 43% increase in our oil and gas market, which accounted for approximately 63% of our fiscal 2010 revenues.

It should, however, be noted that our business in this market is very distributed, with approximately 39% of our total revenues coming from the downstream or refinery markets. We now serve over 66 evergreen locations where we have resident status employees performing daily services on an outsource basis and thus providing Mistras with a recurring revenue stream.

During the year we added 25 new evergreen sites to our total, including 12 refineries, 10 chemical plants, and 3 mid-stream oil and gas locations. Today, there are approximately 150 refineries in the U.S. and Mistras serves 46 of them for a leading market share. More importantly, Mistras maintains evergreens in 57%. These are the 35 out of 61 of the U.S. largest 100-barrels-per-day or higher refineries.

Even with these outstanding numbers, additional asset protection solution opportunities exist in the locations we serve. Our share of less than 7% of the world market is indicative of the opportunities we have in refineries.

As many of you know, BP has historically been our largest customer and our relationship with them dates back to 1985. In fiscal 2010 they accounted for approximately 17% of our revenue, but trending down to 15% in our fourth quarter as we have diversified our oil and gas markets by obtaining more business from other large oil companies. In fiscal 2010 our revenue volume with BP is once again increased, and our relationship continues to be as strong as ever.

We support our friends and partners at BP, as well as those in the gulf impacted by this tragedy. We believe that like any other accident, more emphasis will be paid on additional safety and thus more future inspections and asset protection solutions will be required. Nothing will be immediate, but we see more business coming from the offshore industry in the future.

Turning to our profitability and margins, the rapid growth in our services segment, with its four-year CAGR of 37%, has presented a challenge for the last three years, since much of the revenue increase came from new multi-year contracts where the initial customer services needs are traditional non-destructive testing or base-type American Petroleum Institute, or API work as we call it, which along with contract startup costs, produce lower margins.

The margin decrease in our numbers can be attributed to the 36% growth in our services segment, which has a lower margin profile, while the remaining can be accounted for by pricing pressures from large refinery and chemical customers and entity mix.

At the same time, the new revenue base obtained during the year becomes our platform for secular growth and delivery of new and existing advanced asset protection solutions. Although 84% of our revenues came from the service segment, our two other segments, products and systems and international, also achieved revenue growth during the year and contributed higher margins to our business.

More importantly, these segments provide the high technology that drives our overall growth and profitability. Our operating margins increase, and we draw greater adjustability on dollars as a result of higher volumes and leveraging our sales, general, and administrative costs.

In summarizing fiscal 2010 we had a successful initial public offering, maintained our strong organic and overall revenue growth of 30%, achieved 25% growth in adjusted EBITA, and increased our operating margins. We also completed a large number of high-profile projects, won several significant contracts, increased our head count by over 600, and counting a small acquisition just completed, we now have over 2,300 employees in 70 worldwide locations in 15 countries and are well positioned for continuous growth and improved profitability.

Now let us focus on our outlook for fiscal 2011 and beyond. As noted in our earnings release, we are projecting fiscal 2011 revenues to be in the range of $300 million to $330 million and adjusted EBITA to be in the range of $44 million to $49 million. These projections anticipate continued organic growth supplemented by acquisitions as well as improvement in our profitability.

Based on a proven track record of 11 years of double-digit revenue growth and more than 30 years in developing the technology of the future, [we’ll repeat] as to fiscal 2011 and beyond. We will continue our business model of delivering technology enabled solutions for the world’s industrial and public infrastructure, leveraging the talents and experience of our 30 or so PhDs, our other scientists, engineers, and skilled certified technicians of our centers of excellence providing our customers a single source for their asset protection needs.

We project continued growth in oil and gas as well as our other markets. Although cautious about the profitability of our refining customers, we’re encouraged by recent reported financial results. As you likely know, the recent earnings report of several major oil and gas companies, including Chevron, ExxonMobil, Total, and Conoco Phillips, all pointed to significant refinery profits as a driver of the improved earnings. In addition, Conoco Phillips reported that their U.S. refining capacity realization rate to be 96%.

We believe these results boded well for our refinery business. At the same time we will continue our efforts in our other target markets, including power generation and transmission, chemical [unintelligible], and infrastructure. Our markets including aerospace and industrial sectors have been sluggish, especially as to our inspection testing, but offer us upside potential.

We fully expect additional revenues, both traditional and expanded advanced services, from the multi-year services contracts we won this fiscal year and the continued payback from our investment in the centers of excellence, which are the incubators of new technology and customer solutions. We continue to have potential for new revenue from our ultrasonic imaging systems and 24-7 online monitoring projects to monitor bridges, wind turbines, and other structures.

Mistras has recently won a major contract for a continuous online structural health monitoring system contract valued at $33.4 million to be installed on the San Francisco - Oakland Bay Bridge. Mistras will be the prime contractor for the project, responsible for the sensors and systems manufacture, installation, and implementation and providing 24-7 remote help monitoring. When completed, this will possibly be the largest and most advanced automated structural health monitoring system in the world.

This contract is another example where Mistras is the leader in online monitoring, 24-7, the integrity of infrastructure. Within the last ten years alone, Mistras has provided testing and health monitoring on hundreds of bridges and structures worldwide and which include some of the largest and well-known bridges in the United Kingdom, Pennsylvania, and the greater New York metropolitan areas. Most of this structural health monitoring contracts, particularly for these large historic bridges, involve multi-year monitoring of the structural integrity, generating annual revenue streams for these [forced] installation services.

We also expect revenue from our business model of successfully making small [unintelligible] acquisitions. Subsequent to year end, we made a small acquisition in France and one in Washington State. We acquired the technical services division of [unintelligible] Corporation, a northwest regional engineering firm, effective August 2, 2010. [unintelligible] Technical Services Division provides not only non-destructive testing services, but also metallurgical testing services which is a complementary service we can now offer to our customers nationally. We’re continuously evaluating additional acquisitions, not only in the U.S. and France, but in the rest of Europe, the Middle East, and South America, where we have existing management infrastructure and offer advanced services and product support.

Our guidance for fiscal 2011 implies mid-teen growth in revenues and profitability. After carefully considering current market conditions, we believe an improvement of approximately 75 to 100 basis points over last year’s is certainly achievable. Our management is focused on improving margins and profitability in five areas, which are providing more advanced services to our existing evergreens, aggressively pursuing more aerospace and industrial parts inspection, improving labor utilization and productivity, leveraging our lower margin API inspection work to obtain more asset protection revenues, and controlling our costs.

My father used to say that you need to pay daily attention to the cash register, and at Mistras Worldwide we have adopted his words of wisdom as an important part of our culture. The reasons for last year’s lower profitability in our business were complex, thus solutions cannot be found in a single management [unintelligible] in action, but the relentless effort to better manage our business through the entrepreneurial offices we have created worldwide.

As we continue to grow, with national and global multiyear contracts, we must expect tough negotiations and continued pressure on our margins. Keys to our future profitability must include providing our customers with new technologies and higher value services, improving technician productivity and utilization while maintaining the daily habit of watching the cash register.

Our business model continues to provide predictable and consistent revenue, less vulnerability to more cyclical capital projects, and is the basis for leveraging our growth. Both private and public infrastructure continues to age and needs to be assessed and monitored. We believe the solutions we offer are not optional but critical. These trends should enable us to serve our customers more efficiently and have a positive income on our revenue growth and profitability.

Finally, I am very proud and thankful of our employees. Their continued search of excellence in asset protection solutions instills confidence and trust in our customers as they outsource their inspection and plant maintenance to us that the Mistras team will meet and far exceed their expectations.

That concludes our initial remarks. Let us now open it to questions.

Question-and-Answer Session

Operator

[Operator instructions.] Your first question comes from the line of William Stein with Credit Suisse. Please proceed.

William Stein – Credit Suisse

The bridge contract that you mentioned, Sotirios, have you ever participated as a general contractor in this fashion before, and if you can comment on the margins in that kind of business and how long you think it might take to achieve that? I think you mentioned $33 million in revenue?

Sotirios Vahaviolos

No, $3.4 million. I wish it was $33 million.

William Stein

Okay. Got it. And margins on that kind of business and whether you’ve participated as a general contractor the way you say you are in this business?

Sotirios Vahaviolos

Well, typically we do not really discuss margins, but I will make the statement that it is higher than the service margins.

William Stein

Okay, and then the follow up is regarding acquisitions. You mentioned two of them that closed after the quarter I believe? Have you done any others since the fiscal second quarter of 2010? I think we’ve – pre-IPO there were a lot and then it felt like perhaps there hadn’t been any since -

Sotirios Vahaviolos

Last year for the record we did two acquisitions in July of last year and we made one small acquisition which really was another engineering company that had [unintelligible] the services we required. That was in the November December time frame.

William Stein

And none in the second half.

Sotirios Vahaviolos

Not the second half.

William Stein

And the guidance for fiscal ’11 includes acquisitions that – I was confused by this point. It sounded like you were saying that it includes acquisitions that are being contemplated. Is that right?

Frank Joyce

This is Frank. I think the best way to look at the guidance is the lower end of the range is organic growth and the top end of the range includes acquisitions. So if you’re looking for guidance on just the organic growth -

William Stein

What I’m trying to get at is does the guidance include acquisitions that were done recently, or that have not been completed yet but you anticipate?

Frank Joyce

It’s a small acquisition that was recently completed that is in the guidance.

William Stein

And not others that might be completed?

Paul Peterik

There would be a small number of acquisitions that would be consistent with our pattern. There’s nothing very large that would be anticipated.

Operator

Your next question comes from the line of Scott Levine of JP Morgan. Please proceed.

Scott Levine

You mentioned that 25 evergreen contracts were added in fiscal 2010. Could you talk about – were the additions ratable throughout the year, or did you see building momentum as the year ended? And maybe if you can provide some color, you mentioned in the oil and gas business some positive earnings reports out of the majors. Anecdotally, what types of spending behavior and patterns have you seen? Are things picking up on the margin as we exited fiscal ’10 and move into 2011?

Sotirios Vahaviolos

Well, the refineries, the project’s we’ve got in the refineries, it was distributed evenly throughout the year actually. There was no really specific month that we had a lot more than other months. That’s the one answer on this. As far as – the only thing we can say that the pressure on price in the refinery market is really since the beginning of the year. Last year we had a lot of pressure but not this year.

Scott Levine

Okay, so it sounds like things have kind of stabilized on the pricing front and your expectation is that that will remain the case throughout 2011.

Sotirios Vahaviolos

That’s right. And we also need to understand that we’re really doing the run and maintain, which means that our services are really necessary, so we don’t depend on capital projects, so therefore there’s not going to be a lot of changes in our mixture of business.

Scott Levine

Got it. And then without asking for guidance within guidance for 2011, can you provide maybe a little bit of color around both seasonality and maybe mix of services versus products and systems in international? Is your expectation that 2011 would be generally consistent with 2010 or do you anticipate any changes either in mix or seasonality?

Sotirios Vahaviolos

I think the seasonality will always exist.

Scott Levine

Okay, and do you expect a mix, a higher mix of products and systems in international to drive some margin expansion in 2011, or do you expect the mix to be consistent with 2010?

Sotirios Vahaviolos

I think it will be consistent with 2010.

Operator

Your next question comes from the line of Matt Duncan with Stevens. Please proceed.

Matt Duncan – Stevens Inc.

The first question I’ve got, I want to try to get a little clarity on the guidance here. It sounds like, if I’m understanding you correctly, the right way to look at the guidance is the business you own today including the small acquisitions that you’ve made is sort of the low end to the mid-point of both the revenue and EBITA guidance, and at the mid-point to the high end would be assume acquisitions that have not yet closed. Is that the right way to think about it?

Sotirios Vahaviolos

We agree on that a hundred percent.

Frank Joyce

That’s a fair way to look at it.

Paul Peterik

That’s the way.

Matt Duncan

And then when you look at your margin assumptions that are baked into that guidance are you assuming that you will get much gross margin increase in ’11 or are you really looking more at SG&A leverage driving the bottom line?

Sotirios Vahaviolos

If you notice in my remarks I mention five key points, and would like to stick to them.

Matt Duncan

Okay. And then the last thing I’ve got here and I’ll jump back in queue, it looks to us like refiner profits are up, refiner utilization rates are up, and theoretically that should be good for you guys, especially if you layer in the concerns around plant assets in the wake of the BP oil spill. I’m just curious are you seeing any change in underlying demand for your services at this point as you look out at FY11?

Sotirios Vahaviolos

Not really. We basically we might have more business because of the more evergreen’s that we’ve got but we do not see anything abnormal.

Matt Duncan

So that would be upside then if that happens?

Sotirios Vahaviolos

That’s right.

Operator

Your next question comes from the line of Fred Buonocore of CJS Securities. Please proceed.

Fred Buonocore – CJS Securities

Sotirios, on the last call you talked about some clients managing turnarounds differently and the scope and length of time on some of these projects being shorter and leaving you guys underutilized on your workforce. What have you seen through the fourth quarter in regards to that?

Sotirios Vahaviolos

We really did not see what we saw last year. We saw a lot less. Maybe there was some small changes but they were really minimal to discuss. There was no comparison to the previous, third quarter let’s say.

Fred Buonocore

So in other words that’s a pressure that eased substantially.

Sotirios Vahaviolos

It looks like basically – keep in mind that also there’s always the need for inspection, because you can’t delay it too long, so therefore things are going to really be less and less as they were in the third quarter.

Fred Buonocore

And then my second question relates to acquisitions given that that is a key point, or a key aspect to the higher end of your guidance as Matt just pointed out. Can you talk a little bit about the acquisition environment and where you’d be seeking these kinds of transactions and maybe how close you are on some that you may be handicapping with a high probability in terms of getting into that high end of your guidance?

Sotirios Vahaviolos

First I would like to really mention that we made acquisitions for two reasons. One is geography and the second one is basically obtaining certified employees. I can guarantee you, no matter what the market is there, I could not find 600 and 620 certified employees that I needed last year if I did not make this small acquisition. So for us it’s also the acquisitions are very helpful in really getting more certified employees. It’s very, extremely important to us. The market for acquisition is always there, especially if you cooperate with a lot of the small companies. We have really – we are very friendly to small companies and they are very friendly to us because we use them as our contractors and that’s how we evaluate their capabilities and that’s all I can say for the present.

Operator

Your next question comes from the line of Matt Tucker with KeyBanc Capital Markets. Please proceed.

Matt Tucker – KeyBanc Capital Markets

Just sorry to belabor the point. Just one more question on guidance. I promise that’s it. Should we view, then, the top end of the guidance range in terms of acquisitions as you would need to make acquisitions in order to have the resources to get to that top end?

Sotirios Vahaviolos

There’s no question about it. I would need the acquisitions to make the top end. Again, remember that we’re always talking about very small acquisitions.

Matt Tucker

Sure, would you expect that you would need to make a similar level of acquisitions next year that you did in the past year in order to meet your guidance? Or at least the mid to upper end?

Sotirios Vahaviolos

Well, I think the only thing I can say basically is we always think about a one-third acquisitions and two-thirds organic.

Matt Tucker

Okay, that’s helpful. And then your revenue guidance suggests strong growth year over year but a little slower than the past two years. In light of, as you mentioned, some early signs of recovery in your largest end market, could you just help us put that implied little bit slower growth in the context of your overall end market outlook?

Sotirios Vahaviolos

Well we have not seen really the [unintelligible] to help the large turnarounds that we used to see two three years ago, so therefore we need to be cautious and conservative.

Matt Tucker

That makes sense. Just one final question and I’ll jump back in the queue. It looks like your products and systems segment year over year growth really jumped up in the fourth quarter. Was there anything to lead you to believe that was a bit of a fluctuation or do you think you’re seeing more of a sustainable inflection in demand for that segment?

Sotirios Vahaviolos

There are actually two reasons. Number one, of course, the economy for capital equipment improved in the fourth quarter. That’s one. The second one is that we have really done a lot of projects where we instead of selling equipment we sell solutions to the customers. And so we hope to see that continue in the first quarter and beyond.

Operator

Your next question comes from the line of Richard Eastman with RW Baird. Please proceed.

Richard Eastman – Robert W. Baird

From an acquisition standpoint, these two small ones, the one in Washington and France, can you just give us an annualized revenue number for the combined acquisitions?

Sotirios Vahaviolos

About $8 million.

Richard Eastman

$8 million would be – okay. And then a question on margins. Sotirios you mentioned that you – the target is 75 to 100 basis point margin improvement year over year. Is that a comment on the services margin or is that a comment on the overall operating margin that you put up for the full year? Just what is that referencing?

Sotirios Vahaviolos

The biggest factor might be the services, but it’s also overall. It’s also in products. We can see improvements in products as well as international. We expect more improvements international.

Richard Eastman

So against 7.5% consolidated EBIT margin you’d look for that 75 to 100?

Sotirios Vahaviolos

Yes, that’s it exactly.

Richard Eastman

And then perhaps Frank could you just provide us with an estimated fiscal ’11 D&A number as well as a stock comp number?

Frank Joyce

Yes. For – bear with me.

Richard Eastman

Sure. Sotirios, maybe just last question, promise. Last year when we entered fiscal ’10 I think you had pretty good visibility on a number of incremental evergreen contracts. I think you talked about securing maybe 25 during the year. But I think we entered the year with some decent visibility on some larger pieces of business that would phase in. Are we in the same situation today as we enter fiscal ’11, where we’ve got visibility on X amount of incremental revenue from evergreen contracts, which will begin to phase in during fiscal ’11? Is there some visibility there?

Sotirios Vahaviolos

Well, obviously it is and there’s a lot of marketing strategy. I can make the statement in the first quarter we already have some new evergreen contracts. But I don’t really give a guidance how many I get a year, for competitive reasons.

Richard Eastman

But you obviously, on the low end of your revenue guidance, and that 10% organic growth rate, there’s some portion of that that is an annualized contract that would – is already booked that would be flowing in.

Sotirios Vahaviolos

Definitely.

Richard Eastman

Yeah. We’re not just waiting on an improvement in maintenance budgets and that type of thing?

Sotirios Vahaviolos

Oh no, absolutely not. The procurement is really six months to one year, especially on the large evergreen contracts. It’s not something that happens overnight. We plan that for a long time.

Frank Joyce

I’ve got an answer to part of your question. Stock comp for next year is in the range of about $4.2 million. D&A I don’t have handy and we’ll have to get back to you.

Operator

[Operator instructions.] Your next question is a follow up question from the line of Matt Duncan with Stevens. Please proceed.

Matt Duncan

Just a couple of very small housekeeping questions to help us out on the guidance. Your share count was down quite a bit this quarter. I’m assuming that’s just stock options that went out of the money. What share count do we need to think about using as we model EPS for 2011? And then also tax rate was about 35% this quarter or a little bit lower than I think had been expected. You were around 38% for the year. I think the guidance previously had been about a 42% tax rate. Is that still the number to use for FY11, or has that changed?

Frank Joyce

Going forward I would use a tax rate of about 40%. We had some 1048 reversals for tax years that rolled off this year as well as some valuation allowances for state taxes that we’re able to use. So 40% going forward is a number that I would use. In terms of share count, it’s always hard. It depends on stock price, but I think as guidance I would probably use the diluted number for the fourth quarter, which is about 26.8.

Operator

Your next question is a follow up question from the line of Matt Tucker with KeyBanc Capital Markets. Please proceed.

Matt Tucker

I was just hoping you could comment on how much of your business do you compete on the basis of price in the current environment? Is it mostly price-based in the services segment, and less so in products and systems? And have you seen any change in that over the past few months?

Sotirios Vahaviolos

First of all let’s make a very clear point. We’re not really winning orders because of the price. That’s not the most important element, especially when you have a big offshore contract, where the customer depends on you to be their inspection department. So obviously we are not looking, when we get a contract, for how much more did we make this quarter or the next quarter. We’re looking over the three year period and see how much we can offer besides really doing routine work what other type of work we can do and what we can offer this customer. So therefore I would really say that price is not really the most important factor. Obviously the customers will always try to undercut the price and everything else, but at the end of the day we will walk away from evergreens that are not really meeting our pricing structure and we have done that in the past and we will do it in the future.

Operator

[Operator instructions.]

Frank Joyce

I’d just like to mention that the D&A number that was asked before, while we don’t give guidance on that specifically, it’s going to be in the range of about $15.5 million for 2011.

Operator

We have a follow up question from the line of Scott Levine with JP Morgan. Please proceed.

Scott Levine

One clarification. I think you indicated that the low end of your guidance for 2011 would be more a function of organic growth and the higher end would reflect new acquisitions they haven’t yet made. Does the lower end also assume the rollover effect of the August acquisitions that you mentioned on the call as well, or not?

Frank Joyce

Yes.

Scott Levine

It does. Okay. And then maybe as a follow up, I think Sotirios you indicated on recent earnings calls that the pace of spending from the government with regard to the bridge business maybe hadn’t been as robust as you’d hoped or expected. Can you just talk maybe a little bit about any changes, positive or otherwise, you may be seeing with regard to the spending patterns and behavior of your government customers in particular?

Sotirios Vahaviolos

Well, basically we have seen really money for research as we are now the recipient, as we’ve announced at the beginning of the year, we were the recipient of $6.9 million from the National Institute of Standards and Technology contract. We have not seen the government really spending money. We have seen the departments of transportation, because besides the one in California we had wins in Virginia, we had wins in Florida, all of these really, the people who paid us was the Department of Transportation as it would be in California, the Department of Transportation of Florida, Department of Transportation – VDOT, which is Virginia Department of Transportation. So we have not seen – the government has announced money but I don’t think we have seen anything in that market segment. And we still know that we have one third of our bridges, as the government says, that are structurally deficient.

Scott Levine

Okay, so it doesn’t sound like you’re terribly encouraged that that is going to change any time soon, no?

Sotirios Vahaviolos

Well, you know, I have not seen money. I have not seen really the government really spending money in this area for online monitoring, especially, or health monitoring, and I have not seen the government helping the local departments of transportation. Maybe it will change in the future.

Scott Levine

Okay, I guess we’ll continue to monitor. Thanks.

Operator

You have a question from the line of Jeff Allen with Silvercrest. Please proceed.

Jeff Allen – Silvercrest

Do you guys have the intangible amortization that flowed through the income statement for the quarter and the full year?

Frank Joyce

I’ve got a D&A number. I don’t know if just amortization is readily available. I think we’re going to have to get back to you on that.

Operator

We’re currently showing no more questions in queue at this time. I would like to turn the call over to Mr. Sotirios Vahaviolos for closing remarks.

Sotirios Vahaviolos

Well, we’d like to thank all of you that are attending the meeting and we hope that fiscal 2011 will be better than fiscal 2010.

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