Importantdisclosuresappearonthelastpageofthisreport.

TheHenryFund

HenryB.TippieSchoolofManagementSamNorman[Samuel-Norman@uiowa.edu] NondestructiveTestingServices February8,2017Industrials–Engineering&ConstructionServices IndustryRating MarketWeight

InvestmentThesis KeyIndustryStatistics WerecommendamarketweightpositionintheNDTservicesindustrygivenexpectationsforslowdemandfromoilandgascustomersthrough2017.Wepredictthatoilandgasrevenueswillbegintostabilize in late-2017,butnotreturntogrowthuntilmid2018.Webelievethatweakdemandfromoilandgascustomerswillbeoffsetbystronggrowthinsecondaryendmarketssuchas public infrastructure, power generation, industrial and aerospace anddefense.DriversofThesis• WeexpectNDTindustryrevenuestogrowataCAGRof4.0%overthenext

five years, driven by expansion in secondary endmarkets and renewedgrowthinoilandgasmarketsbeginningin2018

• Our expectations of 2-3 Fed Funds rate hikes in thenext two yearswillincreasefirms’costofcapitalandleadtomoredemandforNDTservicesasfirmsseektoimproveassetutilizationandlivelihoodwithoutsignificantcapitalexpenditure

• Agingpublicinfrastructure,increasinglyadvancedindustrialmachineryandstronger health and safety regulations are positive trends for the NDTindustry

RiskstoThesis• Roughly50%of industryrevenuescomefromoilandgascustomersand

weexpectthatoilandgasdemandwillbeweakuntilmid-2018• Ifhistorically low interestratespersist inthecomingyears, firmswillbe

incentivized to pursue significant capital expenditures to improve assetutilizationandlivelihoodratherthanNDTservices

• NDT industry participants tend to grow through acquisitions and a slowM&Amarketcoulddiminishfuturegrowth

MajorCompaniesbyMarketCapitalizationMistrasGroup,Inc.(MG) $656.0MTeam,Inc.(TISI) $930.5MRockwoodServiceCorp. PrivateSGSGroup(Switzerland) PrivateApplusRTD(Spain) $1,454.0MMajorU.S.CompetitorsMistrasGroup,Inc.OperatingMargin

6.00%ProfitMargin 3.43%ReturnonAssets 5.17%ReturnonEquity 9.46%Team,Inc. OperatingMargin 8.13%ProfitMargin 4.76%ReturnonAssets 7.94%ReturnonEquity 12.51%

DataSource:Factset,Bloomberg

12MonthPerformance IndustryDescription

Source:YahooFinance

NondestructiveTesting(NDT)isusedtoevaluatethe structural integrity of critical energy,industrial and public infrastructure. Unlikedestructive testing,NDTallows infrastructure tobetestedforoperationalandstructuralintegritywithout compromising the future usefulness ofthe tested equipment or materials. NDT, whenused correctly, can benefit asset-intensivebusinesses andprojects by extending the lifeofaging infrastructure, increasing asset utilization,and improving compliance with regulatorystandards.

27.7

9.5 10.6

31.0

12.59.4

19.0 19.8

12.4

0.0

10.0

20.0

30.0

40.0

P/E ROE EV/EBITDA

MG TISI Sector

-10%

0%

10%

20%

30%

40%

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F M A M J J A S O N D J

MG TISI S&P500

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EXECUTIVESUMMARY

We recommend a market weight position in theNondestructive Testing (NDT) industry, as we expectlaggingdemandfromoilandgascustomerstobeoffsetbystrong growth in secondary endmarkets in the years tocome.NDTisgainingacceptanceacrossawidevarietyofindustriesasaneffectivewaytoimprovetheperformanceand livelihood of fixed assets without significant capitaloutlay. While NDT revenues will continue to comepredominatelyfromoilandgascustomersintheyearstocome,weexpectNDTtestingtosteadilygrowinsecondaryend markets such as public infrastructure, powergeneration,industrialandaerospaceanddefense.

We expect firms’ cost of capital to rise steadily in thecomingyears,whichwill lead to lesscapitalexpenditureon new fixed assets andmoremaintenance on existinginfrastructure across all end markets. In addition,technological advances continue to make NDT servicesmorevalueaddedwhilealsoreducingthepriceandtimeof service. Oil and gas revenues may carry industryparticipants in the short run, but we believe thattechnological advancements will continue to make NDTmore widespread in other industries and ultimatelyimprovetheNDTindustry’sprofitability.

INDUSTRYDESCRIPTION

NDT falls under the broader asset protection industry,which also includes destructive testing, predictivemaintenance and mechanical integrity testing services.These asset protection techniques use quantitative andqualitativeinspectiontopromoteincreasedutilizationandimproved livelihood of fixed assets. However, NDT isunique in itscombinationofqualitativeandquantitativeinspection,whilealsopreservingtheusefulnessofassetsafterthetestingprocessiscomplete.

NDT continues to become more prominent, astechnological innovation has allowed it to become anaccurate and cost effective form of asset protection.Technological innovation has also led to a distinctionbetweentraditionalNDTservicesandmoremodernNDTtechniques.Thefollowingchartshowsthecontributionoftraditional and nontraditional NDT services to theindustry’stotalrevenuesin2016:

Source:IBISWorld

TraditionalNDTServices

Traditional NDT services are comprised of simple visualinspections of materials, welds, castings and otherstructures,aswellasradiographicandultrasonictesting,magneticparticletestingandpiquedpenetranttesting.Abriefdescriptionofeachoftheseservicesisgivenbelow:

Visual Inspection:Tests for thesoundnessofequipmentand infrastructure through inspection by a trainedtechnicianRadiographictesting:Usesx-rayorgammarayradiationtogenerateimagesthathelpdetectsurfaceorsubsurfacedefectsUltrasonic testing:Useshigh frequencysoundenergy toexamine and detect discontinuities in materials and/orcoatingsMagnetic particle testing: Detects surface defects inmagneticmaterialsbyflowingamagneticfieldthroughthespecimen, coating the specimen with dyed magneticparticlesandobservingtheparticles’movementpatterns.Piqued penetrant testing: Finds surface breaks that arenotvisibletothenakedeyebyapplyingapenetrantliquidto the object’s surface, removing the excess liquid, andapplying developer to reveal the fluorescent or visiblecoloroftheremainingpenetrantAll of these methods aim to detect defects orimperfectionsthatcouldcausestructuresorequipmenttobreakdown. It isestimatedthattraditionalNDTservicesaccounted for 70% of NDT industry revenues in 20161.However,weexpect thispercentage todecreaseslightlyover the next five years due to growth in the advancedNDTservicesmarket.WhileweexpectanindustryCAGRof5.0%over thenext fiveyears,webelieve thatmost this

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growthwill come from the expansion of advanced NDTservices1.

AdvancedNDTServices

TechnologicaladvancementshaveledtotheemergenceofmoreadvancedNDTcapabilities.AdvancedNDTservicesinclude automated or remote ultrasonic testing,computerizedradiography,acousticemissionstestingandguidedwavetesting,amongothermethods.

Automatedultrasonic testing:Usesultrasonic computerscanners and software to accurately monitordiscontinuities over successive inspection intervals andachievereliable,repeatableandaccurateresultsComputerizedradiography:Capturesdigitalradiographicimagesonflatpanelscreenssothattheycanbeviewedinrealtime,digitallyenhancedforincreaseddetailandeasilystoredforfutureaccessibility.Acousticemissionstesting:Releasesenergywaveswithina material that allow inspectors to “listen” to growingcracksandother formsofdamage frommaterialsunderstressGuided wave testing: Guided wave ultrasonic are sentalongpipesystemstodetermineareasofconcern.The innovative technologies used in advanced NDTservices demand higher prices than traditional NDTservices and generally come with higher margins forservice providers1. Oftentimes, these technologies areemployed by NDT service providers using proprietarysoftware and techniques. Advanced NDT services havegrowninpopularitydespitebeingmoreexpensiveduetotheireffectivenessinproactivelydetectinginfrastructuraldeficienciesandpreventingfuturebreakdowns.AdvancedNDT services currently account for roughly 30% of totalindustry revenues1.However,weexpect thispercentageto grow in the coming years as technological changecontinues to make advanced NDT solutions more costeffective and widespread. We expect the NDT servicesindustrytogrowataCAGRof5.0%overthenextfiveyears,drivenprimarilybygrowthinadvancedNDTservices1.

EndMarkets

The following chart shows the percentage of total NDTrevenuesderivedfromendmarketindustries:

Source:IBISWorld

Historically,demand forNDTserviceshaspredominatelycome from operators in the oil and gas industry. Thesebusinesses are asset-intensive andmust adhere to strictinfrastructural requirements mandated by regulatoryagencies.Demandfromtheoilandgasindustrybegantodip in mid-2016, as NDT service providers began toexperiencetheeffectsoffallingoilpricesfrommid-2014through2015.Webelievethattherecentbounce-backinoilpriceswillcontinueoverthenexttwoyearsandallowfirmstorecover lostoilandgasrevenues(seeeconomicoutlooksectionformoredetailonoilpriceexpectations).However,demand forNDT services typically lagsoil andgasindustrygrowthby6-12months.Therefore,webelievedemandfromoilandgascustomerswillbegintostabilizeinmid-2017andfinallyreturntogrowthinmid-2018.

Insomecases,NDTserviceprovidersareslightlyinsulatedfrom decreased oil and gas demand because decreaseddemand causes oil and gas firms to delay capitalinvestment and therefore become more dependent onaging infrastructure. In a contractionarymarket, oil andgas firms may turn to NDT as a way to improve thelivelihood of capital assets rather than relying on newcapital expenditure. Also, ever-increasing environmentalregulationsmakeitmoredifficulttoconstructnewoilandgas facilities. For example, the last oil refinery withsignificantdownstreamcapacitytobeconstructedintheUnited States began operating in 19772. However, webelievethatthedeclineinoilpricesandproductionfrommid-2014through2015willoutweighgrowthfromtheuseofNDTasanintermittentcapitalexpenditure.Therefore,webelievethatNDTserviceproviderswillstruggleachievegrowth fromoil andgas customers in thenext 12 to18months.

Demand for NDT services has grown from other endmarket industries, as the benefits of NDT have become

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more widely recognized. Power generation facilities,aerospaceanddefensefirms,andindustrialcustomersarebecoming increasingly aware of the benefits of NDTservices. Each of these endmarkets have future growthopportunitiesbasedonuniquefactors.

Power generation facilities, including nuclear and fossil-fuel based power plants, rely extensively on piping,rotating equipment, and other plant components thatrequire constant inspection and monitoring. Theacceptance of asset protection solutions in this industryhas grown rapidly in recent years due to the aging ofcriticalpowergenerationandtransmissioninfrastructure.Forexample,theaverageageofanuclearpowerplantintheUnitedStatesis30years3.PowergenerationdemandforNDTserviceshasalsogrownduetoincreasingenergydemandsacrosstheglobe.EmergingeconomieslikeChinaandIndiacontinuetodemandmorepowerandthistrendis expected to continue in the future3. This presents anopportunity for NDT service providers to achieveinternationalgrowthandpenetrationofneweconomies.

AerospaceanddefensefirmsuseNDTservicesasawayofassuring the safety and reliability of raw materials. Asaerospace and defense manufacturers continue toexperiment and innovate with synthetic and compositematerials, which require extensive testing beforeimplementation, demand for NDT services shouldcontinuetogrowinthissegment.

Recent growth in industrial markets has come frommanufacturing’s increasing relianceonroboticassembly,especially in automotive, consumer electronics andmedical industries3. These industries have strict qualitycontrol requirements and NDT services ensure qualitywhile also preventing production shutdowns that canseverelydamageamanufacturer’soperatingresults.

WebelievethatNDTserviceproviderswillseemorerapidgrowth in these secondary endmarket segments in thenextfiveyears.GrowthinsecondaryendmarketindustriesprovidesopportunitiesfortheNDTindustrytoexpandanddiversify its revenue streams. In particular, NDT serviceprovidersthataregeographicallydiverseandhaveawiderangeofproductsandservicesareinthebestpositiontotakeadvantageofthegrowingdemandforNDTservices.Withonlyafewlargeplayersintheindustry,thesefirmsstandtobenefitthemostfromtheemergingacceptanceofNDTinawiderangeofendmarketindustries.

RECENTDEVELOPMENTS

U.S.PresidentialElection

TherecentelectionofDonaldTrumpmayhaveanimpactontheperformanceofNDTserviceprovidersinthenearfuture. Continued uncertainty about Trump’s policiesmakes it difficult to forecast the direct effect of thepolitical environment on the NDT services industry.However,theNDTservicesindustrystandstobeaffectedby policy decisions impacting regulatory requirements,amongothers.

Trump’svictoryhascreateduncertaintyaboutthefutureofstringentenvironmentalregulationintheUnitedStates.AsignificantportionofNDTservicerevenuescomefromtheOil&Gasindustry,whichhasbecomeaccustomedtointense regulation over the years. All signs point to theTrump administration and a republican-led congressactinginsupportofoildrilling.Iftrue,prodrillingpoliciescoupledwithourexpectationsofrisingoilpricesoverthenext two years indicate that oil and gas revenues willrecoverintheNDTindustryafterrecedinginthelastyear.However,webelievethatthisrecoverywillnotbeginuntil2018.

NDTrevenuesfromoilandgascustomerscomepartiallyfrom mandatory testing needed for firms to meetregulatory standards. One risk of looser environmentalregulationsisthatsomeNDTservicesemployedbytheoilandgasindustrytomeetregulatoryrequirementsmaybelostasenvironmentalstandardsandtestingrequirementsbecomemorerelaxed.However,webelievethatthisriskisminimalbecause theoilandgas industrywill still faceintense regulation relative to other industries. Recentaccidents likeBP’sDeepwaterHorizonoil spill have alsoraisedthelevelofsafetyandenvironmentalawarenessofoilandgasoperators,asfirmsrecognizethepotentialofsimilareventstocausedamagetobrandimageandprofits.Therefore, we believe that more lax environmentalregulationsandprodrillingpolicieswillbeanetbenefitfortheNDTservicesindustryinthenearfuture.

AgingPublicInfrastructure

The following chart illustrates thephenomenonofagingpublicinfrastructureintheUnitedStates:

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Source:BureauofEconomicAnalysis

Asinfrastructureages,theneedforNDTservicesincreasesinordertokeepinfrastructurefunctionalandsafeforthepublic. President Trump campaigned on a promise torebuildAmerica’scrumblinginfrastructure,buthasyettolay out a firm plan of action. Trump’s advisors haveindicated that an eventual agreement between thePresidentandCongresscouldbudgetup to$1 trillion torebuildAmerica’sroads,bridges,airports,etc.4.However,thisproposalwilllikelyfacebureaucraticdelaysandisstillfarshorttheAmericanSocietyofCivilEngineers’estimateof$3.6trillionneededtomaintainAmericaninfrastructureby 20205.Therefore, we predict that infrastructure willcontinuetoageintheyearstocome,whichsuggeststhatthe demand for NDT services will continue to increasefrompublicinfrastructurerelatedtesting.

ReboundinOilPrices

NDTserviceprovidersareaffectedbyoilprices,asroughlyhalfoftheindustry’srevenuescomefromtheoilandgasindustry. Oil prices fell significantly from over $100 perbarrelinmid-2014toroughly$35perbarrelbytheendof2015.NDTserviceprovidersdidnotlosesignificantoilandgasrevenues in2015,butoilandgasrevenuesbegantosufferinmid-2016andcontinuetodeclineinearly2017.Oil prices rebounded slightly throughout 2016 andcurrently sit around $53 per barrel. Further increases inthepriceofoilwillincentivizeproductionandleadtomoreuseofNDTservicesbyoilandgasoperators.Weexpectthatoilpriceswillremainnearcurrentpricesforthenextsixmonths,but increase to$58-60perbarrelwithin the

next two years (for more information on oil marketconditions,seetheeconomicfactorssectionfoundlaterinthisreport).Webelievethatrenewedgrowthinoilandgasmarkets will begin to benefit NDT service providers by2018.

INDUSTRYTRENDS

RisingCostofCapital

Federal Reserve officials hinted at three rate hikesthroughout20176.WhilerateswereleftunchangedintheFed’sfirstmeetingof2017,theFOMCacknowledgedrisingbusinessandconsumerconfidencefollowingtheelectionof Donald Trump as president and reiterated itsexpectations that rates will rise gradually in 20177. Weexpectratestoremainrelativelyunchangedoverthenext6months,butforesee2-3hikesintheFedFundsratebytheend0f2018thatwouldbringthetargetFedFundsratebetween1%and1.25%.

Rising rates increase firms’ cost of capital anddisincentivizes capital outlay for new equipment andinfrastructure. This trend bodes well for NDT serviceproviders, as the demand for NDT services stands toincreasewithmorefirmsseekingavenuestoincreasethelivelihoodandutilizationratesofagingfixedassets.

M&AGrowth

UsersofNDTtechnologyhavebecomeincreasinglylikelyto seek a “one source” provider of asset protectionsolutions.Althoughthisshiftbegan intheearly1990s, ithasacceleratedinrecentyear.Moreandmorefirmsareseeking out NDT service providers that can not onlyprovide testing capabilities, but can also provideenterprise software that allows testing results to becaptured, stored, analyzed and reported in a singleelectronicformat.Asmoreadvancedtestingsolutionstakehold, vendors offering broad, complete and integratedservices will continue to grow their competitiveadvantage3.

Inlinewiththistrend,existingplayersintheNDTservicesindustryhavesoughtoutgrowth throughacquisitionsofsmallerNDTprovidersservinguniquegeographicregionsornichemarkets.MistrasGroupandTeam,Inc.,thetwolargestplayers in theNorthAmericanNDTmarket,haveexhibited this increased consolidation activity. Forinstance,TeamacquiredQualspecGroupinJuly2015for

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$255millionand,inFebruaryof2016,completedamergerwith Furmanite Corporation in which Team acquired alloutstanding shares of Furmanite Corporation for $355million8,9. Mistras has had less significant acquisitionactivity, but still acquired two companies during fiscal2016andfourcompaniesinfiscal2015foratotalof$37.6million3.Both firms listacquisitionsasamajor sourceofgrowthmoving forward, which indicates that this trendwillcontinueinthecomingyears3,8.

Ourexpectationofrising interestratesposesathreattorapid industry consolidation through M&A. Rising ratesincreasethecostofborrowingandcanaffectthevalueofM&Adeals,especiallyifthedealsarebeingfinancedwithdebt.However,webelievethatthefragmentednatureofthe NDT industry will continue to provide ampleopportunityforconsolidationinthecomingyearsaslargerfirmsseektodiversityrevenuestreamsgeographicallyandacrossendmarketindustries.

TechnologicalInnovation

Technological innovation will drive future growth bymaking NDT safer, more effective and more costconscious.PerhapsthebiggestthingtomonitorinregardstotechnologicalinnovationisautomatedNDTtechnologydecreasingtheneedforskilledtechnicians,whosewagesincrease prices and cut NDT profit margins. Currently,wages account for a significant portion of operatingexpenses forNDT service providers, as demonstrated inthechartbelow:

Source:IBISWorld

The industry is currently experiencing reduced need forskilledtechniciansduetodecreaseddemandfromtheoilandgasindustry.However,industrycompetitorsfacethethreatofwagepressureandincreasedlaborcostsasthedemand for NDT services, and therefore the need forskilledtechnicians,increases3.WebelievethatNDTserviceproviderswill be subject to increased labor costs in thecoming years because of growing demand for NDTservices. However, we also believe that technologicalinnovations leading to automated services will allowcompetitorstomaintainorevenslightlyexpandoperatingmarginsinthecomingyearsastheindustry’srelianceonwagelaborbecomeslessprofound.

TheevolutionarynatureofNDTalsogivesanadvantagetomore established industry players with strong customerrelationships, significant R&D spending and existingproprietary technologies. Companies such as MistrasGroup and Team, Inc. are in the best position to takeadvantage of technological advances and productimprovementintheNDTspace.

Largeanddiversifiedfirmswillalsohaveanadvantageincapturingmarketshareofnewandemergingendmarketindustries.Thesecompanieshavethepotentialtoleveragetheir intellectualproperty, reputationandabroadrangeof products and services to appeal to first timeusers ofNDTtechnology.

MARKETSANDCOMPETITION

NDTserviceprovidersoperateinacompetitive,buthighlyfragmented,market.FewprovidersofferabroadrangeofNDT services across expansive geographic regions.Instead, many competitors offer unique or specializedservicesfocusedonanichemarketorgeographicregion.The following chart shows the market share, as apercentageoftotalindustryrevenues,ofthethreemajorplayersintheindustrycomparedtoallotheroperators:

Source:IBISWorld

As demonstrated by the chart above, the three largestplayers in the industry account for nearly half of NDT

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revenues.Weexpectthisnumbertogrowintheyearstocome, as consolidation and technological advancementwillbenefitlargeanddiversifiedNDTserviceproviders.

In the currentNDTmarket, NDT service providers oftencompeteonspecialtyduetothedynamicsoftheindustryanditshostofsmall,niche,operators.Outsideofspecialty,traditional NDT providers compete mainly on projectmanagementandexecution,price,reputationandquality.IntheadvancedNDTmarket,reputation,qualityandfirmsize aremore important thanprice3.NDT firms typicallyenterintoserviceagreementswithcustomersthatmaybeterminated by either party on short notice8. Competingfirms also enter into a select number of long-termcontracts.However, these long-termserviceagreementsconstitute a smaller portion of revenues and typicallyinvolve engineering and manufacturing of customproductsandservices3.Therefore,muchofafirm’ssuccessdependsonitsabilitytoconsistentlymanageprojectsinatimelyandcosteffectivemanner.

BarrierstoEntry

OnebarrierthatnewentrantsfaceintheNDTindustryistheneed todeveloporacquiresignificant technology tocompete againstmore established industry participants.These technologies, particularly those needed to deliveradvancedNDTsolutions,oftendevelopoverseveralyearsof customer engagement and R&D. Proprietarytechnologiesusedbyestablishedindustryparticipantscangreatly enhance the accuracy and timeliness of testingresults.

When conducting NDT testing, firms must also have aknowledge and understanding of complex safety codesand regulations that affect testing as well as the endmarketindustry.Inmanycases,NDTfirmsandtechniciansmust go through extensive certification and licensingprocesses to ensure their understanding of these safetycodes. Furthermore, large customers want NDT testingadministeredbycompanieswithanestablishedreputationandwithwhomtheyhaveconductedbusinesswithinthepast3. These factors contribute to the already strongbarrierstoentrythatresultfromthevalueofproprietarytechnologyinthemarketforNDTservices.

LifeCycleStage

TheNDTindustryisstillinitsgrowthstage,astheindustryisexpected togrow faster than thegrowth rateofGDP.

While5-year growthestimates for the industry reachashighas6.3%,weexpectamoremodest4.0%CAGRoverthenextfiveyearsduetoourexpectationsforlaggingoiland gas demand through mid-20171. Recent industrygrowthhasbeenaccompaniedbyconsolidation,whichisa trend we expect to continue in the near term. Inparticular, the demand for advanced NDT services isgrowing rapidly, as its widespread benefits are beingrealizedbyconsumersfromabroadrangeofendmarketindustries. The high-growth stage of advanced NDTtechnologyisevidencedbythefactthatfirmscompeteonthequalityoftheserviceofferingandcompanyreputationmore than the price of the service itself3. We expectadvanced NDT to be a strong contributor to the NDTservicesmarketoutpacingGDPoverthenextfiveyears.

IndustryOutlook

WeexpecttheNDTservicesindustrytogrowatamodestCAGRof4.0%overthenextfiveyears,asfirmsstruggletorecapturedemandfromoilandgascustomersinthenear-term.Webelieve thatoilandgas revenueswillbegin tostabilize inmid-2017 and resume growth by the end ofcalendar2018,withmodestgrowththereafter.Weexpectthe most significant growth in NDT services industry tocome from secondary markets such as publicinfrastructure, power generation, industrials andaerospaceanddefense.Webelievethateachoftheseendmarket industrieshave thepotential forhighsingle-digitgrowthoverthenextfiveyears.

While theexact futureof regulation isalwaysuncertain,thegeneraltrendtowardsincreasingregulationstandardsforthehealth,safetyandprotectionoftheenvironmentshould bolster the demand for NDT services. We alsoexpectdemandforNDTservicestocontinuegrowingasaresultofmorecomplexinfrastructureandtheneedtotestfor the reliability of more advanced machines,automobiles, and airplanes using a wide variety ofsynthetic raw materials. Lastly, as public infrastructurecontinues to age, we believe that NDT will play anincreasing role in monitoring for potentially harmfuldefectsandpreventinginfrastructuralfailure.

Large NDT service providers with diversified geographicand service offerings are in the best position to takeadvantage of growth in the broaderNDTmarket. Thesefirmswillbenefitfromproprietarytechnologies,strongerR&D,priorrelationshipswithcustomersandtheabilitytooffer a multitude of NDT solutions to customers. The

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advantage of the largest NDT service providers willcontinue to grow as these firms consolidate smallcompetitorsandexpand integratedserviceofferingsandgeographicreach.

PeerComparisons

TheNDTservices industry isextremelyfragmented,withover 1,600 providers.However,most of these providersofferspecializedorlocalizedservices1.Thereareveryfewfirms thatofferbroadcoverage in termsofproductandserviceofferings, aswell as geographic reach. The threelargest players in the North American NDT market areMistrasGroup,TeamInc.andRockwoodServicesGroup.These firms offer NDT services to a broad range of endmarketusersthroughouttheUnitedStatesandabroad.Ofthese three competitors, Mistras Group (NYSE:MG) andTeam, Inc. (NYSE:TISI)are the only two that are publiclytradedintheUnitedStates.

ThefollowingchartsshowtheportionofrevenuesbyendmarketindustryforMistrasGroupandTeam,Inc.infiscal2016:

Source:MistrasGroup201610-K

Source:Team,Inc.2016InvestorPresentation

Of the two largest public competitors, Team, Inc. reliesmost heavily on the oil and gas industry for revenues.Roughly75%ofTeamInc.’s revenuescomefromoilandgas infrastructure projects and processes. Conversely,MistrasGroupattributed56%ofrevenuestooilandgascustomersinitsmostrecentfiscalyear3.

Important operating and valuation statistics for MistrasGroupandTeamcanbefoundbelow:

MG TISIOperatingMargin 6.00% 8.13%ProfitMargin 3.43% 4.76%ReturnonAssets 5.17% 7.94%ReturnonEquity 9.46% 12.51%P/E 27.7 31.0EV/EBITDA 10.6 9.4

DataSource:Bloomberg

ItisimportanttonotethatTeamhasoperationsoutsideoftestingand inspectionthatmayskewprofitabilitymetriccomparisons.Roughly90%ofTeam’srevenuesinitsmostrecent fiscal year came from inspection and testingproducts and services, as compared to nearly 100% ofMistras’revenuesinitslastfiscalyear.Theremaining10%ofTeam’srevenuescomefromoilandgasinfrastructureconsulting services, which provide higher operatingmargins of nearly 18%8. This high-margin businesssegmentmaygiveTeamaprofitabilityadvantageduringperiodsofstrongdemandfromoilandgascustomers.

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ItisclearwhencomparingthetwocompaniesthatTeamreliesmoreheavilyontheoilandgasindustry.AsignificantportionofMistras’revenuesalreadycomefromotherendmarket industries, such as public infrastructure, powergeneration, manufacturing and aerospace and defense.Therefore, Mistras Group is slightly less prone tomovementinoilmarketsandthevolatilitythatcancomeasaresultofmarketforces.

ECONOMICOUTLOOK

The NDT industry faces pressure numerous economicfactors, including interest rates,oil prices,oil rig counts,GDPgrowth,unemploymentandindustrialproduction.

InterestRates

Source:FederalReserveEconomicData(FRED)

While interest rates remain low relative to historicalfigures, rates have been trending upward over the lastyearwithacurrenttargetFedFundsRateof0.50%-0.75%,acurrentT-billyieldof0.82%andacurrent10-yearT-Bondyield of 2.48%. We expect rates to remain relativelystagnantinnextsixmonths.However,weexpect2-3ratehikesoverthecourseofthenexttwoyearsthatwillbringthetarget ratebetween1%and1.25%.WeexpectT-Billyieldstoincreaseto0.9%-1%overthenexttwoyearswhilewe expect 10-year T-Bond yields to increase to roughly2.8%-2.9%duringthatsameperiod.

Ingeneral,risinginterestratesposeathreattothecyclicalindustrials sector.However,webelievethatNDTserviceprovidersareslightlyinsulatedfromthisrisk.Risingratesgenerally lead to delayed capital expenditure andcompanieslookingforwaystoimproveassetperformanceand livelihood without significant capital outlay.

Therefore,webelieve that theNDT industry is in betterpositiontonavigatearisingrateenvironmentthanmoretraditionalindustrialfirms.

OilPrices

Source:Nasdaq

Crude oil prices rebounded slightly in 2016, after aprecipitousfallspanningfrommid-2014through2015.Weexpectcrudeoilpricestoremainnear$53perbarrelinthenext 6months. However,we expect a slight increase inpriceto$58-60perbarreloverthenexttwoyearsdrivenprimarilybyOPECsupplycuts.

IncreasingoilpricesareapositivesignforprovidersofNDTservices,asroughly50%ofindustryrevenuescomefromoil and gas customers. Higher oil prices incentivizeincreasedproductionthatultimatelyleadtowearandtearonoilandgasinfrastructure.

OilRigCount

Source:BakerHughes

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AsofFeb.3rd,2017,theUSoilrigcountreacheditshighestlevelsinceOctoberof2015.Thiscomesafterninemonthsofrecoveryindrillingactivity,aidedbyOPEC’sdecisiontocutsupplieslastNovember10.IncreasingdrillingactivityisapositivesignfortheNDTindustry,asdrillingactivityleadstowearandtearoncapitalassetsandultimatelytheuseofNDTservicesbyoilandgasfirms.Increasedoildrillingalso leads to more demand for NDT services furtherdownstream.

Webelieve thatdrilling activitywill level off in thenearterm,butincreaseslightlyoverthenexttwoyearsinlinewithoilpriceappreciation.WealsobelievethattheNDTservices industry stands to benefit from new pipelineprojects, such as theDakotaAccess andKeystoneXL oilpipelines, launching in the coming years.While theNDTindustry is currently struggling to maintain oil and gasrevenues,webelievethattheNDTindustryshouldbegintorecoveritslostoilandgasrevenuesinlate2017.

GDP

Source:FRED

Initial estimates indicate that the U.S. GDP grew at anannual rate of 1.9% in the fourth quarter of 2016. Thiscomesafter apromising3.5%annualizedgrowth rate inthe third quarter of 2016. All told, U.S. GDP grew at anestimated annual rate of 1.6% in 2016, its worstperformance since 2011. Slow economic growth wascaused primarily byweak oil prices, a strong dollar andefforts by businesses to reduce a large inventoryoverhang11.

WebelievethatGDPgrowthwillimprovetoanannualizedrateof2.5%-3%inthenextsixmonthsandanannualizedrateof3%-3.5% in thenext twoyears.Thisprediction is

driven primarily by expectations for a more business-friendlytaxcodeandimprovingconsumerconfidence.

Unemployment

Source:FRED

Unemployment rates have been steadily dropping inrecent yearsandcurrently sit around4.7%12.Weexpectunemployment rates to remain relatively flat in theforeseeablefuture,asimprovingGDPgrowthcontinuestobemetwithinterestratehikes.

NDT service providers are affected by unemploymentrates in the form of wages paid to employees. Asmentioned,wagesareakeyinputinthedeliveryofNDTservices given the training and certification processnecessarytobecomeatechnicianforcertainNDTserviceofferings. As unemployment remains at relatively lowlevels,NDTserviceprovidersmayfacewagepressurefromskilled laborers. However, we believe that this threat issomewhatmitigatedbytheshifttomoreautomatedNDTservices in the future. Furthermore, increased revenuesfrom advanced NDT services stand to increase industrymarginsandmakeupforanyincreasesinwageexpenses.

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IndustrialProduction

Source:FRED

Industrial production peaked in mid-2015, but hasremained relatively strong since. However, industrialproductionlevelsfacethethreatofrisinginterestratesinthe years to come that could slow the economy anddecreaseassetutilization.Furtherdecreases in industrialproduction could hurt NDT revenues from industrial orotherprocessorientedindustries.

CATALYSTSFORGROWTH

Inthenearterm,NDTindustryrevenuegrowthislikelytocomefromstrengtheningoilmarketsandthesubsequentrise in oil and gas production activity. Strength in oilmarketsdrivesassetutilizationand,ultimately,theneedfor NDT services to monitor and maintain criticalinfrastructure.Therefore,anyincreaseinoilpricesintheneartermshouldbebeneficialfortheNDTindustryanditsparticipants.

Wealsobelievethattheindustry’slargestplayershavethepotentialtodiversifyrevenuesandbecomelessreliantontheoilandgasindustry.Growthinendmarketsoutsideofoil and gas looks promising given a number of marketfactors. Increasing complexity of industrial materials,productsandmachineryshouldbodewell for theuseofNDT in these areas. Aging public infrastructure andincreasingpublicsafetyregulationspointtoNDTgrowthinpublicinfrastructure.Ifthesetrendscontinueintheyearstocome,thedemandforNDTservicesoutsideofoilandgaswillincreaseaccordingly.

INDUSTRYPOSITIVES

• Momentuminoilmarketsstandstobringbacklostoilandgasrevenuesbylate-2017orearly-2018

• Industryprofitmarginshavethepotentialtoimprovein the future, as technological innovation leads tomoreautomatedtestingservices

• The NDT industry is more insulated from economicdownturnsthanmoretraditional industrialfirmsduedelayed capital expenditure in a contractionaryeconomy

IDUSTRYNEGATIVES

• As of today, NDT service providers remain largelydependent on oil and gas firms for revenues.WhileNDT revenues stand to grow in other end markets,near-termperformancewillstillbeaffectedbyweakdemandfromoilandgascustomers.

• GrowththroughM&Acomeswiththeriskthat firmswill struggle to continue finding viable acquisitiontargetsandnotachieveexpectedgrowthrates

KEYSTOMONITOR

Oil prices are a key factor tomonitor going forward, asreliance on oil and gas revenues continues in the NDTindustry.Whilewebelievethatoilpriceswillinchcloserto$60perbarreloverthenexttwoyears,butanydecreasein the price of oil could hurt revenues for NDT serviceproviders.

Infrastructure spending should alsobemonitored in thecomingyears.NDTservicesareexpected togrow in thissegmentdue to the trendof agingpublic infrastructure.However, significant investment in public infrastructureimprovements could slow the aging process and reducetheneedforNDTservices.Investorsshouldalsomonitorcapital expenditure trends in industrial and powergenerationmarkets,as increasedcapitalexpenditure fornewinfrastructureandmachinerywillhurtNDTrevenuesfromtheseindustries.

Lastly, investors should monitor the progress of NDTgrowth innewandemergingendmarket industries. Forinstance,growthinareassuchasaerospaceanddefense,manufacturing and medicine is important to diversifyrevenuesandreducetheindustry’sfuturerelianceonoilandgascustomers.

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REFERENCES

1. IBISWorld Industry Report, Nondestructive TestingServicesintheU.S.

2. U.S.EnergyInformationAdministration-FAQ3. MistrasGroup201610-K4. Bloomberg:“FedExPushesforInfrastructureasTrump

WeighsInvestment”5. American Society of Civil Engineers: American

InfrastructureReportCard(www.asce.org)6. Yahoo Finance: “Fed Hikes Rates, Sees 3 More Rate

Hikesin2017”7. Bloomberg: “FedNods to Improving SentimentWhile

LeavingRatesUnchanged”8. Team,Inc.201610-KT9. Team,Inc.InvestorRelationsrelease(11/2/2015)10. Reuters: “U.S. Oil Rig Count Rises to Highest Since

October2015”11. YahooFinance:“U.S.EconomySlowsonWiderTrade

Gap;BusinessSpendingRises”12. Federal Reserve Economic Data (FRED) – Federal

ReserveBankofSt.Louis

IMPORTANTDISCLAIMER

HenryFundreportsarecreatedbystudentenrolledintheAppliedSecuritiesManagement(HenryFund)programatthe University of Iowa’s Tippie School of Management.Thesereportsareintendedtoprovidepotentialemployersandotherinterestedpartiesanexampleoftheanalyticalskills,investmentknowledge,andcommunicationabilitiesof Henry Fund students. Henry Fund analysts are notregistered investment advisors, brokers or officiallylicensed financial professionals. The investment opinioncontained in this report does not represent an offer orsolicitation to buy or sell any of the aforementionedsecurities. Unless otherwise noted, facts and figuresincludedinthisreportarefrompubliclyavailablesources.Thisreportisnotacompletecompilationofdata,anditsaccuracy is not guaranteed. From time to time, theUniversityofIowa,itsfaculty,staff,students,ortheHenryFund may hold a financial interest in the companiesmentionedinthisreport.