Form 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172023
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number 001-34481
Mistras Group, Inc.
(Exact name of registrant as specified in its charter)charter)
| Delaware | ||||||||
| 22-3341267 | ||||||||
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification | |||||||
195 Clarksville Road
Princeton Junction, New Jersey 08550
(Address of principal executive offices) (Zip Code)
(609) 716-4000
(Address, including zip code, andRegistrant's telephone number, including area code of registrant’s principal executive offices)
)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $.01 par value | MG | New York Stock Exchange | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whetherif the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”).Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer | ||||||||||
| x | |||||||||||
Non-accelerated filer o | Smaller reporting company | ☐ | |||||||||
Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. Yes ☐ No ý
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to § 240.10D-1(b). Yes ☐ No ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No ý
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of June 30, 2017,registrant, based uponon the closing price of $7.72 on June 30, 2023, the common stocklast business day of the registrant's most recently completed second fiscal quarter, as reported byon the New York Stock Exchange, on such date was approximately $377.7$158.4 million.
As of March 5, 2018,6, 2024, the Registrant had 28,301,59830,634,785 shares of common stock outstandingoutstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to portions of the registrant’s definitive Proxy Statementproxy statement for its 2018 Annual Meeting2024 annual meeting of Shareholdersstockholders (the “Proxy Statement”), which is expected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2017.2023. Except as expressly incorporated by reference, the Proxy Statement shall not be deemed to be a part of this report on Form 10-K.
Auditor Name: PricewaterhouseCoopers LLP Auditor Location: Philadelphia, Pennsylvania Auditor Firm ID: 238
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MISTRAS GROUP, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS | |||||||||||
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ITEM 1.BUSINESS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this "Annual Report") contains forward-looking statements regarding us and our business, financial condition, results of operations and prospects within the meaning of Section 27A of the Securities Act of 1933, (Securities Act)as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, (Exchange Act).as amended (the "Exchange Act"), regarding Mistras Group, Inc. ("Mistras," "MISTRAS," "the Company," "us," "we," "our" and similar expressions) and our business, financial condition, results of operations and prospects. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.
In some cases, you can identify forward-looking statements by terminology, such as “goals,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “could,” “should,” “would,” “predicts,” “appears,” “projects,” or the negative of such terms or other similar expressions.expressions, although the absence of such words does not mean that a statement is not forward-looking. Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those discussed elsewhere in this Annual Report in Part I, Item 1A. “Risk Factors,” Part 2,II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in this Item 1, as well as those discussed in our other Securities and Exchange Commission (SEC) filings.1. We undertake no obligation to (and expressly disclaim any obligation to) revise or update any forward-looking statements made herein whether as a result of new information, future events or otherwise.otherwise, except as may be required under applicable securities laws. However, you should consult any further disclosures we may make on these or related topics in our reports on Form 8-K or Form 10-Q filed with the SEC.Securities and Exchange Commission ("SEC").
The following discussions should be read in conjunction with the sections of this Annual Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”
Backed by an innovative, data-driven asset protection portfolio, proprietary technologies, and a decades-long legacy of industry leadership, the Company helps customers with asset-intensive infrastructure in the oil and gas, petrochemical, aerospace and defense, industrials, power generation and transmission (including alternative and renewable energy), other process industries and infrastructure, research and engineering and other industries towards achieving and maintaining operational excellence. By supporting these customers that help fuel our vehicles and power our society; inspecting components that are trusted for commercial, defense, and private space; and building monitoring equipment to help avoid catastrophic incidents, the Company helps the world at large.
The Company enhances value for its customers by providing data driven solutions that digitalize the asset protection process and provide valuable insights to our customers that maximize uptime of the assets monitored. Our data analytical solutions offerings, coupled with the traditional non-destructive testing ("NDT"), provide us a competitive advantage over our competitors. With our ability to integrate asset protection throughout supply chains and centralizing data management, we are able to provide insights and actionable recommendations to our customers through a comprehensive “OneSource” portfoliosuite of customizedIndustrial Internet of Things ("IoT")-connected digital software and monitoring solutions, utilizing a proven systematic method that creates a closed-loop lifecycleincluding OneSuite™, which serves as an ecosystem platform, pulling together all of the Company’s software and data services capabilities, for addressing continuousthe benefit of its customers.
The Company’s core capabilities also include NDT field inspections enhanced by advanced robotics, laboratory quality control, laboratory materials services, shop laboratory assurance testing, sensing technologies and NDT equipment, asset protection and improvement. These mission critical solutions enhance our customers’ ability to comply with governmental safetymechanical integrity engineering services, and environmental regulations, extend the useful life of their assets, increase productivity, minimize repair costs, manage risklight mechanical maintenance and avoid catastrophic disasters.access services.
Given the role our solutions play in ensuringenhancing the safe and efficient operation of our customers' infrastructure, we have historically provided a majority of our solutions to our customers on a regular, recurring basis. We perform these services largely at our customers’ facilities, while primarily servicing our aerospace customers at our growing network of state-of-the-art, in-house laboratories. These solutions typically include Non-Destructive Testing (NDT)NDT and inspection services, and can also include a wide range of
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mechanical services, including engineering assessments, heat tracing, pre-inspection insulation stripping, inspections, coating applications, re-insulation, engineering assessments and long-term condition-monitoring. Our traditional NDT solutions, coupled with our data analytical solutions offerings, allow us to provide accessible and easily understood data to our customers that allows them to identify when an asset may fail, in order to prioritize inspections and repair.
Under thisour business model, many customers outsource their inspection to us on a “run and maintain” basis. We have established long-term relationships as a critical solutions provider to many of the leading companies with asset-intensive infrastructure in our target markets. These markets include companies in the oil and gas, (downstream, midstream, upstream and petrochemical), commercial aerospace and defense, industrials, power generation (natural gas, fossil, nuclear, alternative, renewable, and transmission (including alternative and distribution)renewable energy), publicother process industries and infrastructure, chemicals, transportation, primary metals and metalworking and research and engineering institutions.and other industries.
We have focused on providing our advanced asset protection solutions to our customers using proprietary, technology-enabled software and testing instruments, including those developed by our Products and Systems segment. In the past, we have made numerous acquisitions in an effort to grow our base of experienced, certified personnel, expand our service lines and technical capabilities, increase our geographical reach, complement our existing offerings, and leverage our fixed costs. We have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the integration of acquired companies. These acquisitions have provided us with additional service lines, technologies, resources and customers, which we believe will enhance our advantages over our competition.
We believe long-term growth can be realized in our target markets. Our business and financial results are impacted by world-wide macro- and micro-economic conditions generally, as well as those within our target markets. Among other things, we expect the timing of our oil and gas customers inspection expenditures to be impacted by oil price fluctuations.
We have continued providing our customers with an innovative asset protection software ecosystem through our MISTRAS OneSuite platform. The OneSuite platform offers functions of MISTRAS' software and services brands as integrated applications on a cloud environment. OneSuite serves as a single access portal for customers' data activities and provides access to 90 plus applications being offered on one centralized platform.
We have established long-term relationships as a critical solutions provider to many of the leading companies with asset-intensive infrastructure in our target markets. These markets primarily consist of:
•Oil and Gas (Downstream, Midstream and Upstream)
•Aerospace and Defense
•Industrial
•Power Generation and Transmission
•Infrastructure, Research and Engineering
•Other Process Industries
•Petrochemical
A majority of our revenues are generated by deploying technicians at our customers' locations. A majority of our revenues from aerospace and defense as well as certain manufacturing customers are generated by performing inspections and testing at our various in-house laboratories.
We generated revenues of $705.5 million, $687.4 million and $677.1 million for the years ended December 31, 2023, 2022 and 2021, respectively. We generated net loss of $17.4 million, a net income of $6.6 million and net loss of $3.9 million for the years ended December 31, 2023, 2022, and 2021, respectively. For the years ended December 31, 2023, 2022 and 2021, we generated approximately 82%, 83% and 82%, respectively, of our revenues from our North America segment. Our revenues are diversified, with our top ten customers accounting for approximately 35%, 33% and 33% of our revenues during the years ended December 31, 2023, 2022 and 2021, respectively, with no customer accounting for greater than 10% of our revenues in any such year.
OUR SPECIALIZED SOLUTIONS
As a globalprovider of asset protection leader,solutions, we combine our industry-leading services, products, data management and analytical solutions technologies to provide a comprehensive rangeunique and custom-tailored solution for each customer’s individual asset protection needs, ranging from routine inspections to complex, plant-wide asset integrity management programs.
Field Inspections
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Our field inspections portfolio includes traditional and advanced NDT techniques and inline inspection for pipelines. We offer these solutions that includes:on an individual basis, or as parts of enterprise inspection and testing programs.
Our automated data acquisition solutions utilize smart sensing and monitoring, robotic inspection systems, and digitized spot inspections to provide asset integrity data with greater insight into current and potentially future asset conditions.
Field inspection services include, for example,lend themselves to integration with our other offerings, and as such have often served as the initial entry point to more advanced customer engagements that require additional solutions. After an initial field inspection is performed, we are able to provide multiple supplemental solutions, such as maintenance services, engineering consulting and data analytical solutions services we provide, that further serve to solidify our relationships with our customers and drive additional revenue.
Data Analytical Solutions
The asset protection solutions that we provide throughout our customers’ asset lifecycles generate mechanical integrity (MI) assessments, aboveground storage tankdata that needs to be effectively archived, managed, and analyzed. A common difficulty that our customers face is the ability to easily access and analyze large volumes of data from multiple data collection and input sources. We recognize that this data is most valuable to our customers when it is accessible and integrated (regardless of vendor, tool, or facility), and we have taken significant steps to digitalizing asset protection processes through our data analytical solutions product offerings.
Our data acquisition capabilities capture asset data to help our customers follow regulatory compliance, ensure mechanical integrity, and reduce unplanned outages. We capture data using manned and automated techniques that minimize the impact on our customers' operations. Customers can access our collected data for all facilities, structures, and assets that we manage from one easy to use dashboard, which enables customers to evaluate trending and benchmarking across multiple sites seamlessly.
Customer data is managed in our asset protection software ecosystem, OneSuite. Our OneSuite software platform offers functions of our popular software and services brands as integrated applications in a cloud environment. Our OneSuite software platform serves as a single access portal for customers' data activities and provides access to 90 plus integrated applications being offered in one centralized platform.
Many customers take advantage of our data analytics capabilities that utilize technology to automatically generate insights and actionable recommendations that can be implemented to improve our customers' overall productivity. Our managed services integrate our data capabilities with data analysts, field personnel and engineers to provide a comprehensive solution to our customers that reduces our customers' overall costs.
Our customers within the oil and gas andpetrochemical industries take advantage of our industry-leading application Plant Condition Management Software (PCMS®). This application is one of the most widely used asset integrity management systems (“AIMS”). We estimate that our PCMS application is currently used by approximately 50% of the U.S. refiners, as well as by leading midstream pipeline energy companies and major oil and gas companies in Canada and Europe. This allows us to provide our customers with industry-leading insights across all their facilities and enables us to provide additional software and solutions to these customers and perform recurring maintenance where necessary.
Our pipeline customers utilize our Onstream® services and New Century® software platform to capture, manage and analyze pipeline integrity data in the midstream and upstream sectors of the oil and gas industry. We provide among the most comprehensive, data-driven pipeline protection solutions available to the industry. Our proprietary pipeline data analysis solutions enable deep integration of inline inspection ("ILI") big data with real-time risk analytics and business intelligence ("BI") to provide capabilities for supporting pipeline inspection, American Petroleum Institute (API) visual inspectionsintegrity, which we believe provides us with an important competitive advantage.
Our wind, power and predictive maintenance (PdM) programs.infrastructure customers implement our online condition-monitoring solutions that provide real-time reports and analysis of infrastructure to alert facility personnel to damages before critical failures occur, while our flexible, IIoT compatible, cloud-based online monitoring portal centralizes and analyzes all collected monitoring data. These monitoring solutions are often installed in hazardous or hard-to-reach locations, helping to enhance safety by reducing the need to send technicians into unsafe locations.
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Laboratory Testing
Our in-house laboratories work with our customers to test and measure utilized components throughout their lifetimes, from preparation and production to post-processing and in-service component monitoring. Our laboratory QA/QC solutions help to meet customer needs throughout their manufacturing cycles, with a focus on optimizing production logistics. Our in-house laboratory solutions include:
•Non-destructive evaluation/inspection ("NDE"/"NDI")
•Destructive testing ("DT")
•Metallurgical testing
•Chemical analysis testing
•Mechanical services
•Machining services
•Pre-machining
•Casting repair solutions
•Finishing services
We often inspect and test components prior to assembly to screen for defects and discontinuities introduced in the manufacturing process. We also inspect existing components to ensure they remain fit-for-purpose.
Our laboratories hold a wide variety of certifications, such as: Nadcap (formerly NADCAP, the National Aerospace and Defense Contractors Accreditation Program), AS9100/ISO-9001, Federal Aviation Administration Repair Station, and the International Traffic in Arms Regulations/Export Administration Regulations, that allow us to perform inspections which meet or exceed stringent regulatory and manufacturers' requirements. With these involve proprietary acoustic emission (AE), digital radiography, infrared, wireless and/or automated ultrasonic inspectionscertifications come a comprehensive range of approvals from prime contractors of major projects, militaries and sensors, which are operated byinternationally-renowned original equipment manufacturers ("OEMs") from many of our highly-trained technicians.
key markets, including the oil and gas, aerospace and defense, power generation and industrial markets.Maintenance
Our multi-disciplined technicians offer maintenance and light mechanical services in hard-to-access areas, in combination with rope access or diving strategies.
Mechanical services are still a small part of our business, and we are carefulcarefully try to try and avoid providing any such services that conflict with our inspection services.
Engineering Consulting
Our Asset Integrity Management ("AIMS") and Mechanical Integrity (MI)("MI") services help improve plant safety, asset reliability and regulatory compliance through a
systematic, engineering-based approach to ensure the on-goingongoing integrity and safety of equipment and industrial facilities. AIMS/MI services can include conducting an inventory of infrastructure assets; developing, implementing and training personnel in executing inspection and maintenance procedures; and managing inspections, testing, and assessments of customer assets.MI programs. We enable customershelp to identify gaps between existing and desired practices identify deficiencies and degradations, and establish quality assurance standards for fabrication, engineering and installation of infrastructure assets. Our MI solutions incorporate comprehensive (RBI) data analysis from our proprietary IDMS, providing detailed, integrated, cost-effective solutions that rate the risks
Access
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Equipment
We design and manufacture portable, handheld, wireless and turnkey NDT equipment, along with corresponding data acquisition sensors and software, for spot inspections and long-term, unattended monitoring applications.
We sell these solutions as individual components, or as complete systems, which include a combination of sensors, amplifiers, signal processing electronics, knowledge-based software and decision and feedback electronics. We also sell integrated service-and-system technology packages, in which our field technicians utilize our proprietary and specialized testing procedures and hardware, advanced pattern recognition, neural network software and databases to compare test results against our prior testing data or industry standards.
We provide a range of acoustic emission ("AE") products and are a leader in the design and manufacture of AE sensors, instruments and turnkey systems used for monitoring and testing materials, pressure components, processes, and structures. We also design and manufacture ultrasonic testing ("UT") equipment.
Most of our revenueshardware products are generated by deploying technicians at our customers' locations, where NDTfabricated, assembled and mechanical services are performed on-site. However, the majority of our aerospace revenues are generated at our various in-house laboratories that have Nadcap and numerous other customer accreditations. We have special machinery and equipment and specialized technicians at these labs to perform various forms of NDT inspection and mechanical services, which can include chemical cleaning, coating application, painting, and pressure testing techniques. Our labs hold a wide variety of certifications that allow them to perform inspections to meet or exceed stringent regulatory requirements, such as: Nadcap, AS9100/ISO-9001, FAA Repair Station and ITAR/EAR. With these certifications comes a comprehensive range of approvals from prime contractors of major projects, the military, and internationally-renowned products and systems manufacturers from aerospace to nuclear energy, transportation to petrochemical industries.
Centers of Excellence
Another differentiator in our business model is our Centers of Excellence ("COEs"), which offer support for asset, technology or industry-specific solutions. Our subject matter experts engage in strategic sales opportunities to protectoffer customers value-added solutions using advanced technologies and methods. The COEs help to standardize our investmentapproach to common problems in intellectual property while providing our customers an added value which generates a substantial source of recurring revenues. key market segments. Our COEs include:
•American Petroleum Institute ("API") Turnarounds
•AIMS/MI/Engineering
•Automated Ultrasonics
•Fossil Power
•Guided Wave Ultrasonics
•Mechanical Services segment. Our revenues are diversified, with our top ten customers accounting for approximately 38%, 37%, 36% and 33% of our revenues during the year ended December 31, 2017, the transition period ended December 31, 2016 and fiscal 2016 and 2015, respectively.
•Nuclear Power
•Phased Array
•Rope Access
•Wind
•Tank Inspection
•Tube Inspection
•Unmanned Systems
ASSET PROTECTION INDUSTRY OVERVIEW
Asset Protection Industry Overview
NDT has historically been a prominent solution in the asset protection industry due to its capacity to detect defects without compromising the usefulnessstructural integrity of the tested materials or equipment. The evolutionTraditionally, the supply of NDT inspection services has been provided by many relatively small vendors, who provide services in combination with broader industry trends, including increased asset utilization and aging of infrastructure, includes the desire by owners to extend the useful life of their existing infrastructure, new construction projects, enhanced government regulation and the shortage of certified NDT professionals, have made NDT an integral and increasingly outsourced part of many asset-intensive industries. The industry has progressed such that end users are actively seeking firms that can provide asset protection solutions to both in and out of service issues.
Due to a transition from traditional NDT solutions to more advanced solutions that employ automated digital sensor
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advanced solutions and data analytics, by virtue of their access to customers’ data, create a significant barrier to entry for competitors, leading to the opportunity to further create significant recurring revenues.
Key Dynamics of the Asset Protection Industry
We believe the following represent key dynamics of the asset protection industry:industry, and that the market available to us will continue to grow as these macro-market trends continue to develop:
Digital Transformation of Asset Protection. Plants in the oil and gas, petrochemical and other process industries are recognizing the need to evolve their traditional, paper-based mechanical integrity programs in favor of digitalized solutions. The rise of big data intelligence, and our data analytical solutions offerings, provide our customers with actionable insights from raw asset integrity data. The growing digitization of asset protection provides opportunities for contractors with a wide range of asset protection expertise and integrated data platforms to provide customers with data analytical solutions to help customers maximize uptime while controlling costs.
Extending the Useful Life of Aging Infrastructure. TheInfrastructure While Increasing Utilization. Due to the prohibitive costcosts and challengechallenges of building new infrastructure, has resulted in the significant aging of existing infrastructure and causedmany companies to seek wayshave chosen to extend the useful life of existing assets through enhancements, rather than replacing these assets. For example, due toThis has resulted in the significant cost associated with constructing new refineries, stringent environmental regulations which haveaging and increased the costsutilization of managing them and difficultyexisting infrastructure in finding suitable locations on which to build them, only one new refinery has been constructed in the United States since 1976. Another example is in the area of power transmission and distribution. The Smart Grid initiative in the United States is causing increased loading on aging transformers that are more than 40 years old in many cases. The need to test and monitor these units to ensure their reliability until replacement is instrumental in support of a reliable Smart Grid network.our target markets. Because aging infrastructure requires relatively higher levels ofmore frequent inspection and maintenance and repair in comparison to new infrastructure, as well as more frequent, extensive and ongoing testing, companies and public authorities continue to spend on asset protection solutions to ensure the operational and structural integrity of existing infrastructure.
their aging infrastructure assets continue to operate effectively.Outsourcing of Non-Core Activities and Technical Resource Constraints. TheConstraints. Due to the increasing sophistication and automation of NDT programs, together with a decreasing supply of skilled professionals and stricter and increasing governmental regulations, has caused many companies and public authorities to outsource NDT and other services rather than recruit and train such capabilities internally. Owners and operators of infrastructure are increasingly contractingoutsourcing NDT to third-party providers with third party providers that have the necessary technical product portfolio,advanced solution portfolios, engineering expertise technical workforce and proven track record of results-oriented performance to effectively meet their increasing requirements.
trained workforces.Increasing Corrosion from Low-Quality Inputs.Inputs. The increased availability and low cost of crude oil from areas such as shale plays and oil sands resources have led to the use of lower gradelower-grade raw materials and feedstock used in refinery and power generation processes. These lower grade raw materials and feedstock,feedstock. This leads to higher rates of corrosion, especially in the case of the refining processprocesses involving petroleum with higher sulfur content, can rapidly corrode the infrastructure with which they come into contact, which in turn increases the need for asset protection solutions to identify such corrosion and enable infrastructure owners todetect and/or proactively combat the problems caused by such corrosion.
prevent corrosion-related issues.Increasing Use of Advanced Materials.Materials. Customers in ourvarious target markets - particularly aerospace and defense - are increasingly utilizing advanced materials, such as composites and other unique technologies in the manufacturing and construction of new infrastructure and aerospace applications. As a result, they require advanced testing, assessment and maintenance technologies to inspect and to protect these assets, since many of these advancedtheir assets. These materials often cannot be tested using traditional NDT techniques. We believe that demand for NDTmore advanced testing and assessment solutions will increase as companies and public authorities continue to usethe utilization of these advanced materials not only during the operating phase of the lifecycle of their assets, but alsoincreases during the design, manufacturing, operating and quality control phases and are more frequently integrating and embedding sensors directly into the end product in support of total life cycle asset management.
phases.Meeting Safety Regulations.Regulations. Owners and operators of infrastructure assetsrefineries, pipelines and petrochemical and chemical plants increasingly face strict government regulations and more stringent process safety requirements.enforcement standards. This includes the continued implementation of the Occupational Safety and Health Administration’s National Emphasis Program. Failure to meet these standards can result in significant financial liabilities, increased scrutiny by Occupational Safetygovernment and Health Administration (OSHA), U.S. DOT Pipeline and Hazardous
Expanding Addressable End-Markets. Advances in NDT sensor technology and asset protection software based systems, and theEnd-Markets. The continued emergence of newand advances in asset protection technologies and software-based systems are creating increasedincreasing the demand for asset protection solutions in applications where existing techniques were previously ineffective.
Expanding Aerospace Industry. and Defense Industry. We believe that increased demand will continue to come over the next several years from the aerospacecommercial industry due to the approximately decade-long backlog for next generationnext-generation commercial aircraft to be built, driving the need for enhanced levelsadvanced solutions that drive cost and quality efficiencies. Demand continues to be stable in the defense industry while demand in the private space industry is growing.
Crude Oil Prices. Volatility in the energy sector has been profound during the 2015-2022 period with moderation occurring during 2023. The collapse of inspections.world oil prices in 2015 and 2016 undermined industry expansion. While energy prices recovered in 2017 and 2018, they once more declined, and subsequently rebounded in the second half of 2021 and the first half of 2022 with near record high prices and crack spreads. This resulted in refineries delaying turnarounds during 2022 until oil prices decreased and stabilized in the second half of 2022. The stabilization continued throughout 2023 without major peaks and fluctuations as seen in prior periods. The on-going war in Ukraine and the conflict in the Middle East between Israel and
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Hamas, coupled with continued macroeconomic uncertainty in 2024, are expected to continue to significantly influence oil prices for the foreseeable future.
Expanding Pipeline Integrity Regulations: The United States Pipeline & Hazardous Materials Safety Administration’s “Mega Rule” adopted in October 2019, expands pipeline integrity regulations on more than 500,000 miles of pipelines that carry natural gas, oil and other hazardous materials throughout the United States. Some of these requirements will take operators decades to fulfill. These regulations require inspection and integrity data records throughout a pipeline’s lifetime to be “reliable, traceable, verifiable, and complete,” increasing the demand for integrated inspection, engineering, monitoring, and data management and analysis solutions.
Consolidation of Refineries: Consolidation of refinery ownership will create both pressure on refinery service providers due to increased customer purchasing power and provide an opportunity to those same refinery service providers to become preferred providers to these larger customers.
Our Competitive Strengths
We believe the following competitive strengths contribute to our being a leading provider of asset protection solutions and will allow us to further capitalize on growth opportunities in our industry:
OneSource Provider for Asset Protection Solutions. We believe we have one of the most comprehensive portfolios of integrated asset protection solutions worldwide, which positions us to be a leading single-source provider for our customers’ asset protection requirements. This is particularly a competitive strength in regards to turnarounds and shutdowns - during which facilities temporarily cease portions of their operations in order to perform plant-wide inspections, maintenance and repairs - as the services being requested and performed during these work stoppages make up significant portions of refinery, process and power plant maintenance budgets. Demand for our solutions increases during these outages, as facilities seek third-party providers to perform a wide spectrum of asset protection operations while the plant is offline. In addition, as companies are increasingly outsourcing their NDT needs to third-party providers, we believe that the ability to offer a comprehensive package of solutions provides us with a competitive advantage.
Integrated Data Management: Our expertise and proprietary research and development in data analytical solutions throughout the asset protection cycle provides a competitive advantage. With solutions for integrated data acquisition, storage, visualization and analytics, our integrated data analytical solutions well-position us for the oil and gas increasing movement towards digitalizing and centralizing asset protection to fewer, highly-skilled and multi-disciplined vendors. Many of our data analytical solutions are platform-agnostic, allowing us to integrate into customers' existing operations, and thereby expanding the potential customer pool for our solutions. Our expertise and experience also allow us to tailor our offerings to meet specific customer needs, which sets us apart from our competitors. Our presence in our customers’ operations throughout their asset lifecycles also ideally positions us to be their primary vendor to centralize their asset integrity data collection, management and analysis, creating mutually-beneficial opportunities to scale our relationships.
Long-Standing Trusted Provider to a Diversified and Growing Customer Base. We have become a trusted partner to a large and growing customer base across numerous global markets through our proven, decades-long track record of successful operations. Our customers include some of the largest and most well-recognized firms in the oil and gas, chemicals, power generation and transmission and aerospace and defense industries, as well as public authorities.
Repository of Customer-Specific Inspection Data. Through our world-class enterprise data management and analysis software, PCMS, we have accumulated extensive, proprietary process data that allows us to provide our customers with value-added services, such as benchmarking, "RBI" and reliability-centered maintenance.
Proprietary Products, Software and Technology Packages. Our deep knowledge base in asset protection services and equipment enables us to offer technology packages, in which our field technicians utilize our proprietary and specialized testing procedures and hardware, advanced pattern recognition, neural network software and databases to compare test results against our prior testing data or national and international structural integrity standards.
Deep Domain Knowledge and Extensive Industry Experience. We have extensive asset protection experience and data, dating back several decades of operations. We have gained this through our industry leadership in developing advanced asset protection solutions, including research and development of advanced NDT technologies and applications, process engineering technologies, online plant asset integrity management with sensor fusion; and enterprise software solutions for plant-wide and fleet-wide inspection data archiving and management.
Technological Research and Development. The NDT industry continues to move towards more advanced, automated solutions, requiring service providers to find safer and more cost-efficient inspection techniques. We believe that we remain ahead of the
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technological curve by backing our extensive industry expertise with the investment of resources in research and development. Some of the advanced inspection technologies developed by our internal research and development teams include an automated radiographic testing ("aRT") crawler for corrosion under insulation ("CUI") inspections in above ground pipelines and piping; our Large Structure Inspection ("LSI") scanner, and our real-time radiography ("RTR") crawler for 360° inspections of pipeline girth welds.
Collaborating with Our Customers. We have historically expanded our asset protection solution portfolio in response to our customers’ unique performance specifications. Our technology packages have often been developed in close cooperation and partnership with key customers and industry organizations.
Experienced Management Team. Our management team has a track record of asset protection organizational leadership. These individuals also have successfully driven operational growth organically and through acquisitions, which we believe is important to facilitate future growth in the asset protection industry.
Our Growth Strategy
Our growth strategy emphasizes the following key elements:
Continue to Digitalize Asset Protection Data and Processes. We place a data-centric focus on asset protection, enabling our customers to ease some of their biggest areas of concern (particularly the timely and accurate transfer of asset integrity data from the field to their IDMS, as well as the data’s visibility and accessibility once uploaded). We expect that the demand for our data analytical solutions which provides big data intelligence and remote data visibility will continue to grow, and we are investing in data analytical solutions that help our customers visualize and generate actionable insight from their asset integrity data, regardless of data input. We are also actively seeking to optimize our customers’ asset protection workflows and processes, by creating digital paths between data applications to increase data visibility and reduce manual data entry and human error.
Expand Our Focus in the Aerospace and Defense Industries. We believe that ownersthe introduction of capital assets willnext-generation airframes and aircraft engines has created an inherent demand for inspection, testing, machining and mechanical services required for the production of parts. The recent interest in the use of additive manufacturing techniques to create components also necessitates advanced inspection and testing solutions.
Expand Our Focus in the Pipeline Integrity Industry. We intend to continue broadening our solutions for the pipeline market. Recent industry regulations significantly expanded pipeline integrity management regulations, requiring pipeline owner/operators to inspect, document, and assess the risk of operating conditions for existing lines. This provides us with the opportunity to provide asset protection solutions for both the new construction and integrity phases. In 2019, we acquired a company that provides pipeline integrity management software and services to energy transportation companies. We acquired an inline inspection provider in 2018 and have implemented our PCMS software for several pipeline operators to support their integrity data management.
Expanding our Mechanical Services Portfolio. We believe that performing mechanical services to complement inspections, such as removing and reapplying insulation or preparing surfaces for coating or painting, is an important market differentiator for us. This is particularly true, for example, when considering the cost-efficiencies our customers realize when our rope access technicians perform these services at height without the use of scaffolding. Many of our customers already require these services, but utilize multiple vendors to do so, creating an opportunity for us to provide greater value to a customer base that increasingly lookrequires enhanced speed and efficiency.
Continue to Develop Technology-Enabled and Digital Asset Protection Solutions. We intend to maintain and enhance our technological leadership by continuing to invest in developing new technology, applications and data services. The release of our OneSuite ecosystem underscores our dedication to continue deepening synergies between our solutions to provide our customers with uniquely-integrated offerings, which we believe makes us a more attractive vendor for a single vendor who can providecustomers seeking to centralize their asset protection. We have actively continued to develop technologies that enhance the flow of data throughout multiple operational phases and facilities, through our integrated pipeline integrity data portfolio, and our cloud-based monitoring data portal.
Expand our Solution Offerings to Existing Customers. We believe that branching into adjacent, complementary services, such as mechanical services, increases our value proposition and our ability to capture additional business. Many of our customers are multinational corporations with asset protection requirements at multiple locations. We believe that expanding our solution offerings and merging and visualizing data across facilities for enterprise data analysis, combined with the trend of customers outsourcing asset protection to service providers with integrated offerings, provides opportunities for significant additional recurring revenues.
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Continue to Expand Our Customer Base into New End Markets. We believe we have significant opportunities to expand our customer base in relatively new end markets, including the renewable energy industry, specifically, wind and other alternative energy, natural gas transportation industries, pipeline integrity and additive manufacturing. The expansion of our addressable markets is being driven by the increased recognition and adoption of advanced asset protection technologies (such as unmanned drone inspection devices, robotics, etc.) that are supplanting traditional methods.
Capitalize on Acquisitions. We have completed several acquisitions to supplement and enhance our solutions, add new customers, expand our sales channels and accelerate our expected growth. Due to our current debt levels and restrictions related to the debt covenants in our credit facility, we do not expect to make any acquisitions in 2024 other than small acquisitions with the banks’ approval. However, once we reduce our debt, we expect to make selective acquisitions beyond 2024.
Our Segments
We have three operating segments: (i) North America (which we previously referred to as our Services segment), (ii) International and (iii) Products and Systems:
North America provides asset protection solutions with the largest concentration in the United States, followed by Canada, consisting primarily of NDT, inspection, mechanical and engineering services that are complementaryused to inspectionevaluate the structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components. Software, digital and data services suchare included in this segment.
International offers services, products and systems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment
Products and Systems designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States.
For a discussion of segment revenues, operating results and other financial information, including geographic areas in which we generated revenues, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, as removing insulationwell as Note 2-Revenueand Note 19-Segment Disclosure in orderthe notes to inspect piping, then reinstalling insulation.our audited consolidated financial statements in Item 8 of this Annual Report.
Revenue Overview
The following charts represent our disaggregated revenue by industry for the market available to us will continue to grow as these macro-market trends continue to develop.years ended December 31, 2023, 2022 and 2021.
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Our Target Markets
Overview
Our revenues are comprised of services offerings at our laboratories and at customer facilities. Data Analytical Solutions revenues are comprised of revenue derived from data software sales & subscriptions, implementation services and analytics that offer insights and recommendations to improve asset integrity. Data Analytical Solutions revenue is derived from work performed by Mistras employees in our facilities, or at customer locations, using our proprietary portfolio of software applications. Field Services revenues are comprised of revenue derived primarily by technicians performing asset inspections and maintenance services for our customers at locations other than Mistras properties. Shop Laboratory revenues are comprised of quality assurance inspections of components and materials at our Mistras in-house laboratory facilities. Other revenues are comprised of locations that perform both asset inspection services and testing of components and materials at in-house Mistras laboratories.
There are a number of economic factors which drive the aerospace market, including:
•The multi-year backlog for next generation commercial aircraft to be built, including several large and mid-sized aircraft built by Boeing and Airbus, among other manufacturers; and
•The continuing regulatory scrutiny to ensure public safety serves to ensure the continued need for inspection and mechanical services to be performed.
In the energy market, there are various economic indicators that drive our business, especially in the U.S. domestic markets. These factorsIt is unclear what the short and long term effects of the war between Russia and Ukraine is likely to have on the world economy and certain of our target markets, including particularly the oil and gas market. Excerpted below are excerpted belowforecasts from various Energy Information Administration (EIA) outlook reports;reports, which are subject to change based on these factors:
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Electricity generation from coal is projected to growfall throughout the most onmid 2020s and the decrease will be partially offset by an absolute basis. Natural gas production will grow at a faster rate through 2020, and thereafter grow at a slower pace. Natural gas used for power generation will generally increase over the time period due to the scheduled expiration of renewable tax credits. The industrial sector accounts for the most growth in natural gas consumption, with expanding use in the chemical industries; for industrial heatforecast of combined utility-scale solar and power; and for liquefied natural gas production. Natural gas consumption also increases significantly in the power sector as a result of the scheduled expiration of renewables tax credits in the mid-2020s. In its monthly short-term energy outlook dated December 12, 2017, the agency forecast thatwind generation.
The EIA noted U.S. crude oil output will rise by 780,000production averaged 11.9 million barrels per day (bpd) in 2022 and rose to 10.02an average 12.9 million bpd in 2018, which would be the highest level for any year on record2023. The EIA forecasts production to continue to increase to an average 13.3 million bpd in the United States.2024 and further increase to 13.5 million bpd in 2025.
Oil and Gas
We supply oil and gas asset protection solutions to downstream (refining), midstream (transportation and storage) and upstream (exploration and production) operations.
We actively seek to evolve our solutions through technological enhancements and research and development to discover new applications. Online monitoring and permanently mountedpermanently-mounted sensors, as well as the use of drones and other alternative delivery devices, are all being considered as the Oiloil and Gasgas infrastructure owners look to “smart” technologies that reduce human intervention while delivering highly accurate datahighly-accurate inspection and integrity data. We also have actively sought to aid in their operational decisions. This helps to drive demand forfurther enhance our integrated approach to asset protection. protection, through the development of our complementary mechanical service portfolio.
In general, the oil and gas market is poised to leverage digital solutions to facilitate process improvements as well as increase plant reliability and improve process and personnel safety. This provides an opportunity for us to synergistically leverage our digital asset protection solutions. Digital transmission of data in various industry sectors, with built-in analytic functions, will allow our customers to better leverage inspection data that is being generated in the field.
While we expect off-stream inspection of vessels and piping during a plant shut-down or turnaroundcritical assets to remain a routine practice, by companies in these industries, we anticipate this practice will decrease as owners utilizean increase in the demand for non-invasive or on-stream inspections, of critical assets.inspections. Non-invasive inspections enablesenable companies to minimize the costs associated with shutdownsshutting down equipment during testing, while enabling the economic and safety advantages of advanced planning and/or predictive maintenance.
Aerospace and Defense
The aerospace industry is enjoying unprecedented growthcontinued to rebound from COVID-19 throughout 2023 with many original equipment manufacturers (OEMs) reporting record backlogs of up to ten years.backlog and production levels approaching and exceeding pre-pandemic levels for certain OEMs for the first time since the pandemic. We serve this rapidly growing target market by providing our state of the art fully integrated inspection systems to OEMs. For the OEM that prefers to outsource this inspection, we provide a full range of inspection, testing, machining, mechanical, finishing, additive manufacturing and equipment solutions, for which we are Nadcap certified. Our state-of-the-art in-house services through our various regional facilities. These facilities have obtained andlaboratories maintain numerous accreditations from industry organizations, including Nadcap, and certifications required to meet the stringent inspection criteria that the aerospace industry demands.
Advanced composite materials found in new classes of aircraft require advanced asset protection solutions, including x-ray of critical engine components, ultrasonic fatigue testing of complete aircraft structures and corrosion detection and on-board monitoring of landing gear and other critical components. Many OEMs are shifting towards condition-based maintenance utilizing embedded monitoring sensors to track component structural and operational integrity over time as opposed to performing maintenance on time-based intervals. We expect increased demand for our solutions to result from wider useincrease with the adoption of advanced compositesthese new-age materials and distributed on-lineonline sensor networksnetworks. We also expect demand for asset protection solutions to increase with the continued adoption of additive manufacturing techniques.
Industrials
The quality control requirements driven by the need for zero-to-low-defect component tolerance within automated, robotic-intensive industries such as automotive, consumer electronics and other embedded analytical applications built intomedical industries serve as key drivers for increased demand in asset protection, particularly for in-house inspection and testing. We expect that increasingly stringent quality-control requirements and competitive forces will drive the structure of assets that enable real-time performance monitoringdemand for more-costly finishing and condition-based maintenance.
polishing which, in turn, creates opportunities for integrated partnerships between us and our customers throughout the production lifecycle.
Power Generation and Transmission
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The growing availability of cheap natural gas, along with environmental concerns with coal, has stimulated the construction of new natural gas-fired power plants across North America, creating opportunities for us to provide specialized solutions in multiple phases. These include facility design consultations, NDT services during construction and plant operations and long-term condition monitoring. We anticipate sharp growth in these types of plants as natural gas pricing remains low, and the environmental impacts of coal remain unattractive to the public.
We also offer solutions for inspection, maintenance, monitoring and data services for wind turbines and their components. These include NDT services — often performed through rope and/or drone access — to identify corrosion, cracking, and other defects that can affect the safety and operational effectiveness of wind turbines, along with remedial solutions to repair minor damages identified during inspections.
Other Process Industries
We believe that high profilehigh-profile infrastructure catastrophes such as the collapse of the I-35W Mississippi River Bridge in Minneapolis and others since, have caused public authorities to more actively seek ways to prevent similar events from occurring. Public authorities tasked with new construction and maintenance of existing public infrastructure increasingly use asset protection solutions to inspect these assets, including the use of embedded sensors to enable on-lineonline monitoring throughout the life of the asset. This is a target market for our application technology and experience. Over the last twenty years, we
We have provided testing and structural health monitoring and data analytical solutions on many bridges and structures worldwide, among which includeincluding some of the largest and most well-known bridges in the United States and United Kingdom. In fiscal 2015, for example, we installed several wire break systems complete with multipleOur sensors types (known as sensor fusion). These bridgescontinuously monitor these assets, alerting owner/operators when defects are being monitored continuously and automatically, alerting the bridge owner when a crack is detected. Other services are offered, including internet and cloud data transfer, secure web sites andOur monitoring contracts thatteams also provide for “around the clock monitoring” and regular reports which provide information on the status of the bridge andthat include early detectionwarnings of suspect areas that can be identified and repaired before an alarm is generated.
Petrochemical
We continue to provide these monitoringasset protection NDT services worldwide.
process.
We believe the following competitive strengths contributeactively seek to evolve our being a leading provider of asset protection solutions through technological enhancements and will allowR&D to discover new applications. Online monitoring and permanently-mounted sensors provide real-time data to petrochemical owners and operators and provide an opportunity for us to further capitalize on growth opportunities in our industry:
portfolio.
Customers
We provide our asset protection solutions to a global customer base of diverse companies primarily in our target markets. OneNo customer BP plc., accounted for approximately 11%, 12% andrepresented 10% or more of our total revenues forrevenue in any of the yearyears ended December 31, 2017, the transition period ended December 31, 20162023, 2022 or 2021.
Geographic Areas
We have operations in 10 countries and fiscal 2016, respectively. No customer accounted for more than 10%occasionally conduct business in a few other countries. Most of our revenues in fiscal 2015.
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Sales and Marketing
We sell our asset protection solutions through our direct sales and marketing activities worldwide. In addition, our project and laboratory managers, as well as our management, are trained on our solutions and often are the source of sales leads and customer contacts. Our direct sales and marketing teams work closely with our customers to demonstrate the benefits and capabilities of our asset protection solutions, refine our asset protection solutions based on changing market and customer needs and identify potential opportunities. We divide our sales and marketing efforts into services sales, products and systems sales and marketing and utilize marketing automation and customer relationship management ("CRM") systems to collect, manage and collaborate customer information with our teams globally. Our CRM systems also provide critical data to provide accurate forecasting and reporting.
Manufacturing
Most of our hardware products are manufactured in our Princeton Junction, New Jersey facility. This facility includes the capabilities and personnel to fully produce all of our AE products and NDT Automation Ultrasonic equipment. We also design and manufacture automated ultrasonic systems and scanners in France.
Human Capital
As of December 31, 2023, we had approximately 4,800 employees worldwide, of which 3,200 were located in the United States, 500 in Canada and 1,100 in our other non-U.S. locations. Our employees include full and part time employees throughout our organization. As described below, we value our employees and have established various programs to promote the satisfaction, health and safety of our employees. Less than 0.01% of our employees in the United States are unionized.
Our employees are key to achieving our goals and strategy. We have committed resources throughout our organization to ensure that we are attracting, developing, and retaining talented employees needed to support all aspects of our activities. Our core values and business ethics guide and direct all activities undertaken by us.
The health and safety of our employees is paramount. We have also developed key initiatives and strategies regarding our talent and people initiatives. Below, we describe some of the key initiatives and values around health and safety. Management regularly updates our Board of Directors with regards to our safety and people strategy and how we are performing in these areas. In 2020, our Board established the Environmental, Social and Safety Committee. This Committee, which consists of independent directors, monitors and oversees the strategic direction of our initiatives in support of our core values and our environmental, social and governance initiatives.
Talent, Leadership and Employee Development
Employee development and engagement begins with our senior management team, which has considerable industry experience and expertise. Leveraging this experience and expertise, our senior management team is able to continuously review our organizational structure and provide opportunities for the growth and development for our employees.
As part of our continued commitment to our employees, we have established various programs to promote lifelong learning and development opportunities for our employees. These include a mix of voluntary and mandatory training programs, which are provided in-person, virtually or on the job. We also provide employees the ability to continue to gain additional professional certifications to contribute to their career advancement. We utilize a web-based training center which is available to field technicians for career advancement and includes over 500 web-based classes. In addition, we are committed to ensuring all employees are compensated at a living wage. All local minimum wage requirements are met and where no wage laws are in place, employees are compensated competitively, in accordance with industry standards.
Our human rights policy places a high priority on diversity and equal opportunity and provides our employees with management’s expectations related to human rights and labor practices.
Another program we instituted focuses on our connection by a common thread of caring – about one another, our customers, the environment, and the work we do. We seek to foster a culture of togetherness, safety, respect, and contribution which enables each individual member to feel that he or she is a part of something bigger. A community of caring professionals with a genuine passion for helping people and making a difference together – that is the heart of the program we call “Caring Connects.”
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Our Safety-Conscious Culture
We consider safety the backbone of our operations. Our asset protection solutions aim to ensure that industrial assets and facilities remain in safe, reliable working condition, which in turn enhances safety for our customers, the public, and the environment. Our laboratory and field personnel are trained to operate according to strict safety and quality standards so that our processes and procedures regarding hazardous materials, worker safety, and accident prevention are sound and effective. Further to this, we are constantly evaluating these processes and procedures to ensure that they remain of high quality and are effective, and we consider changes in the manner in which work is performed or lessons that have been learned from any sources, such as industry data. We work to help ensure that our customers are in full compliance with all federal, state, and local regulations. Our practices, policies and procedures are designed to help ensure we perform our duties through the use of safe, industry-best practices, seeking to minimize risk wherever possible.
We emphasize a “MISTRAS’ safety-conscious” culture with the intent that it becomes embedded in the day-to-day work of all our employees. We use various training tools and other practices to instill attitudes, beliefs, perceptions, and values that all employees share in the mandate to create and maintain a safe work environment for all.
We continuously monitor our safety performance through analysis of our company-wide safety statistics, which help us to determine behavioral trends while also instilling a culture of proactivity. For the year ended December 31, 2023, our Total Recordable Incident Rate ("TRIR") was 0.3 while Days Away, Restricted and Transferred Rate was 0.18 and Lost Work Day Rate remained 0.12. For the year ended December 31, 2022, our TRIR was 0.41.
Seasonality
Our business is seasonal. This seasonality relates primarily to our Services segment.oil and gas target market, and to a lesser extent within our other target markets. U.S. refineries’ non-peak periods are generally in the fall, when they are retooling to produce more heating oil for winter, and in the spring, when they are retooling to produce more gasoline for summer. The peak periods for these customers are the summer and winter months, when they run at peak capacity and are not retooling or performing turnarounds or shut downs. As a result, our revenues in the summer and winter months are typically lower than our revenues in the fall and spring, becausewhen demand for our asset protection solutions from the oil and gas as well as the fossil and nuclear power industries increases during their non-peak production periods. Because we are increasing our work in the fall and spring, our cash flows are lower in those quarters than in the summer and winter, as collections of receivables lag behind revenues. We expect that this seasonality will continue.
Competition
We operate in a highly competitive, but fragmented, market. Our primary competitors areinclude large public and private companies, divisions of large companies and many of our other competitors arevarious small companies which generally are limited to a specific product or technology and focused on a niche market or geographic region. We believe that nonefew, if any, of our competitors currently providesprovide the full range of asset protection and NDT products, enterprise software (PCMS)("PCMS") and the traditional and advanced services solutions that we offer. Our competition with respect to NDT services include the Acuren, division of Rockwood Service Corporation, SGS Group, the Team Qualspec division of Team, Inc.IHT Segment and APPLUS RTD. Our competition with respect to our PCMS software includes UltraPIPE, Lloyd’s Register Capstone, Inc. and Meridium Systems. In the traditional NDT market, we believe the principal competitive factors include project management, availability of qualified personnel, execution, price, reputation and quality. Inquality, whereas in the advanced NDT market, reputation, quality and size are moretend to be the most significant competitive factors than price.factors. We believe that the NDT market has significant barriers to entry which would make it difficult for new competitors to enter the market. These barriers include: (1)(i) having to acquire or develop advanced NDT services, products and systems technologies, which in our case occurred over many years of customer engagements and at significant internal research and development expense, (2)(ii) complex regulations and safety codes that require significant industry experience, (3)(iii) license requirements and evolved quality and safety programs,
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We make strategic research and development investments in our data analytical solutions technologies that support integration with our other solution offerings to enhance cost- and time-efficiencies, maximize uptime and safety and improve the flow of data from field technicians to inspection databases. These strategic investments enable us to enhance our service offerings to customers and provide valuable insights and predictive analysis.
We have also invested significant research and development in pre-machining and advanced testing technologies in a purpose-built facility includesfor an aerospace customer, with the capabilitiesgoal of reducing the customer’s production cycle logistics and personnelcosts.
We also work with customers to fully produce alldevelop new products or applications for our technology, including:
•Testing of new composites
•Detecting crack propagation
•Wireless and communications technologies
•Development of permanently embedded inspection systems to provide continuous, online, in-service monitoring of critical structural components
Research and development expenses are reflected in our Consolidated Statements of Income (Loss) as research and engineering expenses. Our company-sponsored research and engineering expenses were approximately $1.7 million, $2.0 million and $2.5 million for the years ended December 31, 2023, 2022 and 2021, respectively. While we have historically funded most of our AE products, NDT Automation Ultrasonic equipmentresearch and Vibra-Metrics vibration sensing productsdevelopment expenditures, from time to time we also receive customer-sponsored research and systems. Certaindevelopment funding. Most of the projects are in our target markets, however, a few of the projects could lead to other hardware is manufactured by a third party and then loaded by us with our proprietary software. We also design and manufacture automated ultrasonic systems and scanners in France.future market opportunities.
Intellectual Property
Our success depends, in part, on our ability to maintain and protect our proprietary technology and to conduct our business without infringing on the proprietary rights of others. We utilize a combination of intellectual property safeguards, including patents, copyrights, trademarks and trade secrets, as well as employee and third-party confidentiality agreements, to protect our intellectual property.
As of December 31, 2017,2023, we held 412 U.S. patents (byby direct ownership or exclusive licensing), alland 5 patent applications pending in the United States, which will expire at various times between 2021 and 2026, and license certain other patents. However,States. All the patent applications pending have been filed since 2018. While we do not principally rely on these patents or licenses to provide a majority of our proprietary asset protection solutions.solutions, certain of these patents do provide us with a competitive advantage and we believe they will be an asset to our growth strategy. Our trademarks and service marks provide us and our products and servicessolutions with a certain amount of brand recognition in our markets. We do not consider any single patent, trademark or service mark material to our financial condition or results of operations.
As of December 31, 2017,2023, the primary trademarks and service marks that we held in the United States included MistrasMISTRAS® and, our stylized globe design.design and our tag line "One Source for Asset Protection Solutions". Other key trademarks or service marks that we utilize in localized markets or product advertising include PCMSinclude:
•Onstream® (word and logo)
•PCMS® (word and logo)
•Ropeworks®
•MISTRAS Digital®,
•OneSuite™
•Sensoria™
•OneSource™
•CALIPERAY™ (word and logo)
•Physical Acoustics Corporation and the PAC logo Ropeworks
•Streamview™
•Sensor Highway™
•TankPAC®, NOESIS,
•VPAC™
•Transformer Clinic™
•FieldCal™
•UTwin®
•AEwin®
•Pocket AE®, AE®
•Pocket UT®, AEwin®, AEwinPost, UTwin®, UTIA, LST, Vibra-Metrics®, Field CAL®, MONPAC, PERFPAC, TANKPAC® , Valve-Squeak®,VPAC, POWERPAC, Sensor Highway, QSL, NDT Automation, and One Source for Asset Projection Solutions®.UT®
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Many elements of our asset protection solutions involve proprietary know-how, technology or data that are not covered by patents or patent applications because they are not patentable or patents covering them would be difficult to enforce, including technical processes, equipment designs, algorithms and procedures. We believe that this proprietary know-how, technology and data is the most important component of our intellectual property assets used in our asset protection solutions and is a primary differentiator of our asset protection solutions from those of our competitors. We rely on various trade secret protection techniques and agreements with our customers, service providers and vendors to protect these assets. All of our employees are subject to confidentiality requirements through our employee handbook. In addition, employees in our Products and Systems segment and our other employees involved in the developmentmany of our intellectual propertyemployees have entered into confidentiality and proprietary information agreements with us. Our employee handbook and these agreements require our employees not to use or disclose our confidential information and to assign to us all of the inventions, designs and technologies they develop during the course of employment with us, and otherwise addressas well as addressing other intellectual property protection issues. We also seek confidentiality agreements from our customers and business partners before we disclose any sensitive aspects of our asset protection solutions technologytechnologies or business strategies. We are not currently involved in any material intellectual property claims.
We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include, among others: the Comprehensive Environmental Response, Compensation, and Liability Act, the Resources Conservation and Recovery Act, the Clean Air Act, the Federal Water Pollution Control Act, the Toxic Substances Control Act, the Atomic Energy Act, the Energy Reorganization Act of 1974, and applicable regulations. In addition to the federal laws and regulations, states and other countries where we do business often have numerous environmental, legal and regulatory requirements by which we must abide. We evaluate and address the environmental impact of our operations by assessing properties in order to avoid future liabilities and comply with environmental, legal and regulatory requirements.
The following were our executive officers for the year ended December 31, 2023 and their background and experience.
| Name | Age | Position | ||||||||||||
| Manuel N. Stamatakis | 76 | Chairman of the Board and Interim President and Chief Executive Officer | ||||||||||||
| Edward J. Prajzner | 57 | Senior Executive Vice President and Chief Financial Officer | ||||||||||||
| Gennaro D'Alterio | 52 | Executive Vice President, Chief Commercial Officer | ||||||||||||
| Michael C. Keefe | 67 | Executive Vice President, General Counsel and Secretary | ||||||||||||
| Michael J. Lange | 63 | Senior Group Executive Vice President | ||||||||||||
| John A. Smith | 54 | Executive Vice President and President of Services | ||||||||||||
Manuel "Manny" N. Stamatakis joined Mistras Board of Directors in 2002, became the Chair of the Governance Committee as well as a member of the Audit Committee and Compensation Committee in 2009 and Lead Director in 2010.On October 9, 2023, Mr. Stamatakis became the Chairman of the Board, and on the same day became our Interim President Chief Executive Officer to replace our prior President and Chief Executive Officer, Dennis Bertolotti. At that same time, Mr. Stamatakis resigned from all the committees of the Board and as our lead director. Mr. Stamatakis currently chairs the Project Phoenix Steering Committee, an initiative for which he is both the chief architect and driving force.
An accomplished entrepreneur for over 30 years, Mr. Stamatakis is an executive officer of Capital Management Enterprises, Inc., a financial services and employee benefits consulting firm based in Pennsylvania.Mr. Stamatakis has held multiple board and chairmanship positions over the years, including Chairman of the Delaware River Port Authority, The Drexel College of Medicine, the Pennsylvania Supreme Court Investment Advisory Board, and the Philadelphia Shipyard Development Corporation which was the catalyst to bringing shipbuilding back to the Philadelphia region. He earned a B.S. in Industrial Engineering from Pennsylvania State University and received an honorary Doctor of Business Administration from Drexel University.
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Edward J. Prajzner joined Mistras in January 2018 as our Senior Vice President, Chief Financial Officer and Treasurer, was subsequently promoted to Executive Vice President and on March 26, 2023, was promoted to become our Senior Executive Vice President and Chief Financial Officer. Prior to joining Mistras, Mr. Prajzner worked at CECO Environmental Corp., a global service provider to environmental, energy and filtration industries, and served as Chief Financial Officer and Secretary from 2014 to 2017, Vice President of Finance and Chief Accounting Officer from 2013 until his appointment as Chief Financial Officer in 2014, and Corporate Controller and Chief Accounting Officer from 2012 to 2013. Mr. Prajzner also served in senior finance roles at CDI Corporation (now AE Industrial Partners) and American Infrastructure (now Allan Myers). Mr. Prajzner began his career in public accounting at Ernst & Young, received his B.S. in accountancy from Villanova University, his MBA in finance from Temple University and is a certified public accountant.
Gennaro "Jerry" D'Alterio joined Mistras on September 11, 2023, as Executive Vice President and Chief Commercial Officer. Prior to joining Mistras, Mr. D'Alterio most recently served as the Vice President of Product Management and Director, Global Business Development at CECO Environmental Corporation’s Fluid Handling & Filtration segment, where he also held the positions of President and Global President. With over 20 years of proven executive leadership and demonstrated ability to drive both revenue growth and profitability, across a wide range of industries, Mr. D’Alterio excels at driving best-in-class commercial operating models and transformations while fostering success-oriented, winning cultures. Mr. D'Alterio holds an MBA and a Bachelor of Science in Mechanical Engineering from Villanova University. He is certified in LEAN enterprise and manufacturing, is member of the Hydraulic Institute and the International Desalination Association, and serves on the Board of the Aquatic Animal Life Support Operators organization.
Michael C. Keefe joined Mistras in December 2009. Prior to joining Mistras, Mr. Keefe worked at International Fight League, a then publicly-traded sports promotion company, from 2007 until 2009, in various executive positions. From 1990 until 2006, Mr. Keefe served in various legal roles with Lucent Technologies and AT&T, the last four years of which he served as Vice President, Corporate and Securities Law and Assistant Secretary. Mr. Keefe received a noticeBS in May 2015 that the U.S. Environmental Protection Agency (“EPA”) performedBusiness Administration (Accounting) from Seton Hall University and a preliminary assessmentJ.D. from Seton Hall University School of Law.
Michael J. Lange joined Mistras when we acquired Quality Services Laboratories in November 2000, and was elected a leased facility we operateDirector in Cudahy, California. Based upon the preliminary assessment, the EPA conducted2003. Mr. Lange has held various executive level positions with Mistras, becoming Senior Executive Vice President, effective June 1, 2016. Mr. Lange is a well-recognized authority in Radiography and has held an investigationASNT Level III Certificate for almost 20 years. Mr. Lange received an Associate of the site. The purpose of the investigation is to determine whether any hazardous materials were releasedScience degree in NDT from the facility. We have been informed that certain hazardous materialsSpartan School of Aeronautics.
John A. Smith joined Mistras in 2008 and pollutants have been foundhas held various positions, including Vice President of Operations, then became Senior Vice President of Operations in 2018 before becoming Executive Vice President and President of Services on October 1, 2023. Mr. Smith began his career as a non-destructive testing (NDT) technician with CONAM Inspection and Engineering Services before launching his own business, Elite Inspection Services Company. He owned and operated Elite for 16 years, until Mistras acquired the ground watercompany in 2008. During his NDT career, Mr. Smith held multiple certifications from the general vicinity ofAmerican Society for Nondestructive Testing (ASNT).
Our executive officers are appointed by, and serve at the site and the EPA is attempting to ascertain the origination or source of these materials and pollutants. Given the historic industrial use of the site, the EPA determined that the sitediscretion of, our Cudahy facility should be examined along with numerous other sites in the vicinity. At this time, weboard of directors. There are not able to determine whether we haveno family relationships among any liability in connection with this matter and if so, the amountof our directors or range of any such liability.executive officers.
Our Website and Available Information
Our website address is www.mistrasgroup.com. We file reports with the SEC, including Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K, Current Reports on Form 8-K and Proxy Statements. All of the materials we file with or furnish to the SEC are available free of charge on our website at http://investors.mistrasgroup.com/sec.cfm, as soon as reasonably practicable after having been electronically submitted to the SEC. Information contained on or connected to our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this reportAnnual Report or any other filing with the SEC. All of our SEC filings are also available at the SEC’s website at www.sec.gov. In addition, materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
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ITEM 1A.RISK FACTORS
This section describes the major risks to us, our business and our common stock. You should carefully read and consider the risks described below, together with the other information contained in this Annual Report, including our financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”(MD&A) before making an investment decision. The statements contained in this section constitute cautionary statements under the Private Securities Litigation Reform Act of 1995. If any of these risks occur, our business, financial condition, results of operations and future growth prospects may be adversely affected. As a result, the trading price of our common stock would likely decline, and you may lose all or part of your investment. You should understand that it is not possible to predict or identify all risk factors that could impact us. For example, the COVID-19 pandemic has had a dramatic negative impact on the health of citizens of many countries, and resulted in major disruptions in economies and markets around the world, including our key markets. In addition, it is unclear what effects the on-going war between Russia and Ukraine and the conflict in the Middle East between Israel and Hamas are likely to have on the world economy and certain of our target markets, including particularly the oil and gas market, in the near and long term. In addition, macroeconomic factors such as inflation, unemployment, and interest rates, amongst others, will impact our business. Accordingly, you should not consider the following to be a complete discussion of all risks and uncertainties pertaining to us and our common stock.
Risks Related to Our Business
Due to our dependency on customers in the oil and gas industry, we are susceptible to prolonged negative trends relating to this industry that could adversely affect our operating results.
Our customers in the oil and gas industry (including the petrochemical market) have accounted for a substantial portion of our historical revenues. Specifically, they accounted for approximately 58%, 55%59%, 56%, and 52%54% of our revenues for the yearyears ended December 31, 2017, the transition period ended December 31, 20162023, 2022 and fiscal 2016 and 2015,2021, respectively. Although we have expanded our customer base into industries other than the oil and gas industry, we still receive approximately halfa majority of our revenues from this industry. Our services are vital to the operators of plants, refineries, and refineriespipelines, and we have expanded our services offerings, such as expanding our mechnicalmechanical and in-line inspection services capabilities. However, economic slowdowns or low oil prices have, and could continue to, result in cutbacks in contracts for our services. In addition, low oil prices could depress the level of new exploration and construction, which would adversely affect our market opportunities. If the price of oil and gas industry were to continue to operate in a market with low oil prices,decrease, our revenues, profits and cash flows may be reduced. If the price of oil reaches record, or near record levels as it did in 2022, we may experience delays or deferrals in performing inspection services to customers in the oil and gas industry.
While we continue to expand our market presence in the aerospace, power generation and transmission, and the chemical processing industries, among others, these markets are also cyclical in nature and as such, are subject to economic downturns. In addition, it is unclear what the continued effects the war between Russia and Ukraine and the conflict in the Middle East between Israel and Hamas are likely to have on the world economy and certain of our target markets, including particularly the oil and gas market, in the near and long term. However, during 2022, we experienced unfavorable foreign currency exchange impacts as it relates to our European operations. Additionally, the Russian-Ukrainian war continues to create disruptions in the oil and gas market and the supply chain in general, which is resulting in some disruption to our business operations. Our European operations are currently experiencing increased costs associated with higher energy costs, among others, due in part to the Russian-Ukrainian war.
We may be affected by climate change and market or regulatory responses to climate change
Climate change could have a material adverse effect on our results of operations, financial condition, and liquidity. Restrictions on emissions, including those that have already been adopted and others that are expected to be adopted in the future, could affect our customers that (i) use commodities to produce energy, (ii) use significant amounts of fossil fuel to produce or deliver commodities, or (iii) manufacture or produce goods that consume significant amounts of fossil fuels or burn fossil fuels. Significant cost increases, government regulation, or changes of consumer preferences for goods or services relating to alternative sources of energy or emissions reductions could materially affect the markets we serve (including the oil and gas industry), which in turn could have a material adverse effect on our results of operations, financial condition and liquidity. Government incentives encouraging the use of alternative sources of energy also could affect certain of our customers and the markets we serve in an unpredictable manner. Any of these factors, individually or with one or more of the other factors, or other unforeseen impacts of climate change could have a material adverse effect on our results of operations, financial condition and liquidity.
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In addition, changes in international, federal, state and local legislation and regulation based on concerns about climate change and increasing climate-related disclosures, including the rules proposed by the SEC, could result in increased compliance and data collection costs if, and when, such laws and regulations become effective.
•fluctuations in currency exchange rates and interest rates;
•regional micro and macro-economic pressures, inflationary costs, energy costs and geopolitical factors;
•compliance with applicable foreign regulations and licensing requirements, and U.S. laws and regulation with respect to conducting business in other countries, including export controls, sanctions, anti-terrorist and anti-bribery laws;
•the cost and uncertainty of obtaining data and creating solutions that are relevant to particular geographic markets;
•the need to provide sufficient levels of technical support in different locations;
•the complexity of maintaining effective policies and procedures in locations around the world;
•political instability, war or conflicts and civil unrest;
•increased risk of hacking, malware or security breaches of our profit margins may suffer, our revenues could declinedata and databases;
•restrictions or may grow more slowly than expectedlimitations on outsourcing contracts or services abroad;
•restrictions or limitations on the repatriation of funds, or tax consequences on the non-repatriation of overseas operationally generated funds; and we may be unable to implement our business strategy as anticipated.
•other potentially adverse tax consequences.
Our operating results could be adversely affected by a reduction in business with our significant customers.
We derive a significant amount of revenues from a few customers. For instance, various divisions or business units of our largest customer were responsible for approximately 11% of our revenues for 2017. Taken as a group, our top ten customers were responsible for approximately 38%35%, 37%33%, 36% and 33% of our revenues for the yearyears ended December 31, 2017, the transition period ended December 31, 20162023, 2022 and fiscal 2016 and 2015,2021, respectively. This concentration pertains almost exclusively to our ServicesNorth America segment, which accounted for more than 70%82%, 83% and 82% of our revenues for the yearyears ended December 31, 2017, the transition period ended December 31, 20162023, 2022 and fiscal 2016 and 2015.2021, respectively. These customers are primarily in the oil and gas sector. Generally, our customers do not have an obligation to make purchases from us and may stop ordering our products and services or may terminate existing orders or contracts at any time with little or no financial penalty. The loss of any of our significant customers, any substantial decline in sales to these customers or any significant change in the timing or volume of purchases by our significant customers could result in lower revenues and could harm our business, financial condition or results of operations. During 2017,
Our business, and the industries we currently serve, are currently subject to governmental regulation, and may become subject to modified or new government regulation that may negatively impact our ability to market our asset protection solutions.
We are required to comply with various government regulations and licensing requirements. For example, the transportation and overnight storage of radioactive materials used in providing certain of our asset protection solutions such as radiography are subject to regulation under federal and state laws and licensing requirements. Our North America segment is currently licensed to handle radioactive materials by the U.S. Nuclear Regulatory Commission, more than 30 state regulatory agencies and the Canadian Nuclear Safety Commission. If we allegedly fail to comply with these regulations, we may be investigated and incur significant legal expenses associated with such investigations, and if we are found to have violated these regulations, we may be fined or lose one or more of our licenses or permits, which would prevent or restrict our ability to provide radiography services. In addition, while we are being investigated, we may be required to suspend work on the projects associated with our alleged noncompliance, resulting in loss of profits or customers, and damage to our reputation. Many of our customers have strict requirements concerning safety or loss time occurrences and if we are unable to meet these requirements it could result in lost
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revenues. In the future, governmental agencies may seek to change current regulations or impose additional regulations on our business. Any modified or new government regulation applicable to our current or future asset protection solutions may negatively impact the marketing and provision of those solutions and increase our costs of providing these solutions and have a corresponding adverse effect on our margins.
Additionally, greenhouse gases that result from human activities, including burning of fossil fuels, have been the focus of increased scientific and political scrutiny and are being subjected to various legal requirements. International agreements, national laws, state laws and various regulatory schemes limit or otherwise regulate emissions of greenhouse gases, and additional restrictions are under consideration by different governmental entities. We derive a significant amount of revenues and profits from such industries, including oil and gas, power generation and transmission, and chemicals processing. Such regulations could negatively impact our customers, which could negatively impact the market for the services and products we provide. This could materially adversely affect our business, financial condition, results of operations and cash flows.
We rely on certification of our NDT solutions by industry standards-setting bodies. We and/or our subsidiaries currently have International Organization for Standardization (ISO) 9001:2008 certification, ISO 14001:2004 certification and OHSAS 18001:2007 certification. In addition, we currently have Nadcap (formerly National Aerospace and Defense Contractors Accreditation Program) and similar certifications for certain of our locations. We continually review our NDT solutions for compliance with the requirements of industry specification standards and the Nadcap special processes quality requirements. However, if we fail to maintain our ISO, Nadcap or other certifications, our business may be harmed because our customers generally require that we have noted a challenged region withinthese certifications before they purchase our Services segment ("the Challenged Region") which includes a large customer contract. During the first quarter of 2018, the large contract in the Challenged Region was awarded to another contractor. Accordingly, our 2018 results will be impacted by the loss of this contract.NDT solutions.
An accident or incident involving our asset protection solutions could expose us to claims, harm our reputation and adversely affect our ability to compete for business and, as a result, harm our operating performance.
We could be exposed to liabilities arising out of the solutions we provide. For instance, we furnish the results of our testing and inspections for use by our customers in their assessment of their assets, facilities, plants and other structures. If such results were to be incorrect or incomplete, as a result of, for instance, poorly designed inspections, malfunctioning testing equipment or our employees’ failure to adequately test or properly record data, we could be subject to claims. Further, if an accident or incident involving a structure we tested occurs and causes personal injuries or property damage, such as the collapse of a bridge or an explosion in a facility, and particularly if these injuries or damages could have been prevented by our customers had we provided them with correct or complete results, we maywould likely face significant claims relating to personal injury, property damage or other losses. Even if our results are correct and complete, we may face claims for such injuries or damage simply because we tested the structure or facility in question. In addition, during the course of a single engagement, such as the inspection of a pipeline, we often perform tests on thousands of welds. Even if the accuracy of only a small number of these test results are questioned, a customer may attempt to refuse payment for the entire project. While we do have insurance, our insurance coverage does not cover non-payment by customers and may not be adequate to cover the damages from any suchof the prior referenced claims, forcing us to bear these uninsured damages directly, which could harm our operating results and may result in additional expenses and possible loss of revenues. An accident or incident for which we are found partially or fully responsible, even if fully insured, or even an incident at a customer or site for which we provide services although we were found not to be responsible, may also result in negative publicity, which would harm our reputation among our customers and the public, cause us to lose existing and future contracts or make it more difficult for us to compete effectively, thereby significantly harming our operating performance. In addition, the occurrence of an accident or incident might also make it more expensive or extremely difficult for us to insure against similar events in the future.
Many of the sites at which we work are inherently dangerous workplaces. If we fail to maintain a safe work environment, we may incur losses and lose business.
Many of our customers, particularly in the oil and gas and chemical industries, require their inspectors and other contractors working at their facilities to have good safety records because of the inherent danger at these sites. If our employees are injured at the work place, we willcould incur costs for the injuries and lost productivity. In addition, safety records are impacted by the number and amount of workplace incidents involving a contractor’s employees. If our safety record is not within the levels required by our customers, or compares unfavorably to our competitors, we could lose business, be prevented from working at
certain facilities or suffer other adverse consequences, all of which could negatively impact our business, revenues, reputation and profitability.
make us unable to successfully provide our solutions, it could lead to a loss of revenues and customers.
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Our software and systems are complex and, accordingly, may contain undetected errors or failures. Software or system defects or inaccurate data may cause incorrect recording, reporting or display of information related to our computerasset protection solutions. Any such failures, defects and communications hardware is located atinaccurate data may prevent us from successfully providing our asset protection solutions, which could result in lost revenues. Software or system defects or inaccurate data may lead to customer dissatisfaction and could cause our customers to seek to hold us liable for any damages incurred. As a single facility, the failure of which would harmresult, we could lose customers, our businessreputation may be harmed and our financial condition and results of operations.operations could be materially adversely affected.
•our computerability to integrate our technology with new and communicationsexisting hardware is located atand software systems, of either Mistras or a single facility. We havecustomer;
•our ability to anticipate and support new standards, especially internet-based standards; and
•our ability to integrate additional software modules under development by either us or a back-up data-centercustomer, with our existing technology and storage in a different geographic area. Should a natural disaster or some other event occur that damagesoperational processes.
If we are unable to adequately address any of these factors, our primary data center or significantly disrupts its operation, such as human error, fire, flood, power loss, telecommunications failure, break-ins, terrorist attacks, actsresults of waroperations and similar events, we could suffer temporary interruption of key functionsprospects for growth and capabilities before the back-up facility is fully operational.profitability
would be adversely impacted.
If we are unable to attract and retain a sufficient number of trained certified technicians, engineers and scientists at competitive wages, changes in laws and other labor issues could materially affect our operational performance may be harmed and our costs may increase.financial performance.
We believe that our success depends, in part, upon our ability to attract, develop and retain a sufficient number of trained certified technicians, engineers and scientists at competitive wages. The demand for such employees fluctuates as the demand for NDT and inspection services fluctuate. There is currently a reduced demand for technicians because of a slowdown of spending in the oil and gas industry. However, iffluctuates. When the demand for qualified technicians increases, we will likelyoften experience increased labor costs.costs, which we may not recover in the amounts we can charge our customers. The markets for our products and services require us to use personnel trained and certified in accordance with standards set by domestic or international standard-setting bodies, such as the American Society of Non-Destructive Testing or the American Petroleum Institute.API. Because of the limited supply of these certified technicians, we expend substantial resources maintaining in-house training and certification programs. If we fail to attract sufficient new personnel or fail to motivate and retain our current personnel, our ability to perform under existing contracts and orders or to pursue new business may be harmed, preventing us from growing our business or causing us to lose customers and revenues, and the costs of performing such contracts and orders may increase, which would likely reduce our margins.
In addition, if our costs of labor or related costs increase for other reasons or if new or revised labor laws, rules or regulations or healthcare laws are adopted or implemented that further increase our labor costs, our financial performance could be materially adversely affected.
Our initiatives to improve our financial performance may not achieve results within expected time frames, or at expected levels.
We have undertaken strategies to transform our business so that we may operate more effectively, streamline and rationalize our cost structures, and look for strategic opportunities to expand our revenue and become more profitable. The extent of our future success depends on how successful we are in these endeavors.
In 2023, we commenced a broad review of our operations, which we refer to as "Project Phoenix". Through Project Phoenix, we have been exploring ways to improve profitability and Adjusted EBITDA, through meaningful margin improvement and sustained cost savings. We have completed most phases of the project, wherein efficiency and profitability opportunities were identified, actionable initiatives were validated, and many of these actions have been implemented prospectively. Project Phoenix has resulted in significant cost reductions, primarily through headcount reductions, more efficient workflows, and streamlining of processes, and also led to developing and initiating action plans to increase revenue.
We believe our Project Phoenix initiatives will benefit the Company and our stockholders in the long run. However, we cannot be certain that some of the cost reductions could result in problems with our operations, lost opportunities, weakening of controls and procedures or other adverse effects if we misjudged the impact of the headcount reductions and other changes that we have implemented and are currently implementing. In addition, headcount reductions can result in lower employee morale and result in employees deciding to leave the Company, which would further adversely impact our businesses.
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We operate in competitive markets and if we are unable to compete successfully, we could lose market share and revenues and our margins could decline.
We face strong competition from NDT and a variety of niche asset protection providers, both larger and smaller than we are. Some of our competitors have greater financial resources than we do and could focus their substantial financial resources to develop a competing business model or develop products or services that are more attractive to potential customers than what we offer. Some of our competitors are business units of companies substantially larger than us and could attempt to combine asset protection solutions into an integrated offering to customers who already purchase other types of products or services from them. Our competitors may offer asset protection solutions at lower prices than ours in order to attempt to gain market share. Smaller niche competitors with small customer bases could be aggressive in their pricing in order to retain customers. These competitive factors could reduce our market share, revenues and profits.
The success of our businesses depends, in part, on our ability to develop new asset protection solutions, increase the functionality of our current offerings and meet the needs and demands of our customers.
The market for asset protection solutions is impacted by technological change, uncertain product lifecycles, shifts in customer demands and evolving industry standards and regulations. We may not be ableIf we fail to execute effective business strategies, or fail to successfully develop and market new asset protection solutions that comply with present or emerging industry regulations and technology standards.standards, our competitive standing and results could suffer. Also, new regulations or technology standards could increase our cost of doing business.
From time to time, our customers have requested greater value and functionality in our solutions. As part of our strategy to enhance our asset protection solutions and grow our business, we continue to make investments in the research and development of new technologies, inspection tools and methodologies. We believe our future success will depend, in part, on our ability to continue to design new, competitive and broader asset protection solutions, enhance our current solutions and provide new, value-added services. Many traditional NDT and inspection services are subject to price competition by our customers. Accordingly, the need to demonstrate our value-added services is becoming more important. Developing new solutions will require continued investment, and we may experience unforeseen technological or operational challenges. In addition, our asset protection software is complex and can be expensive to develop, and new software and software enhancements can require long development and testing periods. If we are unable to develop new asset protection solutions or enhancements that meet market demands on a timely basis, including against possible alternative products developed and marketed by our competitors, we may experience a loss of customers or otherwise be likely to lose opportunities to earn revenues and to gain customers or access to markets, and our business and results of operations will be adversely affected.
Even if we develop new solutions, if our customers, or potential customers, do not see the value our solutions have over competing products and services, our operating results could be adversely impacted. In addition, because the asset protection solutions industry is rapidly evolving, we could lose insight into trends that may be emerging, which would further harm our competitive position by making it difficult to predict and respond to customer needs. If the market for our asset protection solutions does not continue to develop, our ability to grow our business would be limited and we might not be able to maintain
profitability. If we cannot convince our customers of the advantages and value of our advanced NDT services, we could lose large contracts or suffer lower profit margin.
The seasonal nature of our business reduces our revenues and profitability in the winter and summer.summer and related cash flows.
Our business primarily in our Services segment, is seasonal. The fall and spring revenues for our Services segment are typically higher than our revenues in the winter and summer because demand for our asset protection solutions from the oil and gas as well as the fossil and nuclear power industries increases during their non-peak production periods. For instance, U.S. refineries’ non-peak periods are generally in the fall, when they are retooling to produce more heating oil for winter, and in the spring, when they are retooling to produce more gasoline for summer. As a result of these trends, we generally have reduced cash flows in the fall and spring, as collections of receivables lag behind revenues, possiblynormally requiring us to borrowincrease our borrowings under our credit agreement. In addition, most of our operating expenses, such as employee compensation and property rental expense, are relatively fixed over the short term. Moreover, our spending levels are based in part on our expectations regarding future revenues. As a result, if revenues for a particular quarter are below expectations, we may not be able to proportionately reduce operating expenses for that quarter. We expect that the impact of seasonality will continue.
Our credit agreement contains financial and operating restrictions that may limit our access to credit. If we fail to comply with financial or other covenants in our credit agreement, we may be required to repay indebtedness to our existing lenders, which may harm our liquidity.
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Our credit agreement contains financial covenants that require us to maintain compliance with specified financial ratios. If we
fail to comply with these covenants, the lenders could prevent us from borrowing under our credit agreement, require us to pay
all amounts outstanding, require that we cash collateralize letters of credit issued under the credit agreement and restrict us from
making acquisitions. If the maturity of our indebtedness is accelerated, we then may not have sufficient funds available for
repayment or the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us,
or at all. We believe that it is probable, based on the New Credit Agreement (as defined herein), that we will be able to comply
with the financial covenants in our existing credit agreement and that sufficient credit remains available under the credit agreement to meet our liquidity needs. However, due to the uncertainties being caused by the significant volatility in oil prices and volatility in the aerospace production, such matters cannot be predicted with certainty.
Our current credit agreement also imposes restrictions on our ability to engage in certain activities, such as creating liens,
making certain investments, incurring more debt, disposing of certain property, paying dividends and making distributions and
entering into a new line of business. While these restrictions have not impeded our business operations to date, if our plans
change, these restrictions could be burdensome or require that we pay fees to have the restrictions waived. In addition, due to
our current debt levels and restrictions related to the debt covenants in our credit facility, we do not expect to make any
We face risks regarding our information technology and security.
Significant disruptions of our asset protection solutionsinformation technology systems or breaches of information security could harmadversely affect our reputation, inhibit market acceptance
business. We rely upon information technology systems to operate many parts of our solutionsbusiness. We routinely collect, store and cause us to lose customers.
We deploy and operate various technical and procedural controls to maintain the confidentiality and integrity of such sensitive
or confidential information. Furthermore, as we automate more of our inspection process and procedures, including through the
use of MISTRAS Digital, we become more vulnerable to security breaches and other system disruptions. In addition, we rely on
third parties for significant elements of our information technology infrastructure and, as a result, we are managing many
independent vendor relationships with third parties who may or could have access to our confidential information. The size and
complexity of our information technology and information security systems, and those of our third-party vendors with whom we contract (and the large amounts of confidential information that is present on them), make such systems potentially vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees or vendors, or from attacks by malicious third parties. Such attacks are of ever-increasing levels of sophistication and expertise, including organized criminal groups, “hacktivists” and others. Due to the nature of some of these attacks, there is a risk that they may remain undetected for a period of time. While we have invested in the protection of data and information technology, there can be no assurance that our asset protection solutions allow usefforts will prevent service interruptions or security breaches. Any such interruption or breach of our systems could adversely affect our business operations and/or result in the loss of critical or sensitive confidential information, and could result in financial, legal, business and reputational harm to remotely control and store dataus. We maintain cyber liability insurance. However, this insurance may not be sufficient to cover the financial, legal, business or reputational losses that may result from equipment at commercial, institutional and industrial locations. Our asset protection solutions rely on the secure electronic transmissionan interruption or breach of proprietary data over the internet or other networks.our systems. The occurrence or perception of security breaches in connection with our asset protection solutions or our customers’ concerns about internet security or the security of our solutions, whether warranted or not, would likely harm our reputation orand business, inhibit market acceptance of our asset protection solutions and cause us to lose customers, any of
which would harm our financial condition and results of operations.
and storage in a different geographic area. Should a natural disaster or some other event occur that damages our primary data
center or significantly disrupts its operation, such as human error, fire, flood, power loss, telecommunications failure, break-ins,
terrorist attacks, acts of war and similar events, we could suffer temporary interruption of key functions and capabilities before
the back-up facility is fully operational.
Events such as natural disasters, industrial accidents, epidemics, pandemics, war and acts of terrorism, and adverse weather
conditions could disrupt our business or the business of our customers, which could significantly harm our operations, financial results and cash flow.
Our operations and those of our customers are susceptible to the occurrence of catastrophic events outside our control, which
may include events like epidemics, pandemics and other health crises, severe weather conditions, industrial accidents, and acts
of war and terrorism, to name a few. We continue to actively monitor the conflict in the Middle East between Israel and Hamas, and the war between Russia and Ukraine and the sanctions imposed upon Russia in order to assess impacts to our customers and our operations. At this time, we do not believe there is a material impact on our business. If,operations, however the future impact of the conflict, and additional sanctions imposed, are uncertain.
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Any such events could cause a serious business disruption that reduces our customers’ need or interest in handling this information, we failpurchasing our asset
protection solutions. In the past, such events have resulted in order cancellations and delays because customer equipment,
facilities or operations have been damaged, or are not then operational or available. A large portion of our customer base has
operations in the Gulf of Mexico, which is subject to comply with privacy or security laws, we could incur civil liabilityhurricanes and tropical storms. Hurricane-related disruptions to government agencies,our
customers’ operations have adversely affected our revenues in the past. Such events in the future may result in substantial delays in the provision of solutions to our customers and individuals whose privacy is compromised.the loss of valuable equipment. In addition, third parties may attempt to breach our securityresults can be adversely impacted by severe winter weather conditions, which can result in lost workdays and temporary closures of customer facilities or inappropriatelyoutdoor projects.
In addition, these events could disrupt commodity prices or financial markets or have other negative macroeconomic impacts,
such as the conflict in the Middle East between Hamas and Israel and the on-going war between Ukraine and Russia, which could harm our asset protection solutions through computer viruses, electronic break-ins and other disruptions. If a breach is successful, confidential information may be improperly obtained, for which we may be subject to lawsuits and other liabilities.business.
Risks Related to Our Common Stock
A significant stockholder controlshas significant influence over the direction of our business. The concentrated ownership of our common stock may prevent other stockholders from influencing significant corporate decisions.
Dr. Sotirios J. Vahaviolos, our Executivefounder and Chairman Emeritus, owns approximately 37%6% of our outstanding common stock.stock, his three adult children own an additional 6%, in the aggregate, and a grantor retained annuity trust he created, for which his daughter is the sole trustee, owns approximately 22%. As a result, Dr. Vahaviolos exhibitsand his family have significant control over ourthe Company and hasthey have the ability to exert substantial influence over all matters requiring approval by our shareholders,stockholders, including the election and removal of directors, amendments to our certificate of incorporation, and any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. This concentration of ownership could be disadvantageous to other shareholdersstockholders with differing interests from Dr. Vahaviolos.Vahaviolos and his family.
We currently have no plans to pay dividends on our common stock.
We have not declared or paid any cash dividends on our common stock to date, and we do not anticipate declaring or paying any dividends on our common stock in the foreseeable future. To the extent we do not pay dividends on our common stock, investors must look solely to stock appreciation for a return on their investment.
Shares eligible for future sale may cause the market price for our common stock to decline even if our business is doing well.
Future sales by us or by our existing shareholdersstockholders of substantial amounts of our common stock in the public market, or the perception that these sales may occur, could cause the market price of our common stock to decline. This could also impair our ability to raise additional capital in the future through the sale of our equity securities. Under our certificate of incorporation, we are authorized to issue up to 200,000,000 shares of common stock, of which approximately 28,302,000 shares of common stock were outstanding as of March 5, 2018. In addition, we have approximately 3,093,000 shares of common stock reserved for issuance related to stock options and restricted stock units that were outstanding as of March 5, 2018. We cannotcannot predict the size of future issuances of our common stock or the effect, if any, that future sales and issuances of shares of our common stock, or the perception of such sales or issuances, would have on the market price of our common stock. We currently have approximately 170 million shares of common stock available for issuance.
Provisions of our charter,certificate of incorporation, bylaws and of Delaware law could discourage, delay or prevent a change of control of our company, which may adversely affect the market price of our common stock.
Certain provisions of our certificate of incorporation and bylaws could discourage, delay or prevent a merger, acquisition, or other change of control that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions:
•allow the authorized number of directors to be changed only by resolution of our board of directors;
•require that vacancies on the board of directors, including newly created directorships, be filled only by a majority vote of directors then in office;
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•authorize our board of directors to issue, without stockholder approval, preferred stock that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our board of directors;
•require that stockholder actions must be effected at a duly called stockholder meeting by prohibiting stockholder action by written consent;
•prohibit cumulative voting in the election of directors, which may otherwise allow holders of less than a majority of stock to elect some directors; and
•establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at stockholder meetings and limit the right to call special meetings of stockholders to the Chairman of the Board, theour board, our Chief Executive Officer, theour board of directors acting pursuant to a resolution adopted by a majority of directors or theour Secretary upon the written request of stockholders entitled to cast not less than 35% of all the votes entitled to be cast at such meeting.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a prescribed period of time.
General Risk Factors
Our stock price could fluctuate for numerous reasons, including variations in our results.
Our quarterly operating results have fluctuated in the past and may do so in the future. Accordingly, we believe that
period-to-period comparisons of our results of operations may be the best indicators of our business. You should not rely upon
the results of one quarter as an indication of future performance. Our revenues and operating results may fall below the expectations of securities analysts or investors in any future period. Our failure to meet these expectations may cause the market price of our common stock to decline, perhaps substantially. Our quarterly revenues and operating results may vary depending on a number of factors, including those listed previously under “—Risks Related to Our Business.” In addition, the price of our
common stock is subject to general economic, market, industry, and competitive conditions, the risk factors discussed herein
and numerous other conditions outside of our control.
Deteriorations in economic conditions in certain markets or other factors may cause us to recognize additional impairment charges for our goodwill.
During the year ended December 31, 2023, we recognized goodwill impairment charges of $13.8 million within the International reporting units. Future deterioration in industry or economic conditions in which we operate, including increased inflationary costs, energy costs, labor costs, social pressures and disruptions in Europe, the Middle East or elsewhere as a result of the war between Russia and Ukraine and the conflict between Israel and Hamas, disruptions to our business, not effectively integrating acquired businesses, macroeconomic factors or other factors, may cause impairment charges to our goodwill in future periods.
We are subject to privacy and data security/protection laws in the jurisdictions in which we operate and may be exposed to substantial costs and liabilities associated with such laws and regulations.
The regulatory environment surrounding information security and privacy is increasingly demanding, with frequent imposition of new and changing requirements. The European Union's General Data Protection Regulation (“GDPR”), which became effective in May 2018, imposed significant new requirements on how companies process and transfer personal data, as well as significant fines for non-compliance. In addition to GDPR, many states in the U.S. and provinces in Canada have enacted, or are considering, data privacy requirements similar to GDPR, and thus we will need to ensure our procedures comply with these various state and provincial laws. Compliance with changes in privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes, which could have a material adverse effect on our financial condition and results of operations. In addition, the payment of potentially significant fines or penalties in the event of a breach of privacy and information security laws, as well as the negative publicity associated with such a breach, could damage our reputation and adversely impact product demand and customer relationships.
If we lose key members of our senior management team upon whom we are dependent, we may be less effective in managing our operations and may have more difficulty achieving our strategic objectives.
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Our future success depends to a considerable degree upon the availability, contributions, vision, skills, experience and effort of our senior management team. We have in place various compensation programs, such as an annual cash incentive program, equity incentive program and a severance policy, each designed to incentivize and retain our key senior managers. At this time, we do not have any reason to believe that we may lose the services of any of these key persons in the foreseeable future and we believe our compensation programs will help us retain these individuals. However, an unplanned loss or interruption of the service of numerous key members of our senior management team could harm our business, financial condition and results of operations and could significantly reduce our ability to manage our operations and implement our strategy.
Intellectual property may impact our business and results of operations.
Our ability to compete effectively depends in part upon the maintenance and protection of the intellectual property related to our asset protection solutions. Patent protection is unavailable for certain aspects of the technology and operational processes important to our business and any patent or patent applications, trademarks or copyrights held by us or to be issued to us, may not adequately protect us. To date, we have relied principally on copyright, trademark and trade secrecy laws, as well as confidentiality agreements and licensing arrangements, and more recently, patent protection, to establish and protect our intellectual property. However, we have not obtained confidentiality agreements from all our customers. Although we obligate our employees to confidentiality, we cannot be certain that these obligations will be honored or enforceable in all circumstances.
We may require additional capital to support business growth, which might not be available.
We intend to continue making investments to support our business growth and may require additional funds to respond to business challenges or opportunities, including the need to develop new, or enhance our current, asset protection solutions, enhance our operating infrastructure or acquire businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our current stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Our current credit facility meets our current needs, except that due to our current debt levels, the facility limits our ability to make acquisitions without the banks' approval until our debt ratio improves. If we were to secure other debt financing in the future, it could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, no assurance can be given that adequate or acceptable financing will be available to us, in which case we may not be able to grow our business, including through acquisitions, or respond to business challenges.
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
ITEM 1C.CYBERSECURITY
We prioritize the protection of our data assets, the private data of our employees, customers, and vendors, and personal information. To assess, identify, and manage the risks of cybersecurity threats to our information systems and the associated costs, we maintain a robust cybersecurity program that is integrated into the Company’s overall Enterprise Risk Management strategy. We understand that threats from hackers and other cyber criminals continues to adapt and become more sophisticated, and so must our response to these threats.
Governance
Our Board of Directors (“the Board”) is responsible for oversight of our information security program. The Audit Committee, Enterprise Risk Committee, and the Information Technology Leadership Team support the Board in the oversight of our information security program and are focused on cybersecurity and data privacy risk, including compliance with all applicable laws and regulations, incident response planning, timely identification and assessment of incidents, incident recovery and business continuity considerations.
The Divisional Vice President of IT has a biannual meeting with the Audit Committee and other senior executives to provide an update of our current cyber security posture, IT Risk assessment, and compliance with multiple applicable regulations, frameworks, and other privacy initiatives. The Divisional Vice President of IT, along with the Information Technology Leadership Team, also meet with other senior executives every other week throughout the year to discuss on-going cyber security and governance initiatives and risk mitigations. The Divisional Vice President of IT has fifteen years of cybersecurity
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experience, including ten years with Mistras Group, and the Information Technology Leadership Team has a combined fifteen years of cybersecurity experience, including a combined ten years with Mistras Group. The Divisional Vice President of IT and members of the Information Technology Leadership Team maintain industry recognized credentials relevant to their roles.
The Divisional Vice President of IT manages both an Information Security team and an IT Risk team within the Department of Information Technology. The IT Risk team is responsible for governance and compliance related to regulations and frameworks for data classification, data privacy, handling of private data and CUI, and internal policies and procedures. The Cyber Security team is responsible for identifying and implementing technologies to mitigate IT risk, enhance data security, and identify and defend against attacks. Both teams work closely together to establish the cybersecurity policies for the Company, evaluate the current risk profile, and to prevent, investigate, mitigate, and remediate any cyber-attacks on the Company.
Risk Management and Strategy
The IT Risk team uses an asset-based risk approach for evaluating cybersecurity risks and appropriate risk mitigation. All IT assets are reviewed against a broad range of risks twice a year and are evaluated for likelihood of occurrence and impact should they occur. These risks are then mapped to our global inventory of systems and the type of data as well as the number of systems to which a risk applies are evaluated. These factors are used to determine a risk score for each of the reviewed risks, and mitigations are subsequently applied to reduce those risk scores to determine the areas of focus for increasing mitigations. This exercise is logged biannually to monitor improvement.
We have several physical, automated, and administrative controls in place to mitigate the success and extent of any cyber breaches. Our controls are designed to require review of tasks which may occur in the normal course of business but are also common vectors of attack. Automated controls are implemented in all cases where one is feasible, and in other cases standard procedures or documented instructions are in place to ensure that actions are proper and approved before they occur.
Policies related to cybersecurity risks are documented, reviewed annually, and published internally, which define the correct processes for identifying, containing, remediating, and responding to cybersecurity incidents. Our data protection policies define the establishment of the classification of types of data. Based upon this data classification, we determine an incident’s materiality and establish the appropriate response, the incident management team, and the communications required to be distributed to third parties. Incident management policies are in place to establish the proper communication channels and responsible parties for different levels of materiality of an incident. We practice these policies and procedures in a tabletop or simulated fashion multiple times annually.
Each employee plays a role in safeguarding our data assets, and the protection of our data is ingrained in every employee’s day to day activities. Employees must participate in annual Cyber Security training. Simulated testing occurs multiple times throughout the year, including drop testing and SPAM / PHISHING campaigns, and the results are tracked for compliance and we address any weaknesses identified in such trainings and testings as necessary.
The Information Security team performs internal threat hunting, vulnerability scanning, log aggregation, and identity monitoring on an on-going basis. Web site, code, and configuration vulnerability scans are performed as necessary to ensure that changes do not introduce vulnerabilities into our systems. Information Security and IT Risk personnel receive regular training to ensure up-to-date expert knowledge.
To supplement our cybersecurity risk assessment, identification, management, and mitigation efforts, we engage third party cyber security experts. Cyber security assessments are performed at least annually, results are documented and reviewed, and mitigation plans are put in place to reduce any threats identified. The classification of data processed by any system is considered when implementing mitigations.
We recognize the importance of overseeing and identifying material risks from cybersecurity threats associated with our use of third-party vendors. We perform a thorough review of the cyber security measures in place, including any documented third-party audits, for any partners who process our data. Sign-off is required by the Information Security team before agreements can be put in place.
We believe that our current preventative actions and response activities provide adequate measures of protection against security breaches and generally reduce our cybersecurity risks. However, cybersecurity threats are constantly evolving, are becoming more frequent and more sophisticated and are being made by groups of individuals with a wide range of expertise and motives, which increases the difficulty of detecting and successfully defending against them. While we have implemented measures to safeguard our operational and technology systems and have established a culture of continuous learning, monitoring and improvement, the evolving nature of cybersecurity attacks and vulnerabilities means that these protections may
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not always be effective. However, as of the date of this Annual Report, management has determined that none of the cybersecurity attacks that we have experienced has resulted in a material impact on our financial condition, results of operations or business strategy. In addition, as of the date of this Annual Report, we are not aware of any risks from cybersecurity threats that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations and financial condition.
For additional information regarding how cybersecurity threats have affected or are reasonably likely to materially affect our business strategy, results of operations or financial condition, see Part I, Item 1A, “Risk Factors—Risks Related to Our Business—We face risks regarding our information technology and security”.
ITEM 2.PROPERTIES
As of December 31, 2017,2023, we operated approximately 120 offices110 facilities in 1411 countries, with our corporate headquarters located in Princeton Junction, New Jersey. Our headquarters in Princeton Junction is our primary location, where most of our manufacturing and research and development is conducted. While we lease most of our facilities, as of December 31, 2017,2023, we owned properties located in Monroe, North Carolina; Trainer, Pennsylvania; LaPorte, Texas; Burlington, Washington; Gillette, Wyoming, Ellabell, Georgia;Evanston, Wyoming; and Jonquiere, Quebec.Quebec, Canada. Our ServicesNorth America segment utilizes approximately 80 offices70 facilities throughout North America (including Canada)Canada and Mexico). Our Products and Systems segment’s primary location is in our Princeton Junction, NJNew Jersey facility. Our International segment has approximately 40 offices35 facilities including locations in Belgium, Brazil, France, Germany, Greece, India, the Netherlands and the United Kingdom. We believe that all of our facilities are well maintained and are suitable and adequate for our current needs.the foreseeable future.
ITEM 3.LEGAL PROCEEDINGS
We are subject to periodic legal proceedings, investigations and claims that arise in the ordinary course of business. See “Litigation”“Legal Proceedings and Government Investigations - Litigation and Commercial Claims” in Note 18 — Commitments18-Commitments and Contingencies to our audited consolidated financial statements contained in Item 8 of this Annual Report for a description of legal proceedings involving us and our business, which is incorporated herein by reference.
ITEM 4.MINE SAFETY DISCLOSURES
None.
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
Market for Common Stock
Our common stock currently trades on the New York Stock Exchange (NYSE) under the ticker symbol “MG.” The following table sets forth for the periods indicated the range of high and low sales prices, based on closing stock price, of our common stock.
| Year ended December 31, 2017 | |||||||
| High | Low | ||||||
| Quarter ended March 31, 2017 | $ | 26.33 | $ | 20.00 | |||
| Quarter ended June 30, 2017 | $ | 22.78 | $ | 20.54 | |||
| Quarter ended September 30, 2017 | $ | 22.51 | $ | 17.12 | |||
| Quarter ended December 31, 2017 | $ | 23.47 | $ | 20.38 | |||
| Transition period ended December 31, 2016 | |||||||
| Transition period: | High | Low | |||||
Quarter ended June 30, 2016 (1) | $ | 25.32 | $ | 23.01 | |||
| Quarter ended September 30, 2016 | $ | 25.86 | $ | 22.81 | |||
| Quarter ended December 31, 2016 | $ | 26.07 | $ | 20.04 | |||
| Year ended May 31, 2016 | Year ended May 31, 2015 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| Quarter ended August 31, | $ | 20.14 | $ | 13.88 | $ | 25.04 | $ | 20.70 | ||||||||
| Quarter ended November 30, | $ | 21.53 | $ | 12.79 | $ | 21.55 | $ | 15.98 | ||||||||
| Quarter ended February 28, | $ | 22.59 | $ | 18.42 | $ | 21.50 | $ | 15.87 | ||||||||
| Quarter ended May 31, | $ | 26.00 | $ | 22.02 | $ | 19.34 | $ | 17.50 | ||||||||
Holders of Record
As of March 5, 2018,6, 2024, there were 810 holders of record of our Common Stock.common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York 11219.
Dividends
No cash dividends have been paid on our Common Stock to date. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future.
Recent Sale of Unregistered Securities
None.
Stock Performance
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The line graph below compares the cumulative total shareholder value return of our common shares with the cumulative total returns of an overall stock market index, the Russell 3000, and our peer group index. This graph assumes an investment of $100 in our common shares and each index (with all dividends reinvested) on December 31, 2018.
Purchases of Equity Securities
The following table sets forth the shares of our common stock we acquired during the fourth quarter of 20172023. All purchases were effected pursuant to the surrender of shares by employees to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock units.
| Month Ending | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | ||||||
| October 31, 2023 | 27,352 | $ | 5.42 | |||||
| November 30, 2023 | 108 | $ | 6.71 | |||||
| December 31, 2023 | 118,102 | $ | 6.95 | |||||
`ITEM 6.[RESERVED]
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| Month Ending | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Approximate dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) | |||||||||
| October 31, 2017 | 1,233 | $ | 20.69 | — | $ | 25,081,657 | |||||||
| November 30, 2017 | 2,741 | $ | 21.33 | — | $ | 25,081,657 | |||||||
| December 31, 2017 | 2,918 | $ | 23.47 | — | $ | 25,081,657 | |||||||
Contents
| For the year ended | For the Transition period ended | For the year ended May 31, | |||||||||||||||||||||||
| December 31, 2017 (1) | December 31, 2016 (2) | 2016 (3) | 2015 (3) | 2014 (3) | 2013 (4) | ||||||||||||||||||||
| ($ in thousands, except per share data) | |||||||||||||||||||||||||
| Statement of Income Data: | |||||||||||||||||||||||||
| Revenues | $ | 700,970 | $ | 404,161 | $ | 719,181 | $ | 711,252 | $ | 623,447 | $ | 529,282 | |||||||||||||
| Gross profit | 187,712 | 117,004 | 203,008 | 184,733 | 172,943 | 148,371 | |||||||||||||||||||
| Income from operations | 4,160 | 17,533 | 43,177 | 30,353 | 38,295 | 27,554 | |||||||||||||||||||
| Net (loss) income attributable to Mistras Group, Inc. | $ | (2,175 | ) | $ | 9,568 | $ | 24,654 | $ | 16,081 | $ | 22,518 | $ | 11,646 | ||||||||||||
| Per Share Information: | |||||||||||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||||
| Basic | 28,422 | 28,989 | 28,856 | 28,613 | 28,365 | 28,141 | |||||||||||||||||||
| Diluted | 28,422 | 30,125 | 29,891 | 29,590 | 29,324 | 29,106 | |||||||||||||||||||
| (Loss) earnings per common share: | |||||||||||||||||||||||||
| Basic | $ | (0.08 | ) | $ | 0.33 | $ | 0.85 | $ | 0.56 | $ | 0.79 | $ | 0.41 | ||||||||||||
| Diluted | $ | (0.08 | ) | $ | 0.32 | $ | 0.82 | $ | 0.54 | $ | 0.77 | $ | 0.40 | ||||||||||||
| Balance Sheet Data: | |||||||||||||||||||||||||
| Cash and cash equivalents | $ | 27,541 | $ | 19,154 | $ | 21,188 | $ | 10,555 | $ | 10,020 | $ | 7,802 | |||||||||||||
| Total assets | 554,441 | 469,427 | 482,675 | 471,727 | 443,972 | 377,997 | |||||||||||||||||||
| Total long-term debt and obligations under capital leases, including current portion | 181,491 | 103,466 | 104,776 | 132,822 | 97,563 | 77,956 | |||||||||||||||||||
| Total Mistras Group, Inc. stockholders’ equity | $ | 270,619 | $ | 270,582 | $ | 276,163 | $ | 244,819 | $ | 242,104 | $ | 210,053 | |||||||||||||
| Cash Flow Data: | |||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 55,239 | $ | 30,259 | $ | 68,124 | $ | 49,840 | $ | 36,873 | $ | 43,503 | |||||||||||||
| Net cash used in investing activities | (102,797 | ) | (17,374 | ) | (16,752 | ) | (49,651 | ) | (38,005 | ) | (45,479 | ) | |||||||||||||
| Net cash (used in) provided by financing activities | 53,605 | (12,869 | ) | (40,378 | ) | 2,066 | 3,262 | 1,144 | |||||||||||||||||
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONOPERATIONS
The following Management’s Discussion and Analysis (“MD(this “MD&A”) provides a narrativediscussion of our results of operations and financial position for the year ended December 31, 20172023. This section generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 are included in Part II–Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the comparable periodfiscal year ended December 31, 2016,2022 filed with the transition period ended December 31, 2016 and the comparable period ended December 31, 2015 (whichSEC on March 15, 2023, which discussion is referred to as "transition period 2015") and the fiscal years ended May 31, 2016 and 2015, respectively, and our financial position as of December 31, 2017 and December 31, 2016, respectively. Theincorporated herein by reference. This MD&A should be read together with our audited consolidated financial statements and related notes included in Item 8 in this Annual Report on Form 10-K.Report. Unless otherwise specified or the context otherwise requires, “Mistras,” “the Company,"MISTRAS," the "Company,” “we,” “us” and “our” refer to Mistras Group, Inc. and its consolidated subsidiaries. TheThis MD&A includes the following sections:
•Forward-Looking Statements
•Overview
•Note about Non-GAAP Measures
•Consolidated Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Estimates
•Recent Accounting Pronouncements
Forward-Looking Statements
This annual reportAnnual Report on Form 10-K, including this MD&A, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (Securities Act), and Section 21E of the Securities Exchange Act of 1934 (Exchange Act).Act. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements. See “Forward-Looking Statements” at the beginning of Item 1 of this Annual Report.
While our business and operations were negatively impacted the past several years by the COVID-19 pandemic, at the time of this Annual Report, the effects of the COVID-19 pandemic have subsided and our operations have normalized to pre-pandemic levels.
We are currently unable to predict with certainty the effects that inflationary pressures and the Russian-Ukrainian war may have on our business, results of operations or liquidity or in other ways which we cannot yet determine. To date, our European operations have experienced increased costs associated with higher energy costs, among others, due in part to the on-going war between Russia & Ukraine. We will continue to monitor market conditions and respond accordingly.
Overview
We offer our customers “one source for asset protection solutions”® and are a leading global"one source" multinational provider of integrated technology-enabled asset protection solutions, usedhelping to evaluatemaximize the structural integritysafety and reliability ofoperational uptime for civilization’s most critical energy, industrial and public infrastructure. We combine industry-leading productscivil assets.
Backed by an innovative, data-driven asset protection portfolio, proprietary technologies, strong commitment to Environmental, Social, and Governance ("ESG") initiatives, and a decades-long legacy of industry leadership, MISTRAS leads customers in the oil and gas, petrochemical, aerospace and defense, renewable and nonrenewable power, civil infrastructure, and manufacturing industries towards achieving operational and environmental excellence. By supporting these customers that help fuel our vehicles and power our society; inspecting components that are trusted for commercial, defense, and space craft; building real-time monitoring equipment to enable safe travel across bridges; and helping to propel sustainability, MISTRAS helps the world at large.
The Company enhances value for its customers by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial IoT-connected digital software and monitoring solutions. The Company’s core
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capabilities also include non-destructive testing ("NDT") field and in-line inspections enhanced by advanced robotics, laboratory quality control and assurance testing, sensing technologies expertise inand NDT equipment, asset and mechanical integrity (MI), Non-Destructive Testing (NDT), Destructive Testing (DT),engineering services, and light mechanical maintenance and predictive maintenance (PdM) services, process and fixed asset engineering and consulting services, proprietary data analysis and our world class enterprise inspection database management and analysis software, PCMS, to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity management and assessments. These mission critical solutions enhance our customers’ ability to comply with governmental safety and environmental regulations, extend the useful life of their assets, increase productivity, minimize repair costs, manage risk and avoid catastrophic disasters. access services.
Our operations consist of three reportable segments: North America (which we previously referred to as our Services segment), International, and Products and Systems.
•International offers services, products and systems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.
•Products and Systems designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States.
Given the role our solutions play in ensuringenhancing the safe and efficient operation of infrastructure, we have historically provided a majority of our servicessolutions to our customers on a regular, recurring basis. We serveperform these services largely at our customers’ facilities, while primarily servicing our aerospace customers at our network of state-of-the-art, in-house laboratories. These solutions typically include NDT and inspection services, and can also include a global customer basewide range of companies with asset-intensive infrastructure,mechanical services, including companies in the oilheat tracing, pre-inspection insulation stripping, coating applications, re-insulation, engineering assessments and gas (downstream, midstream, upstreamlong-term condition-monitoring. Under this business model, many customers outsource their inspection to us on a “run and petrochemical), commercial aerospace and defense, power generation (natural gas, fossil, nuclear, alternative, renewable, and transmission and distribution), public infrastructure, chemicals, transportation, primary metals and metalworking, pharmaceutical/biotechnology and food processing industries and research and engineering institutions. As of December 31, 2017, we had approximately
reach, complement our existing offerings, and leverage our fixed costs. We have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the integration of acquired companies. These acquisitions have provided us with additional products,service lines, technologies, resources and customers thatwhich we believe will enhance our advantages over our competition.
We believe long-term growth can be realized in our target markets. Our level of business and financial results are impacted by world-wide macro- and micro-economic conditions generally, as well as those within our target markets. Among other things, we expect the timing of our oil and gas customers' inspection expenditures to be impacted by oil price fluctuations.
We have continued providing our customers with an innovative asset protection software ecosystem through our MISTRAS OneSuite platform. The software platform offers functions of MISTRAS' software and services brands as integrated apps on a cloud environment. OneSuite serves as a single access portal for customers' data activities and provides access to 90 plus applications being offered on one centralized platform.
2023 Developments
The Russian-Ukrainian war and the conflict in the Middle East between Israel and Hamas continue to create disruptions in the oil and gas market and the supply chain in general, which is resulting in some disruption to our business operations primarily in Europe due to increased energy costs in connection with the Russian-Ukrainian war.
In 2022, the Company eliminated substantially all of the COVID related cost reduction initiatives undertaken in 2020, including re-installment of the savings plan employer match and increasing wages back to pre-pandemic amounts. At the time of this Annual Report, the effects of the COVID-19 pandemic have subsided, and our operations are continuing to normalize to pre-pandemic levels.
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Our cash position and liquidity remain strong. As of December 31, 2023, our cash and cash equivalents balance was approximately $17.6 million and our Credit Agreement provides us with significant liquidity.
In April 2021, the Biden Administration announced aggressive initiatives to battle climate change, which includes potential plans for a significant reduction in the use of fossil fuels and a transition to electric vehicles and increased use of alternative energy. Any legislation or regulations that may be adopted to implement these measures may negatively impact our customers in the oil and gas market over the long-term, which presently is our largest market, although this initiative will likely benefit the alternative energy market, such as wind energy, for which we provide products and services. At this time, it is difficult to determine the magnitude and timing of the impact that climate change initiatives and legislation, if any, will have on these markets and the resulting impact on our business and operational results.
The Company is currently unable to predict with certainty the overall impact that the factors discussed above and the effect of inflationary pressures may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine. During the third quarter of 2023, a triggering event was identified within the Company's reporting units within the International segment due to decreased gross margin in the current period as a result of inflationary pressures and rising energy costs. This resulted in goodwill impairment charges of $13.8 million within the International reporting units during the third quarter of 2023. The Company will continue to monitor market conditions and respond accordingly. Refer to Item 1A. Risk Factors in Part I of our 2023 Annual Report.
Note about Non-GAAP Measures
The Company prepares its consolidated financial statements in accordance with U.S. GAAP. In this MD&A under the heading "Income (loss) from Operations", the non-GAAP financial performance measure "Income (loss) from operations before special items"items” is used for each of our three operating segments, the Corporate segment and the Total Company,"Total Company", with tables reconciling the measure to a financial measure under GAAP. This non-GAAP measurepresentation excludes from the GAAP measure "Income (loss) from Operations" (a) transaction expenses related to acquisitions, such as professional fees and due diligence costs, (b) the net changes in the fair value of acquisition-related contingent consideration liabilities, (c) impairment charges, (d) reorganization and (d)other costs, which includes items such as severance, labor relations matters and asset and lease termination costs and (e) other special items. These special itemsadjustments have been excluded from the GAAP measure because these expenses and credits are not related to the Company’sour or Segment’sany individual segment's core business operations. The acquisition related costs and special items can be a net expense or credit in any given period.
Our management uses this non-GAAP measure as a measure of operating performance and liquidity to assist in comparing performance from period to period on a consistent basis, as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations. We believe investors and other users of our financial statements benefit from the presentation of "Income before special items” for each of our three segments, the Corporate segment and the Total Companythis non-GAAP measure in evaluating our performance. Income (loss) before special items excludes the identified special items,adjustments, which provides additional tools to compare our core business operating performance on a consistent basis and measure underlying trends and results in our business. Income (loss) before special items is not used to determine incentive compensation for executives or employees, nor is it a replacement for the reported GAAP financial performance and/or necessarily comparable to the non-GAAP financial measures of other companies. Any measure that eliminates the foregoing items has material limitations as a performance or liquidity measure and should not be considered alternatives to net income (loss) or any other measures derived in accordance with GAAP. Because Income (loss) from operations before special items may not be calculated in the same manner by all companies, this measure may not be comparable to other companies non-GAAP financial measures.similarly titled measures used by other companies.
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Consolidated Results of Operations
Year ended December 31, 20172023 vs. Year ended December 31, 20162022
The following table summarizes our consolidated statementsConsolidated Statements of operationsIncome (Loss) for the years ended December 31, 20172023 and 2016:2022:
| For the year ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| ($ in thousands) | |||||||||||
| Revenue | $ | 705,473 | $ | 687,373 | |||||||
| Gross profit | 203,807 | 198,173 | |||||||||
| Gross profit as a % of Revenue | 28.9 | % | 28.8 | % | |||||||
| Income (loss) from operations | (1,904) | 19,799 | |||||||||
| Income from operations as a % of Revenue | (0.3) | % | 2.9 | % | |||||||
| Income (loss) before provision for income taxes | (18,665) | 9,294 | |||||||||
| Net income (loss) | (17,445) | 6,574 | |||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | (17,453) | $ | 6,499 | |||||||
| For the year ended December 31, | ||||||||
| 2017 | 2016 (unaudited) | |||||||
| ($ in thousands) | ||||||||
| Revenues | $ | 700,970 | $ | 684,762 | ||||
| Gross profit | 187,712 | 194,134 | ||||||
| Gross profit as a % of Revenue | 27 | % | 28 | % | ||||
| Total operating expenses | 183,552 | 168,588 | ||||||
| Operating expenses as a % of Revenue | 26 | % | 25 | % | ||||
| Income from operations | 4,160 | 25,546 | ||||||
| Income from operations as a % of Revenue | 1 | % | 4 | % | ||||
| Interest expense | 4,386 | 3,075 | ||||||
| (Loss) income before provision for income taxes | (226 | ) | 22,471 | |||||
| Provision for income taxes | 1,942 | 8,008 | ||||||
| Net (loss) income | (2,168 | ) | 14,463 | |||||
| Less: net income attributable to noncontrolling interests, net of taxes | 7 | 54 | ||||||
| Net (loss) income attributable to Mistras Group, Inc. | $ | (2,175 | ) | $ | 14,409 | |||
Revenues
Revenues by segment for the years ended December 31, 20172023 and 20162022 were as follows:
| For the year ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| ($ in thousands) | |||||||||||
| Revenue | |||||||||||
| North America | $ | 579,330 | $ | 573,336 | |||||||
| International | 124,414 | 112,425 | |||||||||
| Products and Systems | 12,986 | 12,727 | |||||||||
| Corporate and eliminations | (11,257) | (11,115) | |||||||||
| $ | 705,473 | $ | 687,373 | ||||||||
| For the year ended December 31, | ||||||||
| 2017 | 2016 (unaudited) | |||||||
| ($ in thousands) | ||||||||
| Revenues | ||||||||
| Services | $ | 543,565 | $ | 519,378 | ||||
| International | 144,265 | 148,761 | ||||||
| Products and Systems | 23,297 | 26,049 | ||||||
| Corporate and eliminations | (10,157 | ) | (9,426 | ) | ||||
| $ | 700,970 | $ | 684,762 | |||||
Revenue was $701.0$705.5 million for the year ended December 31, 2017,2023, an increase of $16.2$18.1 million, or 2%2.6%, compared with the year ended December 31, 2016.2022. The increase was driven by the ServicesNorth America segment, which increased by $24.2experienced a revenue increase of $6.0 million, or 5%1.0%, partially offset by a decrease of $4.5 million, or 3% from the International segment and the Products and Systems segment, which decreased $2.8 million, or 11%. The Services segment increase was driven by mid-single digit acquisition growth.single-digit organic growth in certain end markets. The International segment decrease was drivenrevenues increased by a mid-single digit organic decline, offset by$12.0 million, or 10.7%, due predominantly to low single digitsingle-digit favorable impact of foreign exchange rates.rates and by mid single-digit organic growth. The Products and Systems segment decrease wasincreased by $0.3 million, or 2.0%, driven by lowerhigher sales volume.
36
| For the year ended December 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||
| Oil and Gas Revenue by sub-category | |||||||||||||||||||||||
| Upstream | $ | 157,828 | $ | 146,056 | |||||||||||||||||||
| Midstream | 101,278 | 97,005 | |||||||||||||||||||||
| Downstream | 156,889 | 144,691 | |||||||||||||||||||||
| Total | $ | 415,995 | $ | 387,752 | |||||||||||||||||||
Oil and gas upstream customer revenue increased approximately $11.8 million, or 8%, for the year ended December 31, 2017,2023 compared to 57%the year ended December 31, 2022, due to continued market share gains and expanded exploration operations, as compared to the prior year period.
Midstream customer revenues increased approximately $4.3 million, or 4%, for the year ended December 31, 2016. Revenues2023 compared to the year ended December 31, 2022, due to increased pipe inspection services.
Downstream customer revenue increased $12.2 million, or 8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, due to increased sales volume at customer refineries and increased customer turnarounds.
The following table presents revenue by type, explained directly below the table.
| For the year ended December 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| ($ in thousands) | |||||||||||||||||||||||
| Revenue by type | |||||||||||||||||||||||
| Field Services | $ | 470,433 | $ | 455,051 | |||||||||||||||||||
| Shop Laboratories | 58,188 | 48,809 | |||||||||||||||||||||
| Data Analytical Solutions | 72,458 | 62,410 | |||||||||||||||||||||
| Other | 104,394 | 121,103 | |||||||||||||||||||||
| Total | $ | 705,473 | $ | 687,373 | |||||||||||||||||||
In presenting the allocation of revenues by type in the table above, management makes certain assumptions in its allocation of revenues from aerospace customers comprised 13%laboratories that provide more than one type of service. The allocation methodology and assumptions made are consistent for the years presented.
Field Services revenues are comprised of revenue derived primarily by technicians performing asset inspections and maintenance services for our customers at locations other than Mistras properties. Field Services revenue increased $15.4 million, or 3.4%, for the twelve months ended December 31, 20172023 as compared to the twelve months ended December 31, 2022. The increase was due to increased sales volume in our oil and 2016.gas end market for our North America and International segments.
Shop Laboratory revenues are comprised of quality assurance inspections of components and materials at our Mistras in-house laboratory facilities. Shop revenues increased $9.4 million, or 19.2%, for the twelve months ended December 31, 2023 as compared to the twelve months ended December 31, 2022. The increase was due to increased sales volume related to our commercial aerospace and industrials end markets.
Data Analytical Solutions revenues are comprised of revenue derived from data software sales & subscriptions, implementation services and analytics that offer insights and recommendations to improve asset integrity. Data Analytical Solutions revenue is derived from work performed by Mistras employees in our facilities, or at customer locations, using our proprietary portfolio of software applications. Data Analytical Solutions revenue increased $10.0 million, or 16.1%, for the twelve months ended December 31, 2023 as compared to the twelve months ended December 31, 2022. The increase was due primarily to increased sales volume within PCMS, Onstream and other Data Analytical Solutions offerings within our North America segment.
37
Other revenues are comprised of locations that perform both asset inspection services and testing of components and materials at in-house Mistras laboratories. Other revenues decreased $16.7 million, or 13.8%, for the twelve months ended December 31, 2023 as compared to the twelve months ended December 31, 2022. Other revenues in 2023 decreased primarily due to decreased sales within the aerospace and defense sector and due to declines in our other end markets within the North America and International segments as compared to the prior year period.
Gross Profit (Loss)
Gross profit (loss) by segment for the years ended December 31, 20172023 and December 31, 2016 was2022 were as follows:
| For the year ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| ($ in thousands) | |||||||||||
| Gross profit (loss) | |||||||||||
| North America | $ | 163,960 | $ | 159,049 | |||||||
| % of segment revenue | 28.3 | % | 27.7 | % | |||||||
| International | 33,610 | 33,591 | |||||||||
| % of segment revenue | 27.0 | % | 29.9 | % | |||||||
| Products and Systems | 6,457 | 5,490 | |||||||||
| % of segment revenue | 49.7 | % | 43.1 | % | |||||||
| Corporate and eliminations | (220) | 43 | |||||||||
| $ | 203,807 | $ | 198,173 | ||||||||
| % of total revenue | 28.9 | % | 28.8 | % | |||||||
| For the year ended December 31, | ||||||||
| 2017 | 2016 (unaudited) | |||||||
| ($ in thousands) | ||||||||
| Gross profit | ||||||||
| Services | $ | 139,160 | $ | 133,532 | ||||
| % of segment revenue | 25.6 | % | 25.7 | % | ||||
| International | 38,974 | 48,372 | ||||||
| % of segment revenue | 27.0 | % | 32.5 | % | ||||
| Products and Systems | 9,798 | 11,956 | ||||||
| % of segment revenue | 42.1 | % | 45.9 | % | ||||
| Corporate and eliminations | (220 | ) | 274 | |||||
| $ | 187,712 | $ | 194,134 | |||||
| % of total revenue | 26.8 | % | 28.4 | % | ||||
Gross profit decreased $6.4increased $5.6 million, or 3%2.8%, for the year ended December 31, 20172023 compared to the year ended December 31, 2016, despite2022, with a sales increase of 2%$18.1 million, or 2.6%. Gross profit margin was 26.8%28.9% and 28.4%28.8% for the years ended December 31, 20172023 and 2016, respectively.2022, respectively, due to favorable sales mix. North America segment gross profit margins had a year-on-year increase of 60 basis points to 28.3% for the year ended December 31, 2023, due primarily to favorable sales mix. International segment gross margins had a year-on-year declinedecrease of 550290 basis points to 27.0% for the year ended December 31, 2017. This decline was2023, due primarily driven by lower revenues in the Company's German subsidiary, as well as poor margins on a large contract and lower utilization of technical labor in the United Kingdom.to increased inflationary pressures. Products and Systems segment gross margins declinedincreased by 380660 basis points for the year ended December 31, 20172023 to 42.1%49.7%, driven by lower sales volumes and a less favorable sales mix. Services segment gross profit margins
Operating Expenses
Operating expenses for the years ended December 31, 2023 and 2022 was as follows:
| For the year ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| ($ in thousands) | |||||||||||
| Operating Expenses | |||||||||||
| Selling, general and administrative expenses | $ | 166,749 | $ | 166,400 | |||||||
| Goodwill Impairment charges | 13,799 | — | |||||||||
| Bad debt provision for troubled customers, net of recoveries | — | 42 | |||||||||
| Reorganization and other costs | 12,269 | 195 | |||||||||
| Research and engineering | 1,723 | 1,994 | |||||||||
| Depreciation and amortization | 10,104 | 10,661 | |||||||||
| Acquisition-related expense, net | 9 | 76 | |||||||||
| Legal settlement and litigation charges (benefit), net | 1,058 | (994) | |||||||||
| $ | 205,711 | $ | 178,374 | ||||||||
| % of total revenue | 29.2 | % | 26.0 | % | |||||||
Operating expenses increased $27.3 million, or 15.3%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 due primarily to impairment charges and reorganization charges recorded in the current period that were consistent withnot
38
in the prior year.period. Selling, general and administrative expenses increased $0.3 million, or 0.2% for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to unfavorable foreign currency exchange.
Income (Loss) from Operations.
The following table shows a reconciliation of segment income (loss) from operations to income (loss) before special items (unaudited) for the years ended December 31, 20172023 and 2016:2022:
| For the year ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| ($ in thousands) | |||||||||||
| North America: | |||||||||||
| Income from operations (GAAP) | $ | 55,170 | $ | 49,616 | |||||||
| Bad debt provision for troubled customers, net of recoveries | — | 42 | |||||||||
| Reorganization and other costs | 960 | 99 | |||||||||
| Legal settlement and insurance (recoveries) charges, net | 1,058 | (841) | |||||||||
| Acquisition-related expense, net | — | 45 | |||||||||
| Income before special items (non-GAAP) | $ | 57,188 | $ | 48,961 | |||||||
| International: | |||||||||||
| Income (loss) from operations (GAAP) | $ | (12,229) | $ | 3,566 | |||||||
| Goodwill Impairment charges | 13,799 | — | |||||||||
| Reorganization and other costs | 351 | (43) | |||||||||
| Income before special items (non-GAAP) | $ | 1,921 | $ | 3,523 | |||||||
| Products and Systems: | |||||||||||
| Income (loss) from operations (GAAP) | $ | 267 | $ | (992) | |||||||
| Reorganization and other costs | 382 | — | |||||||||
| Income (loss) before special items (non-GAAP) | $ | 649 | $ | (992) | |||||||
| Corporate and Eliminations: | |||||||||||
| Loss from operations (GAAP) | $ | (45,112) | $ | (32,391) | |||||||
| Legal settlement and insurance (recoveries) charges, net | — | (153) | |||||||||
| Loss on debt modification | — | 693 | |||||||||
| Reorganization and other costs | 10,576 | 139 | |||||||||
| Acquisition-related expense, net | 9 | 31 | |||||||||
| Loss before special items (non-GAAP) | $ | (34,527) | $ | (31,681) | |||||||
| Total Company: | |||||||||||
| Income (loss) from operations (GAAP) | $ | (1,904) | $ | 19,799 | |||||||
| Goodwill Impairment charges | 13,799 | — | |||||||||
| Bad debt provision for troubled customers, net of recoveries | — | 42 | |||||||||
| Legal settlement and insurance (recoveries) charges, net | 1,058 | (994) | |||||||||
| Loss on debt modification | — | 693 | |||||||||
| Reorganization and other costs | 12,269 | 195 | |||||||||
| Acquisition-related expense, net | 9 | 76 | |||||||||
| Income before special items (non-GAAP) | $ | 25,231 | $ | 19,811 | |||||||
See "Note about Non-GAAP Measures" in this Annual Report for an explanation of our use of non-GAAP measures.
39
| For the year ended December 31, | |||||||
| 2017 | 2016 (unaudited) | ||||||
| ($ in thousands) | |||||||
| Services: | |||||||
| Income from operations (GAAP) | $ | 46,677 | $ | 37,788 | |||
| Litigation charges | — | 6,320 | |||||
| Bad debt provision for a customer bankruptcy | 1,200 | — | |||||
| Severance costs | 561 | 77 | |||||
| Asset write-offs and lease terminations | 123 | — | |||||
| Acquisition-related (benefit) expense, net | 392 | (232 | ) | ||||
| Income before special items (non-GAAP) | 48,953 | 43,953 | |||||
| International: | |||||||
| Income from operations (GAAP) | 3,537 | 12,908 | |||||
| Severance costs | 1,055 | 1,184 | |||||
| Asset write-offs and lease terminations | — | 1,042 | |||||
| Acquisition-related (benefit) expense, net | (501 | ) | (42 | ) | |||
| Income before special items (non-GAAP) | 4,091 | 15,092 | |||||
| Products and Systems: | |||||||
| Loss from operations (GAAP) | (16,991 | ) | (180 | ) | |||
| Impairment charges | 15,810 | — | |||||
| Severance costs | 18 | 31 | |||||
| Loss before special items (non-GAAP) | (1,163 | ) | (149 | ) | |||
| Corporate and Eliminations: | |||||||
| Loss from operations (GAAP) | (29,063 | ) | (24,970 | ) | |||
| Litigation charges | 1,600 | — | |||||
| Severance costs | 184 | 133 | |||||
| Acquisition-related expense (benefit), net | 591 | 269 | |||||
| Loss before special items (non-GAAP) | (26,688 | ) | (24,568 | ) | |||
| Total Company: | |||||||
| Income from operations (GAAP) | $ | 4,160 | $ | 25,546 | |||
| Litigation charges | $ | 1,600 | $ | 6,320 | |||
| Impairment charges | $ | 15,810 | $ | — | |||
| Bad debt provision for a customer bankruptcy | $ | 1,200 | $ | — | |||
| Severance costs | $ | 1,818 | $ | 1,425 | |||
| Asset write-offs and lease terminations | $ | 123 | $ | 1,042 | |||
| Acquisition-related (benefit) expense, net | $ | 482 | $ | (5 | ) | ||
| Income before special items (non-GAAP) | $ | 25,193 | $ | 34,328 | |||
Total Company income from operations (GAAP) decreased by $21.4$21.7 million, or 84%109.6% compared to the year ended December 31, 2016.2022. Total Companycompany income before special items (non-GAAP) decreasedincreased by $9.1$5.4 million or 27%27.4% compared with the year
ended December 31, 2016.2022. Operating expenses, excluding special items (non-GAAP), as a percentage of revenue, was 25.3% for the year ended December 31, 2023 compared to 25.9% for the year ended December 31, 2022. The primary driver for the increase in total company income before special items was increased sales in 2023 compared to 2022. Income before special items declinedas a percentage of revenue increased by 14070 basis points to 3.6% for the year ended December 31, 20172023 from 5.0%2.9% for the year ended December 31, 2016.
Interest Expense
Interest expense was $4.4$16.8 million and $3.1$10.5 million for the years ended December 31, 20172023 and December 31, 2016.2022, respectively. The increase was primarily relateddue to increased borrowings oninterest rates in the Company's revolving line of credit.current period.
Income Taxes
Our effective income tax rate was approximately (858)%6.5% for the year ended December 31, 2017,2023, compared to 36%29.3% for the year ended December 31, 2016.2022. The changedecrease in effective tax rate was primarily driven by a $1.7 million US R&D tax reformcredit benefit in 2022, partially offset by the United States. recording of a $1.1 million valuation allowance recorded in 2022 which was related to certain Canadian entities.
On December 22, 2017,27, 2020, the United States enacted fundamental changes to federalthe Consolidated Appropriations Act, 2021, (the "Appropriations Act") an additional stimulus package providing financial relief for individuals and small business. The Appropriations Act contains a variety of tax law following the passageprovisions, including full expensing of business meals in 2021 and 2022, and expansion of the Tax Cutsemployee retention tax credit. We are currently evaluating the impact of this guidance on our consolidated financial position, results of operations, and Jobscash flows, but does not expect it to have a material impact.
Further in response to the COVID-19 pandemic, the American Rescue Plan Act was signed into law on March 11, 2021. This act, among other things, provides economic relief provisions to individuals and funding to certain businesses and programs. The Company does not expect this act to have a material impact.
On August 19, 2022, the United States enacted the Inflation Reduction Act, (the “Tax Act”"Inflation Act")., a package intended to reduce inflation. The TaxInflation Act is complex and significantly changes the U.S.contains a variety of tax provisions, including a 15% corporate minimum tax, system. Our financial statements for the year ended December 31, 2017 reflect certain effects of the Tax Act which includes a reduction in the corporate tax rate from 35% to 21%, imposition of a tax on unrepatriated foreign earnings (“stock repurchases, and various tax credit opportunities. We evaluated the transition tax”),impact of this guidance on our consolidated financial position, results of operations, and cash flows, and do not expect it to have a reduction to deferred tax assets attributable to changes made to executive compensation rules. As a result of the changes to tax laws and tax rates under the Tax Act, we incurred an increase in income tax expense of $1.9 million during the year ended December 31, 2017, which consisted primarily of a $2.3 million decrease in our net deferred tax liabilities due to the reduction in the federal corporate tax rate from 35% to 21%, an increase of $3.9 million in tax expense attributable to the transition tax, and a decrease in the realizability of deferred tax assets of $0.3 million due to changes made to executive compensation rules pursuant to the Tax Act. material impact.
Income tax expense varies as a function of pre-tax income and the level of non-deductible expenses, such as certain amounts of meals and entertainment expense, valuation allowances, and other permanent differences. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. Our effective income tax rate may fluctuate over the next few years due to many variables including the amount and future geographic distribution of our pre-tax income, changes resulting from our acquisition strategy, and increases or decreases in our permanent differences, and the effects of the Tax Act.differences.
| For the Transition period ended December 31, | ||||||||
| 2016 | 2015 (unaudited) | |||||||
| ($ in thousands) | ||||||||
| Revenues | $ | 404,161 | $ | 427,913 | ||||
| Gross profit | 117,004 | 123,190 | ||||||
| Gross profit as a % of Revenue | 29 | % | 29 | % | ||||
| Total operating expenses | 99,471 | 88,092 | ||||||
| Operating expenses as a % of Revenue | 25 | % | 21 | % | ||||
| Income from operations | 17,533 | 35,098 | ||||||
| Income from operations as a % of Revenue | 4 | % | 8 | % | ||||
| Interest expense | 2,052 | 3,672 | ||||||
| Income before provision for income taxes | 15,481 | 31,426 | ||||||
| Provision for income taxes | 5,870 | 11,627 | ||||||
| Net income | 9,611 | 19,799 | ||||||
| Less: net income (loss) attributable to noncontrolling interests, net of taxes | 43 | (15 | ) | |||||
| Net income attributable to Mistras Group, Inc. | $ | 9,568 | $ | 19,814 | ||||
| For the Transition period ended December 31, | ||||||||
| 2016 | 2015 (unaudited) | |||||||
| ($ in thousands) | ||||||||
| Revenues | ||||||||
| Services | $ | 293,218 | $ | 327,118 | ||||
| International | 104,013 | 87,411 | ||||||
| Products and Systems | 14,541 | 18,786 | ||||||
| Corporate and eliminations | (7,611 | ) | (5,402 | ) | ||||
| $ | 404,161 | $ | 427,913 | |||||
| For the Transition period ended December 31, | ||||||||
| 2016 | 2015 (unaudited) | |||||||
| ($ in thousands) | ||||||||
| Gross profit | ||||||||
| Services | $ | 75,784 | $ | 87,514 | ||||
| % of segment revenue | 25.8 | % | 26.8 | % | ||||
| International | 34,210 | 26,762 | ||||||
| % of segment revenue | 32.9 | % | 30.6 | % | ||||
| Products and Systems | 6,920 | 8,986 | ||||||
| % of segment revenue | 47.6 | % | 47.8 | % | ||||
| Corporate and eliminations | 90 | (72 | ) | |||||
| $ | 117,004 | 123,190 | ||||||
| % of total revenue | 28.9 | % | 28.8 | % | ||||
| For the transition period ended December 31, | |||||||
| 2016 | 2015 (unaudited) | ||||||
| ($ in thousands) | |||||||
| Services: | |||||||
| Income from operations (GAAP) | $ | 22,411 | $ | 37,175 | |||
| Severance costs | 77 | 188 | |||||
| Acquisition-related expense (benefit), net | 236 | (593 | ) | ||||
| Income before special items (non-GAAP) | 22,724 | 36,770 | |||||
| International: | |||||||
| Income from operations (GAAP) | 10,597 | 6,888 | |||||
| Severance costs | 474 | 175 | |||||
| Asset write-offs and lease terminations | 1,042 | — | |||||
| Acquisition-related expense (benefit), net | 29 | (457 | ) | ||||
| Income before special items (non-GAAP) | 12,142 | 6,606 | |||||
| Products and Systems: | |||||||
| (Loss) income from operations (GAAP) | (254 | ) | 2,613 | ||||
| Severance costs | 14 | 17 | |||||
| (Loss) income before special items (non-GAAP) | (240 | ) | 2,630 | ||||
| Corporate and Eliminations: | |||||||
| Loss from operations (GAAP) | (15,221 | ) | (11,578 | ) | |||
| Severance costs | 133 | — | |||||
| Acquisition-related expense (benefit), net | 231 | 91 | |||||
| Loss before special items (non-GAAP) | (14,857 | ) | (11,487 | ) | |||
| Total Company: | |||||||
| Income from operations (GAAP) | $ | 17,533 | $ | 35,098 | |||
| Severance costs | $ | 698 | $ | 380 | |||
| Asset write-offs and lease terminations | $ | 1,042 | $ | — | |||
| Acquisition-related expense (benefit), net | $ | 496 | $ | (959 | ) | ||
| Income before special items (non-GAAP) | $ | 19,769 | $ | 34,519 | |||
| For the year ended May 31, | |||||||
| 2016 | 2015 | ||||||
| ($ in thousands) | |||||||
| Revenues | $ | 719,181 | $ | 711,252 | |||
| Gross profit | 203,008 | 184,733 | |||||
| Gross profit as a % of Revenue | 28 | % | 26 | % | |||
| Total operating expenses | 159,831 | 154,380 | |||||
| Operating expenses as a % of Revenue | 22 | % | 22 | % | |||
| Income from operations | 43,177 | 30,353 | |||||
| Income from operations as a % of Revenue | 6 | % | 4 | % | |||
| Interest expense | 4,762 | 4,622 | |||||
| Income before provision for income taxes | 38,415 | 25,731 | |||||
| Provision for income taxes | 13,765 | 9,740 | |||||
| Net income | 24,650 | 15,991 | |||||
| Less: net (loss) income attributable to noncontrolling interests, net of taxes | (4 | ) | (90 | ) | |||
| Net income attributable to Mistras Group, Inc. | $ | 24,654 | $ | 16,081 | |||
| For the year ended May 31, | ||||||||
| 2016 | 2015 | |||||||
| ($ in thousands) | ||||||||
| Revenues | ||||||||
| Services | $ | 553,279 | $ | 540,224 | ||||
| International | 143,025 | 146,953 | ||||||
| Products and Systems | 30,293 | 31,255 | ||||||
| Corporate and eliminations | (7,416 | ) | (7,180 | ) | ||||
| $ | 719,181 | $ | 711,252 | |||||
| For the year ended May 31, | |||||||
| 2016 | 2015 | ||||||
| ($ in thousands) | |||||||
| Gross profit | |||||||
| Services | $ | 145,262 | $ | 135,201 | |||
| % of segment revenue | 26.3 | % | 25.0 | % | |||
| International | 43,613 | 34,572 | |||||
| % of segment revenue | 30.5 | % | 23.5 | % | |||
| Products and Systems | 14,022 | 14,314 | |||||
| % of segment revenue | 46.3 | % | 45.8 | % | |||
| Corporate and eliminations | 111 | 646 | |||||
| $ | 203,008 | $ | 184,733 | ||||
| % of total revenue | 28.2 | % | 26.0 | % | |||
| For the year ended May 31, | |||||||
| 2016 | 2015 | ||||||
| ($ in thousands) | |||||||
| Services: | |||||||
| Income from operations (GAAP) | $ | 52,552 | $ | 49,142 | |||
| Legal settlement | 6,320 | — | |||||
| Severance costs | 188 | — | |||||
| Acquisition-related expense (benefit), net | (1,061 | ) | (639 | ) | |||
| Income before special items (non-GAAP) | 57,999 | 48,503 | |||||
| International: | |||||||
| Income (loss) from operations (GAAP) | $ | 9,293 | $ | (575 | ) | ||
| Severance costs | 885 | 1,082 | |||||
| Asset write-offs and lease terminations | — | 872 | |||||
| Acquisition-related expense (benefit), net | (520 | ) | (2,926 | ) | |||
| Income (loss) before special items (non-GAAP) | 9,658 | (1,547 | ) | ||||
| Products and Systems: | |||||||
| Income from operations (GAAP) | $ | 2,688 | $ | 2,461 | |||
| Severance costs | 34 | 99 | |||||
| Asset write-offs and lease terminations | — | 157 | |||||
| Acquisition-related expense (benefit), net | — | — | |||||
| Income before special items (non-GAAP) | 2,722 | 2,717 | |||||
| Corporate and Eliminations: | |||||||
| Loss from operations (GAAP) | $ | (21,356 | ) | $ | (20,675 | ) | |
| Severance costs | — | 542 | |||||
| Charges related to sale of foreign operations | — | 2,516 | |||||
| Acquisition-related expense (benefit), net | 128 | (1,602 | ) | ||||
| Loss before special items (non-GAAP) | (21,228 | ) | (19,219 | ) | |||
| Total Company: | |||||||
| Income from operations (GAAP) | $ | 43,177 | $ | 30,353 | |||
| Legal settlement | $ | 6,320 | $ | — | |||
| Severance costs | $ | 1,107 | $ | 1,723 | |||
| Asset write-offs and lease terminations | $ | — | $ | 1,029 | |||
| Charges related to sale of foreign operations | $ | — | $ | 2,516 | |||
| Acquisition-related expense (benefit), net | $ | (1,453 | ) | $ | (5,167 | ) | |
| Income before special items (non-GAAP) | $ | 49,151 | $ | 30,454 | |||
Liquidity and Capital Resources
Overview
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Cash Flows Table
The following table summarizes our cash flows for the years ended December 31, 20172023 and 2016, the transition period ended December 31, 2016 and fiscal 2016 and 2015:2022:
| For the year ended December 31, | For the Transition period ended December 31, | For the year ended May 31, | ||||||||||||||||||
| 2017 | 2016 | 2016 | 2016 | 2015 | ||||||||||||||||
| ($ in thousands) | (unaudited) | |||||||||||||||||||
| Net cash provided by (used in): | ||||||||||||||||||||
| Operating activities | $ | 55,239 | $ | 63,211 | $ | 30,259 | $ | 68,124 | $ | 49,840 | ||||||||||
| Investing activities | (102,797 | ) | (22,408 | ) | (17,374 | ) | (16,752 | ) | (49,651 | ) | ||||||||||
| Financing activities | 53,605 | (30,031 | ) | (12,869 | ) | (40,378 | ) | 2,066 | ||||||||||||
| Effect of exchange rate changes on cash | 2,340 | (1,217 | ) | (2,050 | ) | (361 | ) | (1,720 | ) | |||||||||||
| Net change in cash and cash equivalents | $ | 8,387 | $ | 9,555 | $ | (2,034 | ) | $ | 10,633 | $ | 535 | |||||||||
| For the year ended December 31, | ||||||||||||||
| ($ in thousands) | 2023 | 2022 | ||||||||||||
| Net cash provided by (used in): | ||||||||||||||
| Operating activities | $ | 26,748 | $ | 26,406 | ||||||||||
| Investing activities | (22,133) | (12,238) | ||||||||||||
| Financing activities | (7,706) | (16,323) | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 249 | (1,467) | ||||||||||||
| Net change in cash and cash equivalents | $ | (2,842) | $ | (3,622) | ||||||||||
Cash Flows from Operating Activities
Cash provided by operating activities for the year ended December 31, 20172023 was $55.2$26.7 million, a declinean increase of $8$0.3 million from the prior year.year period. The decreaseincrease was primarilymainly attributable to a lower level of net income, exclusive of the $15.8 million impairment charge during 2017.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 20172023 was $102.8$22.1 million, principally due to $83.4an increase of $9.9 million of acquisitions and $20.6 million purchases of property, plant and equipment and intangible assets. Net cash used in investing activities forfrom the prior year ended December 31, 2016 was $22.4period. The Company used $10.2 million principally due to $15.9 millionmore cash for purchases of property, plant and equipment and intangible assets as well as $8.3 million of acquisitions. in 2023 compared to 2022.
Cash Flows from Financing Activities
Effect of Exchange Rate Changes on Cash and $2 million of net repayments of debt.
Cash Balance and Credit Facility Borrowings
The terms of our New Credit Agreement are described in Note 11-Long-Term Debtof the Notes to Consolidated Financial Statements in this Annual Report, under the heading "Senior Credit Facility", the provisions of which are incorporated herein.
As of December 31, 2017, the Company2023, we had cash and cash equivalents totaling $27.5$17.6 million of which $27.3 million is outside of the United States, and available borrowing capacity of up to $88.2$116.0 million under its credit agreement (as defined below).our New Credit Agreement. Borrowings of $156.9$186.4 million and letters of credit of $4.9$2.9 million were outstanding under the credit agreementNew Credit Agreement at December 31, 2017.2023. We finance our operations primarily through our existing cash balances, cash collected from operations, bank borrowings and capital lease financing. We believe these sources are sufficient to fund our operations for the foreseeable future.
As of December 31, 2017, the Company was2023, we were in compliance with the terms of the New Credit Agreement and has undertaken towill continuously monitor our compliance with these covenants.the covenants contained in the New Credit Agreement. See Note 11-Long-Term Debt of the notes to the consolidated financial statements for additional information.
Liquidity and Capital Resources Outlook
Future Sources of Cash
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We expect our future sources of cash to include cash flow generated from our operating activities and borrowings under our New Credit Agreement. Our revolving credit facility is available for cash advances required for working capital and for letters of credit to support our operations. Acquisitions, if any, are funded through available cash and borrowings under the revolving credit facility and seller notes.New Credit Agreement.
Future Uses of Cash
We expect our future uses of cash will primarily be for acquisitions, international expansion, stock repurchases,repayment of debt, purchases or manufacture of field testingfield-testing equipment to support growth, additional investments in technology and software products and the replacement of existing assets and equipment used in our operations. We often make purchases to support new sources of revenues, particularly in our ServicesNorth America segment. In addition, we will need toannually fund a certain amount of replacement equipment, including a portion of our fleet vehicles. We historically spend approximately 2% to 4%3% of our total revenues on capital expenditures, excluding acquisitions, and expect to fund these expenditures through a combination of cash and lease financing. Our cash capital expenditures, excluding acquisitions, for each of the yearyears ended December 31, 2017, the transition period ended December 31, 20162023 and for fiscal 2016 and 20152022 were approximately 3%, 2%, 2%3.4% and 2%2.0% of revenues, respectively. We continue to take steps to reduce spending and preserve cash.
Our New Credit Agreement does not limit the Company’s ability to acquire other businesses or companies except for certain provisions as described within Note 11-Long-Term Debt.Our future acquisitions may also require capital. We acquired three companies during the year ended December 31, 2017 and, three companies during the transition period ended December 31, 2016, with an aggregate cash outlay of $92.3 million. In some cases, additional equipment will be needed to upgrade the capabilities of these acquired companies. In addition, our future acquisition and capital spending may increase as we pursue growth opportunities and acquire additional equipment to meet or pursue business opportunities. Other investments in infrastructure, training and software may also be required to match our growth, but we plan to continue using a disciplined approach to building our business. In addition, we will use cash to fund our operating leases, capitalfinance leases, long-term debt repayments and various other obligations as they arise.arise as noted within Note 11-Long-Term Debt andNote 17- Leases.
We also expect to use cash to support our working capital requirements for our operations, particularly in the event of further growth and due to the impacts of seasonality on our business. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new solutions and enhancements to existing solutions and our expansion of sales and marketing and product development activities. To the extent that our cash and cash equivalents and future cash flows from operating activities are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements, or public or private equity, financings, or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products that will complement our existing operations. In the event additional funding is required, we may not be able to obtain bank credit arrangements or effect an equity or debt financing on acceptable terms.
| ($ in thousands) | Total | December 31, 2018 | December 31, 2019 | December 31, 2020 | December 31, 2021 | December 31, 2022 | Thereafter | |||||||||||||||||||||
| Long-term debt (1) | $ | 166,878 | $ | 2,358 | $ | 1,664 | $ | 1,243 | $ | 892 | $ | 157,728 | $ | 2,993 | ||||||||||||||
| Capital lease obligations (2) | 15,344 | 5,899 | 3,788 | 2,485 | 1,778 | 634 | 760 | |||||||||||||||||||||
| Operating lease obligations | 49,432 | 11,542 | 8,888 | 6,902 | 4,881 | 4,304 | 12,915 | |||||||||||||||||||||
| Contingent consideration obligations (3) | 5,508 | 3,430 | 1,279 | 799 | — | — | — | |||||||||||||||||||||
| Total | $ | 237,162 | $ | 23,229 | $ | 15,619 | $ | 11,429 | $ | 7,551 | $ | 162,666 | $ | 16,668 | ||||||||||||||
Off-Balance Sheet Arrangements
During the yearyears ended December 31, 2017, the transition period ended December 31, 2016 as well as fiscal 20162023 and 2015,2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with generally accepted accounting principlesU.S. GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. We have established policies and control procedures intended to ensure that estimation methods, including any judgments made as part of such methods, are well-controlled, independently reviewed and applied consistently from period to period. The accounting policies that we believe require more significant estimates and assumptions include:include revenue recognition, long-
We believe that the following critical accounting policies comprise the more significant estimates and assumptions used in the preparation of our consolidated financial statements.
Revenue Recognition
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Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. We provide highly integrated and bundled inspection services to our customers. Some of our contracts have multiple performance obligations, most commonly due to the contract providing both goods and services. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each customer arrangement, upon completion ofdistinct good or service in the earnings process and when collection is reasonably assured. At the end of any reporting period, earned revenue is accrued for services that have been provided which have not yet been billed. Reimbursable costs, including those relatedcontract. The primary method used to travel and out-of-pocket expenses, are included in revenue, and equivalent amounts of reimbursable costs are included in cost of services.
Contract modifications are not routine in the performance of our contracts. Generally, when contracts are modified, the modification is to account for changes in scope to the goods and interchangeable competitor productsservices that are provided. In most instances, contract modifications are for goods or services in standalone sales to similarly situated customers. We determine ESP by considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle. Consideration is also given to market conditions such as competitor pricing strategies and industry technology life cycles. When determining ESP, we apply management judgment to establish margin objectives and pricing strategies and to evaluate market conditions and product life cycles. Changes in the aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangementsthat are distinct, and, therefore, may change the pattern and timing of revenue recognitionare accounted for these elements, but will not change the total revenue recognized for the arrangement.as a separate contract.
The majority of our revenue recognized at a point in time is related to product sales when the customer obtains control of the asset, which is generally upon shipment to the customer. Contract costs include labor, material and overhead.
We expect any significant remaining performance obligations to be satisfied within one year.
Contract Estimates
The majority of our revenues are short-term in nature. We have many Master Service Agreements ("MSAs") that specify an overall framework and contract terms, where we and our customers agree upon services or products underto be provided. The actual contracting to provide services or furnish products are triggered by a work order, purchase order, or some similar document issued pursuant to an MSA which sets forth the scope of services and/or identifies the products to be provided. From time to time, we may enter into long-term contracts, that may lastwhich can range from several months to several years, dependingyears. Revenue on the contract. Revenues fromsuch long-term contracts are recognized on the percentage-of-completion method of accounting. Under the percentage-of-completion method of accounting revenues areis recognized as work is performed. The percentage of completion at any point in time is generallyperformed based on total costs or total labor dollars incurred to date in relation to the total estimated costs or total labor dollars estimatedfor the performance of the contract at completion. The percentage of completion is then applied to the totalThis includes contract revenue to determine the amount of revenue to be recognized in the period. Application of the percentage-of-completion method of accounting requires the use of estimates of costs to be incurred for the performance of the contract. Contract costs include all direct materials, direct labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and all costs associated with operation of equipment. The costCost estimation process is based upon the professional knowledge and experience of our engineers, project managers, engineers and financial professionals. Factors that are considered in estimating the work to be completed include the availability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in our project performance and the recoverability of any claims. Whenever revisions of estimatedestimates, contract costs andand/or contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.
Long-Lived Assets
We perform a review of long-lived assets (or asset groups) for impairment when events or changes in circumstances indicate the carrying value of such assets may not be recoverable. If an indication of impairment is present, we compare the estimated undiscounted future net cash flows to be generated by the asset (or asset group) to its carrying amount. If the undiscounted future net cash flows are less than the carrying amount of the asset (or asset group), we record an impairment loss equal to the excess of the asset’s carrying amount over its fair value. We estimate fair value based on valuation techniques such as a discounted cash flow analysis or a comparison to fair values of similar assets. As of December 31, 20172023 and December 31, 2016,2022, we had $87.1$81.0 million and $73.1$77.6 million in net property, plant and equipment, respectively, and $63.7$44.0 million and $40.0$49.0 million in intangible assets, net, respectively. During the third quarter of 2017, there was a triggering event in the Products and Systems segment that resulted in a $2.6 million impairment charge of long-lived assets. (See Note 9 in the notes to consolidated financial statements in Item 8 of this Annual Report for further details) During the transition period ended December 31, 2016, $0.8 million of specifically identified assets were written off.
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Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets. We test goodwill for impairment at a “reporting unit” level (which for the Companyus is represented by (i) our ServicesNorth America segment, (ii) our Products and Systems segment, and (iii) the European component of our International segment and (iv) the Brazilian component of our International segment). Our annual impairment test is conducted on the first day of our fourth quarter. In connection with the change in our fiscal year to December 31, our annual test datequarter, which is October 1. For the transition period ended December 31, 2016, a December 1 date was used and historically, prior to the fiscal year end change, the Company tested for impairment annually as of March 1. Goodwill is also tested for impairment whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the third quarter of 2017, there was a triggering event in the Products and Systems segment that resulted in a $13.2 million
In testing for goodwill impairment, charge. See Note 8 inwe have the notesoption to consolidated financial statements in Item 8first assess qualitative factors to determine whether the existence of this Annual Report for further details.
An impairment will be recorded in the amount that the fair value is less than the carrying value, as the ASU eliminated step two of goodwill impairment process. The Company considersvalue. We consider the income and market approaches to estimating the fair value of our reporting units, which requires significant judgment in evaluation of economic and industry trends, estimated future cash flows, discount rates and other factors. Sustained declines in our stock price and related market capitalization could impact key assumptions in the overall estimated fair values of our reporting units and could result in non-cash impairment charges that could be material to our consolidated balance sheet or results of operations.
During the third quarter of 2023, a triggering event was identified within the Company's reporting units within the International segment due to decreased gross margin in the current period as a result of inflationary pressures and rising energy costs impacting the International reporting units' operations. As a result, the Company performed an interim quantitative goodwill impairment test.
In performing the interim quantitative goodwill impairment test and consistent with prior practice, the Company determined the fair value of each of the reporting units using a combination of the income approach and the market approach by assessing each of these valuation methodologies based upon availability and relevance of comparable company data and determining the appropriate weighting.
Under the income approach, the fair value for each of the reporting units was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company used internal forecasts, updated for recent events, to estimate future cash flows estimated using a terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on the Company’s most recent views of the long-term outlook for each reporting unit. The internal forecasts include assumptions about future profitability, including the expected demand for the Company’s goods and services. Due to the inherent uncertainties involved in making estimates and assumptions, actual results may differ from those assumed in the forecasts. The Company derived the discount rates using a capital asset pricing model and analyzing published rates for industries relevant to the reporting units to estimate the cost of equity financing. The Company used discount rates that are commensurate with the risks and uncertainties inherent in the respective businesses and in the internally developed forecasts, updated for recent events. Increased interest rates in the current period increased the discount rate associated with the reporting units which contributed in an unfavorable decrease in the reporting units value.
The market approach valuation was derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses was based on the markets in which the reporting units operate, considering risk profiles, size, geography, and diversity of products and services.
Based upon the results of the interim quantitative goodwill impairment test, the Company recorded an impairment charge of $13.8 million within the International reporting units. The impairment was calculated based on the difference between the estimated fair value and the carrying value of the reporting units and is included in Goodwill impairment charges on the condensed consolidated statements of income (loss) for the three and nine months ended September 30, 2023. Any significant adverse changes in future periods to the Company’s internal forecasts or the external market conditions, if any, could reasonably be expected to negatively affect its key assumptions and may result in future goodwill impairment charges which could be material.
We elected to perform a quantitative assessment of goodwill on October 1, 2023. Our quantitative assessment considered relevant events and circumstances occurring since our interim quantitative goodwill impairment test performed as of September
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30, 2023. Specifically, we considered changes in macroeconomic conditions, industry and market conditions, our internal forecasts of future revenue and expenses, our stock price, any significant events affecting the Company and actual changes in the carrying values of our net assets. After considering all positive and negative evidence for the assessment as of September 30, 2023, we concluded that it was not more likely than not that our carrying values exceeded fair values and as such, no additional impairment was indicated.
Additionally, as of December 31, 2023, there are no indicators of an impairment. See Note 8-Goodwill of the notes to the consolidated financial statements for additional information.
Acquisitions
We allocate the purchase price of acquired businesses to their identifiable tangible assets and liabilities as well as identifiable intangible assets, such as customer relationships, technology, non-compete agreements and trade names. Allocations are based on estimated fair values of assets and liabilities, which reflects assumptions that would be made by typical market participants if they were to buy or sell each asset on an individual asset basis. Certain estimates and judgments are required in the application of the fair value techniques, including estimates of the respective acquisitions' future performance and related cash flows, selection of a discount rate and economic lives, and use of Level 3 measurements as defined in ASC 820 Fair Value Measurements and Disclosure. Deferred taxes are recorded for any differences between the assigned values and tax bases of assets and liabilities. We typically engage third-party valuation experts to assist in determining the fair values for both identifiable tangible and intangible assets. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, could materially impact our results of operations. See Note 7-Acquisitions to the consolidated financial statements for additional information.
Recent Accounting Pronouncements
For information about recent accounting pronouncements, see Note 21-Summary of Significant Accounting Policies and Practices of the notes to the consolidated financial statements.
ITEM 7A.Quantitative and Qualitative Disclosures About Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
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Foreign Currency Risk
We have foreign currency exposure related to our operations in foreign locations. This foreign currency exposure, particularly the Euro, British Pound Sterling, Brazilian Real, Canadian Dollar and the Indian Rupee, arises primarily from the translation of our foreign subsidiaries’ financial statements into U.S. Dollars. Gains and losses relating to nonfunctional currency transactions, are reported in the Consolidated Statements of Income (Loss). For example, a portion of our annual sales and operating costs are denominated in British Pound Sterling and we have exposure related to sales and operating costs increasing or decreasing based on changes in currency exchange rates. If the U.S. Dollar increases in value against these foreign currencies, the value in U.S. Dollars of the assets and liabilities originally recorded in these foreign currencies will decrease. Conversely, if the U.S.
Dollar decreases in value against these foreign currencies, the value in U.S. Dollars of the assets and liabilities originally recorded in these foreign currencies will increase. Thus, increases and decreases in the value of the U.S. Dollar relative to these foreign currencies have a direct impact on the value in U.S. Dollars of our foreign currency denominated assets and liabilities, even if the value of these items has not changed in their original currency. Translation adjustments for these movements are recorded as a separate component of Accumulated Other Comprehensive Income (Loss) in ShareholderStockholder Equity. For the year ended December 31, 2023, a 10% movement, favorable or unfavorable, in the average U.S. Dollar exchange rates would cause a change in adjusted operating income of approximately $1.5 million. We do not currently enter into forward exchange contracts to hedge exposures denominated in foreign currencies. An unfavorable 10% change (strengthening) in the average U.S. Dollar exchange rates for the year ended December 31, 2017 would cause a decrease in consolidated operating income of approximately $0.8 million and a favorable 10% change (weakening) would cause an increase of approximately $0.9 million. We may consider entering into hedging or forward exchange contracts in the future, as sales in international currencies increase due to growth in our International segment.
Fair Value of Financial Instruments
We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments purchased with a remaining maturity of three months or less. We do not use derivative financial instruments for speculative or trading purposes; however, this does not preclude our adoption of specific hedging strategies in the future.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Mistras Group, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Overover Financial Reporting
We have audited the accompanying consolidated balance sheetssheet of Mistras Group, Inc. and its subsidiaries (the “Company”) as of December 31, 20172023, and 2016, the related consolidated statements of income (loss) income,, of comprehensive income (loss), of equity and of cash flows for the year then ended, December 31, 2017, the seven month transition period ended December 31, 2016, and each of the years in the two-year period ended May 31, 2016, andincluding the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’sCompany's internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016,2023, and the results of its operations and its cash flows for the year then ended December 31, 2017, the seven month transition period ended December 31, 2016, and each of the years in the two-year period ended May 31, 2016, in conformity with U.S.accounting principles generally accepted accounting principles.in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.COSO.
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting.Reporting appearing under Item 9A. Our responsibility is to express an opinionopinions on the Company’s consolidated financial statements and an opinion on the Company’sCompany's internal control over financial reporting based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our auditsaudit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment - North America Reporting Unit
As described in Notes 1 and 8 to the consolidated financial statements, the Company’s goodwill balance was $187.4 million as of December 31, 2023, which related to the North America reporting unit. Management tests goodwill for impairment at a reporting unit level, which is represented by its North America segment. Management reviews goodwill for impairment on October 1 of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Management considers the income and market approaches to estimate the fair value of the reporting unit, which requires significant judgments and assumptions related to revenue growth rates, gross margins, EBIT margins, and market multiples.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the North America reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the North America reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue growth rates, gross margins, and market multiples; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the North America reporting unit. These procedures also included, among others (i) testing management’s process for developing the fair value estimate of the North America reporting unit; (ii) evaluating the appropriateness of the income and market approaches used by management; (iii) testing the completeness and accuracy of underlying data used in the income and market approaches; and (iv) evaluating the reasonableness of the significant assumptions used by management related to revenue growth rates, gross margins, and market multiples. Evaluating management’s assumptions related to revenue growth rates and gross margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the North America reporting unit; (ii) the consistency with external market and industry data; and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the income and market approaches and (ii) the reasonableness of the market multiples assumption.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 11, 2024
We have served as the Company’s auditor since 2023.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors Mistras Group, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Mistras Group, Inc. and subsidiaries
(the Company) as of December 31, 2022, the related consolidated statements of income (loss), comprehensive income (loss), equity, and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2013.from 2013 to 2023.
Short Hills, New Jersey
March 15, 2023
49
Mistras Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)data)
| December 31, | |||||||
| 2017 | 2016 | ||||||
| ASSETS | |||||||
| Current Assets | |||||||
| Cash and cash equivalents | $ | 27,541 | $ | 19,154 | |||
| Accounts receivable, net | 138,080 | 130,852 | |||||
| Inventories | 10,503 | 10,017 | |||||
| Deferred income taxes | — | 6,230 | |||||
| Prepaid expenses and other current assets | 18,884 | 16,399 | |||||
| Total current assets | 195,008 | 182,652 | |||||
| Property, plant and equipment, net | 87,143 | 73,149 | |||||
| Intangible assets, net | 63,739 | 40,007 | |||||
| Goodwill | 203,438 | 169,940 | |||||
| Deferred income taxes | 1,606 | 1,086 | |||||
| Other assets | 3,507 | 2,593 | |||||
| Total Assets | $ | 554,441 | $ | 469,427 | |||
| LIABILITIES AND EQUITY | |||||||
| Current Liabilities | |||||||
| Accounts payable | $ | 10,362 | $ | 6,805 | |||
| Accrued expenses and other current liabilities | 65,561 | 58,697 | |||||
| Current portion of long-term debt | 2,358 | 1,379 | |||||
| Current portion of capital lease obligations | 5,875 | 6,488 | |||||
| Income taxes payable | 6,069 | 4,342 | |||||
| Total current liabilities | 90,225 | 77,711 | |||||
| Long-term debt, net of current portion | 164,520 | 85,917 | |||||
| Obligations under capital leases, net of current portion | 8,738 | 9,682 | |||||
| Deferred income taxes | 8,803 | 17,584 | |||||
| Other long-term liabilities | 11,363 | 7,789 | |||||
| Total Liabilities | 283,649 | 198,683 | |||||
| Commitments and contingencies | |||||||
| Equity | |||||||
| Preferred stock, 10,000,000 shares authorized | — | — | |||||
| Common stock, $0.01 par value, 200,000,000 shares authorized, 28,294,968 and 29,216,745 shares issued | 282 | 292 | |||||
| Additional paid-in capital | 222,425 | 217,211 | |||||
| Treasury stock at cost, 0 and 420,258 shares | — | (9,000 | ) | ||||
| Retained earnings | 64,717 | 91,803 | |||||
| Accumulated other comprehensive loss | (16,805 | ) | (29,724 | ) | |||
| Total Mistras Group, Inc. stockholders’ equity | 270,619 | 270,582 | |||||
| Non-controlling interests | 173 | 162 | |||||
| Total Equity | 270,792 | 270,744 | |||||
| Total Liabilities and Equity | $ | 554,441 | $ | 469,427 | |||
| December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 17,646 | $ | 20,488 | |||||||
| Accounts receivable, net | 132,847 | 123,657 | |||||||||
| Inventories | 15,283 | 13,556 | |||||||||
| Prepaid expenses and other current assets | 14,580 | 10,181 | |||||||||
| Total current assets | 180,356 | 167,882 | |||||||||
| Property, plant and equipment, net | 80,972 | 77,561 | |||||||||
| Intangible assets, net | 43,994 | 49,015 | |||||||||
| Goodwill | 187,354 | 199,635 | |||||||||
| Deferred income taxes | 2,316 | 779 | |||||||||
| Other assets | 39,784 | 40,032 | |||||||||
| Total Assets | $ | 534,776 | $ | 534,904 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | 17,032 | $ | 12,532 | |||||||
| Accrued expenses and other current liabilities | 84,331 | 77,844 | |||||||||
| Current portion of long-term debt | 8,900 | 7,425 | |||||||||
| Current portion of finance lease obligations | 5,159 | 4,201 | |||||||||
| Income taxes payable | 1,101 | 1,726 | |||||||||
| Total current liabilities | 116,523 | 103,728 | |||||||||
| Long-term debt, net of current portion | 181,499 | 183,826 | |||||||||
| Obligations under finance leases, net of current portion | 11,261 | 10,045 | |||||||||
| Deferred income taxes | 2,552 | 6,283 | |||||||||
| Other long-term liabilities | 32,438 | 32,273 | |||||||||
| Total Liabilities | $ | 344,273 | $ | 336,155 | |||||||
| Commitments and contingencies | |||||||||||
| Equity | |||||||||||
| Preferred stock, 10,000,000 shares authorized | — | — | |||||||||
| Common stock, $0.01 par value, 200,000,000 shares authorized, 30,597,633 and 29,895,487 shares issued | 305 | 298 | |||||||||
| Additional paid-in capital | 247,165 | 243,031 | |||||||||
| Accumulated Deficit | (28,942) | (11,489) | |||||||||
| Accumulated other comprehensive loss | (28,336) | (33,390) | |||||||||
| Total Mistras Group, Inc. stockholders’ equity | 190,192 | 198,450 | |||||||||
| Non-controlling interests | 311 | 299 | |||||||||
| Total Equity | 190,503 | 198,749 | |||||||||
| Total Liabilities and Equity | $ | 534,776 | $ | 534,904 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
50
Mistras Group, Inc. and Subsidiaries
Consolidated Statements of Income (Loss) Income
(in thousands, except per share data)data)
| For the year ended December 31, | For the transition period ended December 31, | For the year ended May 31, | |||||||||||||
| 2017 | 2016 | 2016 | 2015 | ||||||||||||
| Revenue | $ | 700,970 | $ | 404,161 | $ | 719,181 | $ | 711,252 | |||||||
| Cost of revenue | 492,238 | 274,298 | 494,911 | 506,281 | |||||||||||
| Depreciation | 21,020 | 12,859 | 21,262 | 20,238 | |||||||||||
| Gross profit | 187,712 | 117,004 | 203,008 | 184,733 | |||||||||||
| Selling, general and administrative expenses | 153,025 | 91,058 | 141,229 | 143,978 | |||||||||||
| Impairment charges | 15,810 | — | — | — | |||||||||||
| Research and engineering | 2,272 | 1,577 | 2,523 | 2,521 | |||||||||||
| Depreciation and amortization | 10,363 | 6,340 | 11,212 | 13,048 | |||||||||||
| Acquisition-related expense (benefit), net | 482 | 496 | (1,453 | ) | (5,167 | ) | |||||||||
| Litigation charges | 1,600 | — | 6,320 | — | |||||||||||
| Income from operations | 4,160 | 17,533 | 43,177 | 30,353 | |||||||||||
| Interest expense | 4,386 | 2,052 | 4,762 | 4,622 | |||||||||||
| (Loss) income before provision for income taxes | (226 | ) | 15,481 | 38,415 | 25,731 | ||||||||||
| Provision for income taxes | 1,942 | 5,870 | 13,765 | 9,740 | |||||||||||
| Net (loss) income | (2,168 | ) | 9,611 | 24,650 | 15,991 | ||||||||||
| Less: net income (loss) attributable to noncontrolling interests, net of taxes | 7 | 43 | (4 | ) | (90 | ) | |||||||||
| Net (loss) income attributable to Mistras Group, Inc. | $ | (2,175 | ) | $ | 9,568 | $ | 24,654 | $ | 16,081 | ||||||
| (Loss) earnings per common share | |||||||||||||||
| Basic | $ | (0.08 | ) | $ | 0.33 | $ | 0.85 | $ | 0.56 | ||||||
| Diluted | $ | (0.08 | ) | $ | 0.32 | $ | 0.82 | $ | 0.54 | ||||||
| Weighted average common shares outstanding: | |||||||||||||||
| Basic | 28,422 | 28,989 | 28,856 | 28,613 | |||||||||||
| Diluted | 28,422 | 30,125 | 29,891 | 29,590 | |||||||||||
| For the year ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Revenue | $ | 705,473 | $ | 687,373 | $ | 677,131 | |||||||||||
| Cost of revenue | 477,671 | 466,567 | 457,013 | ||||||||||||||
| Depreciation | 23,995 | 22,633 | 22,971 | ||||||||||||||
| Gross profit | 203,807 | 198,173 | 197,147 | ||||||||||||||
| Selling, general and administrative expenses | 166,749 | 166,400 | 161,334 | ||||||||||||||
| Bad debt provision for troubled customers, net of recoveries | — | 42 | — | ||||||||||||||
| Reorganization and other costs | 12,269 | 195 | — | ||||||||||||||
| Goodwill Impairment charges | 13,799 | — | — | ||||||||||||||
| Legal settlement and litigation charges (benefit), net | 1,058 | (994) | 2,042 | ||||||||||||||
| Research and engineering | 1,723 | 1,994 | 2,518 | ||||||||||||||
| Depreciation and amortization | 10,104 | 10,661 | 11,950 | ||||||||||||||
| Acquisition-related expense, net | 9 | 76 | 1,133 | ||||||||||||||
| Income (loss) from operations | (1,904) | 19,799 | 18,170 | ||||||||||||||
| Interest expense | 16,761 | 10,505 | 10,882 | ||||||||||||||
| Income (loss) before provision (benefit) for income taxes | (18,665) | 9,294 | 7,288 | ||||||||||||||
| Provision (benefit) for income taxes | (1,220) | 2,720 | 3,395 | ||||||||||||||
| Net income (loss) | (17,445) | 6,574 | 3,893 | ||||||||||||||
| Less: net income attributable to noncontrolling interests, net of taxes | 8 | 75 | 33 | ||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | (17,453) | $ | 6,499 | $ | 3,860 | |||||||||||
| Earnings (loss) per common share | |||||||||||||||||
| Basic | $ | (0.58) | $ | 0.22 | $ | 0.13 | |||||||||||
| Diluted | $ | (0.58) | $ | 0.21 | $ | 0.13 | |||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||
| Basic | 30,330 | 29,901 | 29,572 | ||||||||||||||
| Diluted | 30,330 | 30,229 | 30,130 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
51
Mistras Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
| For the year ended December 31, | For the transition period ended December 31, | For the year ended May 31, | ||||||||||||||
| 2017 | 2016 | 2016 | 2015 | |||||||||||||
| Net (loss) income | $ | (2,168 | ) | $ | 9,611 | $ | 24,650 | $ | 15,991 | |||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Foreign currency translation adjustments | 12,919 | (9,625 | ) | 1,014 | (19,602 | ) | ||||||||||
| Comprehensive income (loss) | 10,751 | (14 | ) | 25,664 | (3,611 | ) | ||||||||||
| Less: net income (loss) attributable to noncontrolling interests | 7 | 43 | (4 | ) | (90 | ) | ||||||||||
| Foreign currency translation adjustments attributable to noncontrolling interests | 4 | 6 | 1 | 5 | ||||||||||||
| Comprehensive income (loss) attributable to Mistras Group, Inc. | $ | 10,748 | $ | (51 | ) | $ | 25,669 | $ | (3,516 | ) | ||||||
| For the year ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Net income (loss) | $ | (17,445) | $ | 6,574 | $ | 3,893 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Foreign currency translation adjustments | 5,058 | (13,084) | (4,252) | ||||||||||||||
| Comprehensive loss | (12,387) | (6,510) | (359) | ||||||||||||||
| Less: net income attributable to noncontrolling interests, net of taxes | 8 | 75 | 33 | ||||||||||||||
| Less: Foreign currency translation adjustments attributable to noncontrolling interests | 4 | (5) | (2) | ||||||||||||||
| Comprehensive loss attributable to Mistras Group, Inc. | $ | (12,399) | $ | (6,580) | $ | (390) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
52
Mistras Group, Inc. and Subsidiaries
Consolidated Statements of Equity
(in thousands)
| Common Stock | Treasury Stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total Mistras Group, Inc. Stockholders’ Equity | Noncontrolling Interest | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total Equity | ||||||||||||||||||||||||||||||||||||
| Balance at May 31, 2014 | 28,456 | $ | 284 | — | $ | — | $ | 201,831 | $ | 41,500 | $ | (1,511 | ) | $ | 242,104 | $ | 288 | $ | 242,392 | |||||||||||||||||||||
| Net income | — | — | — | — | — | 16,081 | — | 16,081 | (90 | ) | 15,991 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | (19,602 | ) | (19,602 | ) | (5 | ) | (19,607 | ) | ||||||||||||||||||||||||||
| Share-based payments | 21 | — | — | — | 6,579 | — | — | 6,579 | — | 6,579 | ||||||||||||||||||||||||||||||
| Net settlement on vesting of restricted stock units | 161 | 2 | — | — | (1,483 | ) | — | — | (1,481 | ) | — | (1,481 | ) | |||||||||||||||||||||||||||
| Excess tax benefit from share-based payment compensation | — | — | — | — | 388 | — | — | 388 | — | 388 | ||||||||||||||||||||||||||||||
| Exercise of stock options | 65 | 1 | — | — | 749 | — | — | 750 | — | 750 | ||||||||||||||||||||||||||||||
| Balance at May 31, 2015 | 28,703 | $ | 287 | — | $ | — | $ | 208,064 | $ | 57,581 | $ | (21,113 | ) | $ | 244,819 | $ | 193 | $ | 245,012 | |||||||||||||||||||||
| Net income | — | — | — | — | — | 24,654 | — | 24,654 | (4 | ) | 24,650 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 1,014 | 1,014 | (64 | ) | 950 | |||||||||||||||||||||||||||||
| Share-based payments | — | — | — | — | 6,394 | — | — | 6,394 | — | 6,394 | ||||||||||||||||||||||||||||||
| Net settlement on vesting of restricted stock units | 182 | 2 | — | — | (1,093 | ) | — | — | (1,091 | ) | — | (1,091 | ) | |||||||||||||||||||||||||||
| Excess tax benefit from share-based payment compensation | — | — | — | — | (170 | ) | — | — | (170 | ) | — | (170 | ) | |||||||||||||||||||||||||||
| Exercise of stock options | 55 | 1 | — | — | 542 | — | — | 543 | — | 543 | ||||||||||||||||||||||||||||||
| Balance at May 31, 2016 | 28,940 | $ | 290 | — | $ | — | $ | 213,737 | $ | 82,235 | $ | (20,099 | ) | $ | 276,163 | $ | 125 | $ | 276,288 | |||||||||||||||||||||
| Net income | — | — | — | — | — | 9,568 | — | 9,568 | 43 | 9,611 | ||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | — | (9,625 | ) | (9,625 | ) | (6 | ) | (9,631 | ) | ||||||||||||||||||||||||||
| Share-based payments | — | — | — | — | 4,627 | — | — | 4,627 | — | 4,627 | ||||||||||||||||||||||||||||||
| Net settlement on vesting of restricted stock units | 212 | 2 | — | — | (2,325 | ) | — | — | (2,323 | ) | — | (2,323 | ) | |||||||||||||||||||||||||||
| Excess tax benefit from share-based payment compensation | — | — | — | — | 568 | — | — | 568 | — | 568 | ||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | (420 | ) | (9,000 | ) | — | — | — | (9,000 | ) | — | (9,000 | ) | |||||||||||||||||||||||||||
| Exercise of stock options | 65 | — | — | — | 604 | — | — | 604 | — | 604 | ||||||||||||||||||||||||||||||
| Balance at December 31, 2016 | 29,217 | $ | 292 | (420 | ) | $ | (9,000 | ) | $ | 217,211 | $ | 91,803 | — | $ | (29,724 | ) | $ | 270,582 | $ | 162 | $ | 270,744 | ||||||||||||||||||
| Net loss | — | — | — | — | — | (2,175 | ) | — | (2,175 | ) | 7 | (2,168 | ) | |||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | 12,919 | 12,919 | 4 | 12,923 | ||||||||||||||||||||||||||||||
| Share-based payments | — | — | — | — | 6,588 | — | — | 6,588 | — | 6,588 | ||||||||||||||||||||||||||||||
| Net settlement on vesting of restricted stock units | 187 | 2 | — | — | (1,649 | ) | — | — | (1,647 | ) | — | (1,647 | ) | |||||||||||||||||||||||||||
| Retirement of treasury stock | (1,146 | ) | (12 | ) | 1,146 | 24,923 | — | (24,911 | ) | — | — | — | — | |||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | (726 | ) | (15,923 | ) | — | — | — | (15,923 | ) | — | (15,923 | ) | ||||||||||||||||||||||||||
| Exercise of stock options | 37 | — | — | — | 275 | — | — | 275 | — | 275 | ||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 28,295 | $ | 282 | — | $ | — | $ | 222,425 | — | $ | 64,717 | — | $ | (16,805 | ) | $ | 270,619 | $ | 173 | — | $ | 270,792 | ||||||||||||||||||
| Common Stock | Additional paid-in capital | Retained earnings (deficit) | Accumulated other comprehensive income (loss) | Total Mistras Group, Inc. Stockholders’ Equity | Noncontrolling Interest | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 29,234 | $ | 292 | $ | 234,638 | $ | (21,848) | $ | (16,061) | $ | 197,021 | $ | 198 | $ | 197,219 | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | 3,860 | — | 3,860 | 33 | 3,893 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | (4,250) | (4,250) | (2) | (4,252) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 5,421 | — | — | 5,421 | — | 5,421 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net settlement on vesting of restricted stock units | 312 | 3 | (1,372) | — | — | (1,369) | — | (1,369) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 29,546 | $ | 295 | $ | 238,687 | $ | (17,988) | $ | (20,311) | $ | 200,683 | $ | 229 | $ | 200,912 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 6,499 | — | 6,499 | 75 | 6,574 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (13,079) | (13,079) | (5) | (13,084) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 5,335 | — | — | 5,335 | — | 5,335 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net settlement of restricted stock units | 349 | 3 | (991) | — | — | (988) | — | (988) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 29,895 | $ | 298 | $ | 243,031 | $ | (11,489) | $ | (33,390) | $ | 198,450 | $ | 299 | $ | 198,749 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | (17,453) | — | (17,453) | 8 | (17,445) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | 5,054 | 5,054 | 4 | 5,058 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 5,712 | — | — | 5,712 | — | 5,712 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net settlement of restricted stock units | 703 | 7 | (1,578) | — | — | (1,571) | — | (1,571) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | 30,598 | $ | 305 | $ | 247,165 | $ | (28,942) | $ | (28,336) | $ | 190,192 | $ | 311 | $ | 190,503 | ||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
53
Mistras Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
| For the year ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net income (loss) | $ | (17,445) | $ | 6,574 | $ | 3,893 | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | |||||||||||||||||
| Depreciation and amortization | 34,099 | 33,294 | 34,921 | ||||||||||||||
| Deferred income taxes | (5,281) | (517) | 87 | ||||||||||||||
| Share-based compensation expense | 5,712 | 5,335 | 5,421 | ||||||||||||||
| Impairment charges | 13,799 | — | — | ||||||||||||||
| Bad debt provision for troubled customers, net of recoveries | — | 42 | — | ||||||||||||||
| Change in provision for doubtful accounts | 346 | — | — | ||||||||||||||
| Foreign currency (gain) loss | 1,030 | (208) | 417 | ||||||||||||||
| Payment of finance costs | — | (400) | — | ||||||||||||||
| Fair value adjustments to contingent consideration | — | 45 | 949 | ||||||||||||||
| Other | (437) | 786 | 119 | ||||||||||||||
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions | |||||||||||||||||
| Accounts receivable | (8,026) | (17,225) | (3,979) | ||||||||||||||
| Inventories | (1,867) | (1,283) | 278 | ||||||||||||||
| Prepaid expenses and other assets | (1,852) | 5,959 | 943 | ||||||||||||||
| Accounts payable | 4,177 | (93) | (1,139) | ||||||||||||||
| Accrued expenses and other liabilities | 4,010 | (6,454) | 2,268 | ||||||||||||||
| Income taxes payable | (580) | 1,084 | (1,917) | ||||||||||||||
| Payment of contingent consideration in excess of initial estimate | (937) | (533) | — | ||||||||||||||
| Net cash provided by operating activities | 26,748 | 26,406 | 42,261 | ||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Purchase of property, plant and equipment | (20,854) | (12,591) | (18,161) | ||||||||||||||
| Purchase of intangible assets | (2,795) | (825) | (1,115) | ||||||||||||||
| Acquisition of businesses, net of cash acquired | — | — | (440) | ||||||||||||||
| Proceeds from sale of equipment | 1,516 | 1,178 | 1,165 | ||||||||||||||
| Net cash used in investing activities | (22,133) | (12,238) | (18,551) | ||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Repayment of finance lease obligations | (5,047) | (4,140) | (4,060) | ||||||||||||||
| Proceeds from borrowings of long-term debt | 611 | 125,000 | — | ||||||||||||||
| Repayment of long-term debt | (7,598) | (81,405) | (16,262) | ||||||||||||||
| Proceeds from revolver | 83,000 | 192,501 | 89,000 | ||||||||||||||
| Repayments of revolver | (77,100) | (246,750) | (89,065) | ||||||||||||||
| Payments of financing costs | — | (147) | (550) | ||||||||||||||
| Payment of contingent consideration for business acquisitions | — | (405) | (938) | ||||||||||||||
| Taxes paid related to net share settlement of share-based awards | (1,572) | (977) | (1,370) | ||||||||||||||
| Net cash used in financing activities | (7,706) | (16,323) | (23,245) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 249 | (1,467) | (2,115) | ||||||||||||||
| Net change in cash and cash equivalents | (2,842) | (3,622) | (1,650) | ||||||||||||||
| Cash and cash equivalents: | |||||||||||||||||
| Beginning of period | 20,488 | 24,110 | 25,760 | ||||||||||||||
| End of period | $ | 17,646 | $ | 20,488 | $ | 24,110 | |||||||||||
| Supplemental disclosure of cash paid | |||||||||||||||||
| Interest, net | $ | 17,078 | $ | 8,603 | $ | 10,078 | |||||||||||
| Income taxes, net | $ | 6,901 | $ | (3,069) | $ | 4,707 | |||||||||||
| Noncash investing and financing | |||||||||||||||||
| Equipment acquired through finance lease obligations | $ | 7,125 | $ | 5,076 | $ | 2,923 | |||||||||||
| For the year ended December 31, | For the transition period ended December 31, | For the year ended May 31, | |||||||||||||
| 2017 | 2016 | 2016 | 2015 | ||||||||||||
| Cash flows from operating activities | |||||||||||||||
| Net (loss) income | $ | (2,168 | ) | $ | 9,611 | $ | 24,650 | $ | 15,991 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||||||
| Depreciation and amortization | 31,383 | 19,199 | 32,474 | 33,286 | |||||||||||
| Deferred income taxes | (4,854 | ) | (174 | ) | 240 | (1,745 | ) | ||||||||
| Share-based compensation expense | 6,574 | 4,559 | 6,514 | 6,579 | |||||||||||
| Impairment charges | 15,810 | — | — | — | |||||||||||
| Bad debt provision for unexpected customer bankruptcy | 1,200 | — | — | — | |||||||||||
| Charges associated with the exit of foreign operations | — | — | — | 2,516 | |||||||||||
| Fair value adjustments to contingent consideration | (463 | ) | 262 | (2,066 | ) | (5,382 | ) | ||||||||
| Other | 79 | 559 | (1,052 | ) | 1,647 | ||||||||||
| Changes in operating assets and liabilities, net of effect of acquisitions | |||||||||||||||
| Accounts receivable | 2,490 | 4,123 | (4,999 | ) | 3,982 | ||||||||||
| Inventories | (117 | ) | 628 | 1,595 | 388 | ||||||||||
| Prepaid expenses and other current assets | (2,464 | ) | (4,453 | ) | (1,812 | ) | (1,109 | ) | |||||||
| Accounts payable | 2,574 | (3,667 | ) | 254 | (6,571 | ) | |||||||||
| Accrued expenses and other liabilities | 4,188 | (2,301 | ) | 10,187 | 2,006 | ||||||||||
| Income taxes payable | 1,007 | 1,913 | 2,139 | (1,748 | ) | ||||||||||
| Net cash provided by operating activities | 55,239 | 30,259 | 68,124 | 49,840 | |||||||||||
| Cash flows from investing activities | |||||||||||||||
| Purchase of property, plant and equipment | (19,314 | ) | (9,093 | ) | (14,864 | ) | (15,104 | ) | |||||||
| Purchase of intangible assets | (1,255 | ) | (697 | ) | (1,315 | ) | (866 | ) | |||||||
| Acquisition of businesses, net of cash acquired | (83,424 | ) | (8,262 | ) | (1,743 | ) | (34,677 | ) | |||||||
| Proceeds from sale of equipment | 1,196 | 678 | 1,170 | 996 | |||||||||||
| Net cash used in investing activities | (102,797 | ) | (17,374 | ) | (16,752 | ) | (49,651 | ) | |||||||
| Cash flows from financing activities | |||||||||||||||
| Repayment of capital lease obligations | (6,492 | ) | (4,490 | ) | (7,870 | ) | (8,653 | ) | |||||||
| Proceeds from borrowings of long-term debt | 6,653 | 386 | 2,737 | 2,232 | |||||||||||
| Repayment of long-term debt | (2,101 | ) | (11,919 | ) | (17,580 | ) | (11,457 | ) | |||||||
| Proceeds from revolver | 124,000 | 48,400 | 55,800 | 110,300 | |||||||||||
| Repayments of revolver | (50,600 | ) | (34,300 | ) | (69,600 | ) | (86,800 | ) | |||||||
| Payment of contingent consideration for business acquisitions | (560 | ) | (795 | ) | (3,147 | ) | (3,213 | ) | |||||||
| Purchases of treasury stock | (15,923 | ) | (9,000 | ) | — | — | |||||||||
| Taxes paid related to net share settlement of share-based awards | (1,647 | ) | (2,323 | ) | (1,091 | ) | (1,481 | ) | |||||||
| Excess tax benefit from share-based compensation | — | 568 | (170 | ) | 388 | ||||||||||
| Proceeds from the exercise of stock options | 275 | 604 | 543 | 750 | |||||||||||
| Net cash provided by (used in) financing activities | 53,605 | (12,869 | ) | (40,378 | ) | 2,066 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 2,340 | (2,050 | ) | (361 | ) | (1,720 | ) | ||||||||
| Net change in cash and cash equivalents | 8,387 | (2,034 | ) | 10,633 | 535 | ||||||||||
| Cash and cash equivalents: | |||||||||||||||
| Beginning of period | 19,154 | 21,188 | 10,555 | 10,020 | |||||||||||
| End of period | $ | 27,541 | $ | 19,154 | $ | 21,188 | $ | 10,555 | |||||||
| Supplemental disclosure of cash paid | |||||||||||||||
| Interest | $ | 4,264 | $ | 2,079 | $ | 4,151 | $ | 4,504 | |||||||
| Income taxes | $ | 3,063 | $ | 8,119 | $ | 10,686 | $ | 13,243 | |||||||
| Noncash investing and financing | |||||||||||||||
| Equipment acquired through capital lease obligations | $ | 3,185 | $ | 1,829 | $ | 8,248 | $ | 8,031 | |||||||
| Issuance of notes payable and other debt obligations primarily related to acquisitions | $ | — | $ | 325 | $ | — | $ | 20,480 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Mistras Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(tabular dollars in thousands, except per share data)
1. DescriptionSummary of BusinessSignificant Accounting Policies and Basis of PresentationPractices
Description of Business
Mistras Group, Inc. and, together with its subsidiaries (the Company)"Company"), is a leading “one source” globalmultinational provider of integrated technology-enabled asset protection solutions helping to maximize the safety and operational uptime for civilization’s most critical industrial and civil assets.
Backed by an innovative, data-driven asset protection portfolio, proprietary technologies and decades-long legacy of industry leadership, the Company helps customers with asset-intensive infrastructure in the oil and gas, aerospace and defense, industrials, power generation and transmission (including alternative and renewable energy), other process industries and infrastructure, research and engineering and other industries towards achieving and maintaining operational excellence. By supporting these organizations that help fuel our vehicles and power our society; inspecting components that are trusted for commercial, defense, and space craft; and building real-time monitoring systems to help avoid catastrophic incidents, the Company helps the world at large.
The Company enhances value for its customers by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial Internet of Things ("IoT")-connected digital software and monitoring solutions, including OneSuite™, which serves as an ecosystem platform, pulling together all of the Company’s software and data services capabilities, for the benefit of its customers.
The Company’s core capabilities also include non-destructive testing (“NDT”) field inspections enhanced by advanced robotics, laboratory quality control, laboratory materials services, shop laboratory assurance testing, sensing technologies and NDT equipment, asset and mechanical integrity engineering services, and light mechanical maintenance and access services.
The Company has three operating segments. During the first quarter of 2023, the Company renamed the Services segment to the North America segment to more closely align to the geographical area in which the Services segment operates. We did not recast the corresponding financial information for the historical periods presented, as there was no change in the manner which our chief operating decision maker reviews the financial results of each segment and allocates resources. Our Segments, with the updated naming convention, are as follows:
•North America (Referred to as "Services" in prior filings). This segment provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of NDT, inspection, mechanical and engineering services that are used to evaluate the safety, structural integrity and reliability of critical energy, industrial and public infrastructure. The Company combines industry-leadinginfrastructure and commercial aerospace components. Software, digital and data services are included in this segment.
•International. This segment offers services, products and technologies, expertisesystems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in mechanical integrity (MI), non-destructive testing (NDT)China and mechanicalSouth Korea, which are served by the Products and Systems segment.
•Products and Systems. This segment designs, manufactures, sells, installs and services the Company’s asset protection products and proprietary data analysis softwaresystems, including equipment and instrumentation, predominantly in the United States.
Recent Developments
During the third quarter of 2023, a triggering event was identified within the Company's reporting units within the International segment due to deliverdecreased gross margin in the current period as a comprehensive portfolioresult of customized solutions, ranging from routine inspectionsinflationary pressures and rising energy costs which resulted in impairment charges within the International reporting units of $13.8 million. Refer to complex, plant-wide asset integrity assessmentsNote 8-Goodwill.
During 2022, the Company experienced unfavorable foreign currency exchange impacts as it relates to the Company's European operations. Additionally, the Russian-Ukrainian war and management. These mission critical solutions enhance customers’ abilitythe conflict in the Middle East between Israel and Hamas continues to extend the useful life of their assets, increase productivity, minimize repair costs, comply with governmental safety and environmental regulations, manage risk and avoid catastrophic disasters. The Company serves a global customer base of companies with asset-intensive infrastructure, including companiescreate disruptions in the oil and gas commercial aerospacemarket and defense, fossilthe supply chain in general, which is resulting in some disruption to our business operations. The Company’s European operations are currently experiencing increased costs associated with higher energy costs, among others, due in part to the Russian-Ukrainian war.
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In 2022, the Company eliminated substantially all of the COVID related cost reduction initiatives undertaken in 2020, including re-instatement of the savings plan employer match and nuclear power, alternativeincreasing wages back to pre-pandemic amounts.
The Company is currently unable to predict with certainty the overall impact that the factors discussed above and renewable energy, public infrastructure, chemicals, transportation, primary metalsthe effect of inflationary pressures may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine. The Company will continue to monitor market conditions and metalworking, pharmaceutical/biotechnology and food processing industries and research and engineering institutions.respond accordingly.
Principles of Consolidation
The Company follows guidance on the consolidation of variable interest entities ("VIEs") that requires companies to utilize a qualitative approach to determine whether it is the primary beneficiary of a VIE. The process for identifying the primary beneficiary of a VIE requires consideration of the factors that indicate a party has the power to direct the activities that most significantly impact the VIE’s economic performance, including powers granted to the VIE’s program manager, powers contained in the VIE governing board and, to a certain extent, a company’s economic interest in the VIE. The Company analyzes its joint ventures and classifies them as either:
•a VIE that must be consolidated because the Company is the primary beneficiary, or the joint venture is not a VIE and the Company holds the majority voting interest with no significant participative rights available to the other partners; or
•a VIE that does not require consolidation and is treated as an equity method investment because the Company is not the primary beneficiary or the joint venture is not a VIE and the Company does not hold the majority voting interest.
As part of the above analysis, if it is determined that the Company has the power to direct the activities that most significantly impact the joint venture’s economic performance, the Company considers whether or not it has the obligation to absorb losses or rights to receive benefits of the VIE that could potentially be significant to the VIE.
The Company became the primary beneficiary in July 2020 of a VIE in which the Company has a 49% interest in a limited partnership, and a 49% stockholder in the corporate general partner of the limited partnership. The Company consolidated the financial statements of the VIE with the financial statements of the Company. As of and for the year ended December 31, 2023, the VIE had immaterial assets and had approximately $3.0 million of revenue. The Company is the primary sub-contractor of the VIE.
The accompanying audited consolidated financial statements include the accounts of Mistras Group, Inc. as well as its wholly-owned subsidiaries, majority-owned subsidiaries and its wholly and majority-owned subsidiaries.consolidated VIE. For subsidiaries in which the Company’s ownership interest is less than 100%, the non-controlling interests are reported in stockholders’ equity in the accompanying consolidated balance sheets.Consolidated Balance Sheets. The non-controlling interests in net income,results, net of tax, is classified separately in the accompanying consolidated statementsConsolidated Statements of income.
All significant intercompany accounts and transactions have been eliminated in consolidation. For fiscal 2016 and 2015, Mistras Group, Inc.’s and its subsidiaries’ fiscal years ended on May 31 except for the subsidiaries in the International segment, which ended on April 30. Accordingly, the Company’s International segment subsidiaries were consolidated on a one-month lag. Therefore, in the quarter and year of acquisition,The results of operations of companies acquired subsidiaries in the International segment were generallyare included in consolidated results for one less month than the actual number of months from the acquisition date to the end of the reporting period. As discussed in Note 7 - Acquisitions and Dispositions, during the lag period in fiscal 2015, the Company sold an international subsidiary, and decided to sell two additional international subsidiaries. Effective December 31, 2016, the Company's International segment is no longer consolidated on a one month lag, and such change for the seven month transition period ended December 31, 2016 was not material.acquisition.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the Company's financial condition or results of operations as previously reported.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") requires that the Company make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date of the financial statements. The Company bases its estimates and assumptions on historical experience, known or expected trends and various other assumptions that it believes to be reasonable. As future
events and their effects cannot be determined with precision, actual results could differ significantly from these estimates, which may cause the Company’s future results to be significantly affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
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Accounts receivable are stated net ofReceivable and Allowance for Credit Losses
The Company maintains an allowance for doubtful accounts and sales allowances. Outstandingcredit losses on its accounts receivable balances, which represents its best estimate of current expected credit losses over the contractual life of the accounts receivable. When evaluating the adequacy of its allowance for credit losses each reporting period, the Company analyzes accounts receivable balances with similar risk characteristics on a collective basis, considering factors such as the aging of receivable balances, payment terms (primarily with 30 day terms), geographic location, historical loss experience, current information and future expectations (generally considered one year which is consistent with expected collectability of the Company's trade receivables).
The Company monitors and considers whether historical loss rates are reviewed periodically,consistent with expectation of supportable forward-looking estimates for its trade receivables noting any current or future economic considerations that would require adjusting the Company’s historical loss experience. Each reporting period, the Company reassesses whether any accounts receivable no longer share similar risk characteristics and allowancesshould instead be evaluated as part of another pool or on an individual basis. Changes to the allowance for credit losses are provided at such timeadjusted through credit loss expense, which is presented within Selling, general and administrative expenses in the Consolidated Statements of Income (Loss).
Concentration of Credit Risk
For each of the years ended December 31, 2023 and 2022, no customer represented 10% or more of the Company's revenue.
Financial instruments that managementpotentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At times, cash deposits may exceed the limits insured by the Federal Deposit Insurance Corporation. The Company believes it is probable that such balances will not be collected within a reasonable periodexposed to any significant credit risk or risk of time. The Company extends credit to its customers based upon credit evaluations in the normal coursenonperformance of business, primarily with 30-day terms. Bad debts are provided for based on historical experience and management’s evaluation of outstanding accounts receivable. Accounts are written off when they are deemed uncollectible. One customer accounted for 7% and 11% of our accounts receivable as of December 31, 2017 and December 31, 2016, respectively.financial institutions.
Inventories
Inventories are stated at the lower of cost or net realizable value, as determined by using the first-in, first-out method, or market. Work in process and finished goods inventory include material, direct labor, variable costs and overhead.
Purchased and Internal-Use Software
The Company capitalizes certain costs that are incurred to purchase or to create and implement internal-use software, which includes software coding, installation and testing. Capitalized costs are amortized on a straight-line basis over three years, the estimated useful life of the software.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is computed utilizing the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed utilizing the straight-line method over the shorter of the remaining lease term or estimated useful life. Repairs and maintenance costs are expensed as incurred.
Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets. We testThe Company tests goodwill for impairment at a “reporting unit” level (which for the Company is represented by (i) our Servicesits North America segment, (ii) ourits Products and Systems segment, and (iii) the European component of its International segment and (iv) the Brazilian component of ourits International segment). OurThe Company's annual impairment test is conducted on the first day of ourthe Company's fourth quarter. In connection with the change in our fiscal year to December 31, our annual test datequarter, which is October 1. For the transition period ended December 31, 2016, a December 1 date was used and historically, prior to the fiscal year end change, the Company tested for impairment annually as of March 1. Goodwill is also tested for impairment whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the third quarter of 2017, there was a triggering event in the Products and Systems segment that resulted in a $13.2 million
In testing for goodwill impairment, charge. See Note 8 for further details.the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative
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impairment test is not necessary. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test.
If the fair value of a reporting unit is less than its carrying value, this is an indicator that the goodwill assigned to that reporting unit may be impaired. As a result of the Company adopting ASU 2017-04,An impairment will be recorded in the amount that the fair value is less than the carrying value, as the ASU eliminated step two of goodwill impairment process.value. The Company considers the income and market approaches to estimatingestimate the fair value of ourits reporting units, which requires significant judgment in evaluation of economic and industry trends, estimated future cash flows, discountassumptions related to revenue growth rates, gross margins, EBIT margins, and other factors.market multiples.
See Note 8-Goodwill for additional information related to the Company's goodwill impairment test during 2023.
Impairment of Long-lived Assets
The Company reviews the recoverability of its long-lived assets (or asset groups) on a periodic basiswhenever events or changes in order to identify indicatorscircumstances indicate that the carrying amount of a possible impairment.the long-lived asset (group) might not be recoverable. The assessment for potential impairment is based primarily on the Company’s ability to
recover the carrying value of its long-lived assets from expected future undiscounted cash flows. If the total expected future undiscounted cash flows are less than the carrying amount of the assets, a loss is recognized for the difference between fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets. During
Acquisitions
The Company allocates the third quarterpurchase price of 2017, there was a triggering eventacquired businesses to their identifiable tangible assets and liabilities as well as identifiable intangible assets, such as customer relationships, technology, non-compete agreements and trade names. Certain estimates and judgments are required in the Productsapplication of the fair value techniques, including estimates of the respective acquisition's future performance and Systems segment that resultedrelated cash flows, selection of a discount rate and economic lives, and use of Level 3 measurements as defined in a $2.6 million impairment chargeASC No. 820, Fair Value Measurements and Disclosure. Deferred taxes are recorded for any differences between the assigned values and tax bases of long-lived assets. See Note 9 for further details.assets and liabilities.
Research and Engineering
Research and product development costs are expensed as incurred.
Advertising, Promotions and Marketing
The costs for advertising, promotion and marketing programs are expensed as incurred and are included in selling, general and administrative expenses. Advertising expense was approximately $1.9$1.4 million, $1.2 million, $1.8$2.0 million and $2.2$1.0 million for the yearyears ended December 31, 2017, the transition period ended December 31, 20162023, 2022 and fiscal 2016 and 2015,2021, respectively.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other financial current assets and liabilities approximate fair value based on the short-term nature of the items. The carrying value of long-term debt approximates fair value due to the variable-rate structure of the debt. The fair value of the Company’s notes payable and capital lease obligations approximate their carrying amounts as those obligations bear interest at rates which management believes would currently be available to the Company for similar obligations.
Foreign Currency Translation
The financial position and results of operations of the Company’s foreign subsidiaries are measured using their functional currencies, which are their local currencies. Assets and liabilities of foreign subsidiaries are translated into the U.S. Dollar at the exchange rates in effect at the balance sheet date. Income and expenses are translated at the average exchange rate during the period. Translation gains and losses are reported as a component of other comprehensive income (loss) income for the period and included in accumulated other comprehensive income (loss) income within stockholders’ equity.
Foreign currency (gains) and losses arising from transactions denominated in currencies other than the functional currency are included in net income, reported in SG&Aselling, general and administrative expenses, and were approximately $0.6$1.3 million, $(0.7) million, $(0.1)$(0.2) million, and $1.5$0.4 million for the yearyears ended December 31, 2017, transition period ended December 31, 20162023, 2022 and fiscal 2016 and 2015,2021, respectively.
Self-Insurance
The Company is self-insured for certain losses relating to workers’ compensation and health benefitsbenefit claims. The Company maintains third-party excess insurance coverage for all workers' compensation and health benefit claims in excess of
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approximately $0.3 million per occurenceoccurrence to reduce its exposure from such claims. Self-insured losses are accrued when it is probable that an uninsured claim has been incurred but not reported and the amount of the loss can be reasonably estimated at the balance sheet date.
Share-based Compensation
The value of services received from employees and directors in exchange for an award of an equity instrument is measured based on the grant-date fair value of the award. Such value is recognized as a non-cash expense on a straight-line basis over the minimum period the individual provides services, which is typically the vesting period of the award with the exception of awards with graded vesting that contain an internal performance measure where each tranche is recognized on a straight-line basis over its vesting period subject to the probability of meeting the performance requirements and adjusted for the number of shares
expected to be earned. Awards to certain employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. As share-based compensation expense is based on awards ultimately expected to vest, the amount of expense has beenis reduced for estimated forfeitures. The cost of these awards is recorded in selling, general and administrative expenseexpenses in the Company’s consolidated statementsConsolidated Statements of income.Income (Loss).
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred incomeWe recognize deferred tax assets and liabilities are recognizedat enacted income tax rates for the future tax consequences attributable totemporary differences between the financial statement carrying amountsreporting bases and the tax bases of existingour assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferredliabilities. Any effects of changes in income tax assets and liabilitiesrates or tax laws are measured using enacted tax rates expected to apply to taxable incomeincluded in the years in which those temporary differences are expected to be recovered or settled. The effect on deferredprovision for income tax assets and liabilities of a change in tax rates is recognized in incometaxes in the period that includes the enactment date.of enactment. Our net deferred tax assets primarily consist of net operating loss carry forwards, or NOLs. A valuation allowance is provided if it is more likely than not that some or all of a deferred income tax asset will not be realized. Financial accounting standards prescribe a minimum recognition threshold aA current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current and prior years.
We recognize the tax benefit from an uncertain tax position only if it is required to meet before beingmore likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements. These standards also provide guidancestatements from such a position are measured based on de-recognition, measurement, and classificationthe largest benefit that has a greater than 50% likelihood of amounts relating to uncertain tax positions, accounting for and disclosure of interest and penalties, accounting in interim periods and disclosures required. Interest and penalties related to unrecognized tax positions are recognized as incurred within “provision for income taxes” in the consolidated statements of income.being realized upon ultimate resolution.
Recent Accounting Pronouncements
In August 2015,March 2020 and updated in January 2021, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU") 2015-14, Revenue from Contracts with Customers2020-04 and 2021-01, “Reference Rate Reform (Topic 606)848): DeferralFacilitation of the Effective Date, which defersEffects of Reference Rate Reform on Financial Reporting.” The amendments provide optional guidance for a limited period of time to ease the effective date ofpotential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU 2014-092020-04 are effective for all entities by one year. This update is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Earlier application is permitted only as of annual reporting periods beginning afterMarch 12, 2020 through December 15, 2016, including interim reporting periods within that reporting period. ASU 2014-09 will become effective for31, 2024. The Company is currently evaluating applicable contracts and the Company beginning 2018. The ASU permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively withavailable expedients provided by the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The ASU also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.new guidance.
2. Revenue
The Company adopted ASU 2014-09 along withderives the related additional ASU’s on Topic 606 on January 1, 2018, utilizing the cumulative catch-up method. The resultmajority of adoption is immaterial to the Company's consolidated financial statements, largely because most of our projects are short-term in nature and billedits revenue by providing services on a time and material basis.basis that are short-term in
nature. The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.
Performance Obligations
The Company provides highly integrated and bundled inspection services to its customers. The majority of the Company's contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the Company's best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is a relative selling price based on price lists.
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Contract modifications are not routine in the performance of the Company's contracts. Generally, when contracts are modified, the modification is to account for changes in scope to the goods and services that are provided. In most instances, contract modifications are for goods or services that are distinct, and, therefore, are accounted for as a separate contract.
The Company's performance obligations are satisfied over time as work progresses or at a point in time. The majority of the Company's revenue is recognized over time as work progresses for the Company's service deliverables, which includes providing testing, inspection and mechanical services to our customers. Revenue is recognized over time, based on time and material incurred to date which best portrays the transfer of control to the customer. The Company also utilizes aan available practical expedient that provides for revenue to be recognizerecognized in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. Fixed fee arrangements are determined based on expected labor, material, and overhead to be consumed on fulfillment of such services. For these arrangements, revenue is recognized on a cost-to-cost method tracked on an input basis.
The majority of our revenue recognized at a point in time is related to product sales when the customer obtains control of the asset, which is generally upon shipment to the customer. Contract costs include labor, material and overhead.
The Company will make the additional required disclosures under Topic 606, starting withexpects any significant remaining performance obligations to be satisfied within one year.
Contract Estimates
The majority of the Company's condensed consolidatedrevenues are short-term in nature. The Company enters into master service agreements ("MSAs") with customers that specify an overall framework and contract terms. The actual contracting to provide services or furnish products are triggered by a work order, purchase order, or some similar document issued pursuant to an MSA which sets forth the scope of services and/or identifies the products to be provided. From time-to-time, the Company may enter into longer-term contracts, which can range from several months to several years. Revenue on certain contracts is recognized as work is performed based on total costs incurred to date in relation to the total estimated costs for the performance of the contract at completion. This includes contract estimates of costs to be incurred for the performance of the contract. Cost estimation is based upon the professional knowledge and experience of the Company's project managers, engineers and financial statementsprofessionals. Factors that are considered in estimating the work to be completed include the availability of materials, the effect of any delays in the first quarterCompany's project performance and the recoverability of 2018.any claims. Whenever revisions of estimates, contract costs and/or contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.
The following series of tables present the FASB issued ASU No. 2015-17, Income Taxes (Topic 740)Company's disaggregated revenue:
Revenue by industry was as follows (in thousands):
| Year ended December 31, 2023 | North America | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| Oil & Gas | $ | 379,221 | $ | 36,615 | $ | 159 | $ | — | $ | 415,995 | |||||||||||||||||||
| Aerospace & Defense | 56,000 | 20,711 | 286 | — | 76,997 | ||||||||||||||||||||||||
| Industrials | 42,518 | 26,292 | 1,773 | — | 70,583 | ||||||||||||||||||||||||
| Power Generation and Transmission | 23,598 | 6,609 | 3,767 | — | 33,974 | ||||||||||||||||||||||||
| Other Process Industries | 33,035 | 14,456 | 112 | — | 47,603 | ||||||||||||||||||||||||
| Infrastructure, Research & Engineering | 16,620 | 9,320 | 3,168 | — | 29,108 | ||||||||||||||||||||||||
| Petrochemical | 13,216 | 1,216 | — | — | 14,432 | ||||||||||||||||||||||||
| Other | 15,122 | 9,195 | 3,721 | (11,257) | 16,781 | ||||||||||||||||||||||||
| Total | $ | 579,330 | $ | 124,414 | $ | 12,986 | $ | (11,257) | $ | 705,473 | |||||||||||||||||||
60
| Year ended December 31, 2022 | North America | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| Oil & Gas | $ | 356,763 | $ | 30,654 | $ | 335 | $ | — | $ | 387,752 | |||||||||||||||||||
| Aerospace & Defense | 61,475 | 18,763 | 314 | — | 80,552 | ||||||||||||||||||||||||
| Industrials | 38,197 | 23,703 | 2,083 | — | 63,983 | ||||||||||||||||||||||||
| Power Generation and Transmission | 31,197 | 8,304 | 2,603 | — | 42,104 | ||||||||||||||||||||||||
| Other Process Industries | 40,778 | 14,021 | 28 | — | 54,827 | ||||||||||||||||||||||||
| Infrastructure, Research & Engineering | 15,283 | 7,946 | 3,994 | — | 27,223 | ||||||||||||||||||||||||
| Petrochemical | 15,360 | 536 | — | — | 15,896 | ||||||||||||||||||||||||
| Other | 14,283 | 8,498 | 3,370 | (11,115) | 15,036 | ||||||||||||||||||||||||
| Total | $ | 573,336 | $ | 112,425 | $ | 12,727 | $ | (11,115) | $ | 687,373 | |||||||||||||||||||
| Year ended December 31, 2021 | North America | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||||||||||||||||||||
| Oil & Gas | $ | 330,880 | $ | 35,232 | $ | 808 | $ | — | $ | 366,920 | |||||||||||||||||||||||||||||||||||||
| Aerospace & Defense | 51,593 | 16,513 | 286 | — | 68,392 | ||||||||||||||||||||||||||||||||||||||||||
| Industrials | 41,873 | 24,000 | 1,842 | — | 67,715 | ||||||||||||||||||||||||||||||||||||||||||
| Power Generation and Transmission | 39,966 | 9,927 | 2,853 | — | 52,746 | ||||||||||||||||||||||||||||||||||||||||||
| Other Process Industries | 38,742 | 12,593 | 64 | — | 51,399 | ||||||||||||||||||||||||||||||||||||||||||
| Infrastructure, Research & Engineering | 16,809 | 11,496 | 3,985 | — | 32,290 | ||||||||||||||||||||||||||||||||||||||||||
| Petrochemical | 19,378 | 227 | — | — | 19,605 | ||||||||||||||||||||||||||||||||||||||||||
| Other | 16,146 | 7,257 | 3,993 | (9,332) | 18,064 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 555,387 | $ | 117,245 | $ | 13,831 | $ | (9,332) | $ | 677,131 | |||||||||||||||||||||||||||||||||||||
Revenue per key geographic location was as follows (in thousands):
| Year ended December 31, 2023 | North America | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| United States | $ | 495,764 | $ | 934 | $ | 5,956 | $ | (2,372) | $ | 500,282 | |||||||||||||||||||
| Other Americas | 77,880 | 12,906 | 850 | (4,697) | 86,939 | ||||||||||||||||||||||||
| Europe | 3,655 | 105,934 | 1,927 | (3,381) | 108,135 | ||||||||||||||||||||||||
| Asia-Pacific | 2,031 | 4,640 | 4,253 | (807) | 10,117 | ||||||||||||||||||||||||
| Total | $ | 579,330 | $ | 124,414 | $ | 12,986 | $ | (11,257) | $ | 705,473 | |||||||||||||||||||
| Year ended December 31, 2022 | North America | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| United States | $ | 485,551 | $ | 910 | $ | 6,495 | $ | (3,083) | $ | 489,873 | |||||||||||||||||||
| Other Americas | 83,877 | 9,076 | 406 | (4,105) | 89,254 | ||||||||||||||||||||||||
| Europe | 2,811 | 99,714 | 1,896 | (3,502) | 100,919 | ||||||||||||||||||||||||
| Asia-Pacific | 1,097 | 2,725 | 3,930 | (425) | 7,327 | ||||||||||||||||||||||||
| Total | $ | 573,336 | $ | 112,425 | $ | 12,727 | $ | (11,115) | $ | 687,373 | |||||||||||||||||||
| Year ended December 31, 2021 | North America | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| United States | $ | 472,125 | $ | 912 | $ | 6,469 | $ | (4,284) | $ | 475,222 | |||||||||||||||||||
| Other Americas | 80,013 | 5,003 | 395 | (1,768) | 83,643 | ||||||||||||||||||||||||
| Europe | 1,841 | 108,411 | 2,174 | (2,812) | 109,614 | ||||||||||||||||||||||||
| Asia-Pacific | 1,408 | 2,919 | 4,793 | (468) | 8,652 | ||||||||||||||||||||||||
| Total | $ | 555,387 | $ | 117,245 | $ | 13,831 | $ | (9,332) | $ | 677,131 | |||||||||||||||||||
61
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet Classification of Deferred Taxes. This amendment will simplifySheets. Amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, generally at periodic intervals (e.g., weekly, bi-weekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the presentation of deferred taxCompany sometimes receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities. These assets and liabilities are aggregated on an individual contract basis and reported on the balance sheetConsolidated Balance Sheets at the end of each reporting period within accounts receivable, net or accrued expenses and require all deferred tax assetsother current liabilities.
Revenue recognized for 2023 and liabilities to be treated as non-current. ASU 2015-17 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2016, with early adoption permitted. The Company adopted this guidance prospectively beginning2022, that was included in the first quarter of 2017, which did not have a material impact on the consolidated financial statements and related disclosures.
or less.
3. Earnings per Share
Basic earnings (loss) per share is computed by dividing net income attributable to common shareholders(loss) by the weighted averageweighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to common shareholders(loss) by the sum of (1) the weighted averageweighted-average number of shares of common stock outstanding during the period, and (2) the dilutive effect of assumed conversion of equity awards using the treasury stock method. With respect to the number of weighted averageweighted-average shares outstanding (denominator), diluted shares reflects: (i) only the exercise of options to acquire common stock to the extent that the options’ exercise prices are less than the average market price of common sharesstock during the period and (ii) the pro forma vesting of restricted stock units.
The following table sets forth the computations of basic and diluted earnings (loss) per share:
| For the year ended December 31, | For the transition period ended December 31, | For the year ended May 31, | |||||||||||||
| 2017 | 2016 | 2016 | 2015 | ||||||||||||
| Basic (loss) earnings per share | |||||||||||||||
| Numerator: | |||||||||||||||
| Net (loss) income attributable to Mistras Group, Inc. | $ | (2,175 | ) | $ | 9,568 | $ | 24,654 | $ | 16,081 | ||||||
| Denominator | |||||||||||||||
| Weighted average common shares outstanding | 28,422 | 28,989 | 28,856 | 28,613 | |||||||||||
| Basic (loss) earnings per share | $ | (0.08 | ) | $ | 0.33 | $ | 0.85 | $ | 0.56 | ||||||
| Diluted earnings per share: | |||||||||||||||
| Numerator: | |||||||||||||||
| Net income attributable to Mistras Group, Inc. | $ | (2,175 | ) | $ | 9,568 | $ | 24,654 | $ | 16,081 | ||||||
| Denominator | |||||||||||||||
| Weighted average common shares outstanding | 28,422 | 28,989 | 28,856 | 28,613 | |||||||||||
| Dilutive effect of stock options outstanding | — | 791 | 712 | 719 | |||||||||||
| Dilutive effect of restricted stock units outstanding | — | 345 | 323 | 258 | |||||||||||
| 28,422 | 30,125 | 29,891 | 29,590 | ||||||||||||
| Diluted (loss) earnings per share | $ | (0.08 | ) | $ | 0.32 | $ | 0.82 | $ | 0.54 | ||||||
| For the year ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Basic earnings (loss) per share: | |||||||||||||||||
| Numerator: | |||||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | (17,453) | $ | 6,499 | $ | 3,860 | |||||||||||
| Denominator | |||||||||||||||||
| Weighted average common shares outstanding | 30,330 | 29,901 | 29,572 | ||||||||||||||
| Basic earnings (loss) per share | $ | (0.58) | $ | 0.22 | $ | 0.13 | |||||||||||
| Diluted earnings (loss) per share: | |||||||||||||||||
| Numerator: | |||||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | (17,453) | $ | 6,499 | $ | 3,860 | |||||||||||
| Denominator | |||||||||||||||||
| Weighted average common shares outstanding | 30,330 | 29,901 | 29,572 | ||||||||||||||
| Dilutive effect of stock options outstanding | — | — | 558 | ||||||||||||||
| Dilutive effect of restricted stock units outstanding | — | 328 | — | ||||||||||||||
| 30,330 | 30,229 | 30,130 | |||||||||||||||
| Diluted earnings (loss) per share | $ | (0.58) | $ | 0.21 | $ | 0.13 | |||||||||||
62
The following potential shares of common sharesstock were excluded from the computation of diluted earnings per share, as the effect would have been anti-dilutive:
| For the year ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
Potential shares of common stock attributable to restricted stock units (RSUs) and performance stock units (PSUs) outstanding (1) | 547 | 1,005 | 109 | ||||||||||||||
| Potential shares of common stock attributable to stock options outstanding | — | 1 | 5 | ||||||||||||||
| Total | 547 | 1,006 | 114 | ||||||||||||||
| For the year ended December 31, | For the transition period ended December 31, | For the year ended May 31, | ||||||||||
| 2017 | 2016 | 2016 | 2015 | |||||||||
| Potential common stock attributable to stock options outstanding | 810 | (1 | ) | — | 5 | 6 | ||||||
| Potential common stock attributable to restricted stock units (RSUs) and performance stock units (PSUs) outstanding | 353 | (2 | ) | 2 | 24 | 1 | ||||||
| Total | 1,163 | 2 | 29 | 7 | ||||||||
(1) - 805For the year ended December 31, 2023, 1,014,527 shares of common stock related to restricted stock and 250,000 stock options, were excluded from the calculation of diluted EPS due to the net loss for the period.
4. Accounts Receivable net
Accounts receivable consist of the following:following (in thousands):
| December 31, | December 31, | December 31, | |||||||||||||||||||
| 2017 | 2016 | 2023 | 2022 | ||||||||||||||||||
| Trade accounts receivable | $ | 141,952 | $ | 133,704 | |||||||||||||||||
| Allowance for doubtful accounts | (3,872 | ) | (2,852 | ) | |||||||||||||||||
| Allowance for credit losses | |||||||||||||||||||||
| Accounts receivable, net | $ | 138,080 | $ | 130,852 | |||||||||||||||||
The Company had $14.4$18.5 million and $16.8$13.5 million of unbilled revenues accrued as of December 31, 20172023 and December 31, 2016, respectively.2022, respectively, which is included within the trade accounts receivable balance above. Unbilled revenuesrevenue is generally billed in the subsequent quarter to their revenue recognition. The Company considers unbilled receivables as short-term in nature as they are normally converted to trade receivables within 90 days, thus future changes in economic conditions will not have a significant effect on the credit loss estimate.
The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of December 31, 2017 are expected2019, approximately $1.4 million of past due receivables were outstanding from this customer. The Company received notice from the customer in December 2019, alleging that the work performed was not in compliance with the contract. The Company filed a lawsuit to be billedrecover the $1.4 million and other amounts due to the Company and the customer filed a counterclaim, alleging breach of contract and seeking damages. The Company recorded a full reserve for this receivable during 2019. The parties agreed to a settlement in the first quarter ending June 30, 2023, with releases executed in July 2023, whereby the Company released its claim for the $1.4 million of 2018.outstanding receivables. Accordingly, the receivable has been written off. See Note 18-Commitments and Contingencies for additional details.
5. Inventories
Inventories consist of the following:
| December 31, | December 31, | ||||||
| 2017 | 2016 | ||||||
| Raw materials | $ | 5,105 | $ | 5,054 | |||
| Work in progress | 1,192 | 1,246 | |||||
| Finished goods | 2,746 | 2,335 | |||||
| Services-related consumable supplies | 1,460 | 1,382 | |||||
| Inventory | $ | 10,503 | $ | 10,017 | |||
| December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Raw materials | $ | 6,099 | $ | 5,351 | |||||||
| Work in progress | 839 | 336 | |||||||||
| Finished goods | 5,740 | 5,475 | |||||||||
| Consumable supplies | 2,605 | 2,394 | |||||||||
| Inventories | $ | 15,283 | $ | 13,556 | |||||||
63
6. Property, Plant and Equipment net
Property, plant and equipment consist of the following:
| December 31, | December 31, | December 31, | |||||||||||||||||||||||||||||
| Useful Life | 2017 | 2016 | Useful Life | 2023 | 2022 | ||||||||||||||||||||||||||
| (Years) | (Years) | (in thousands) | |||||||||||||||||||||||||||||
| Land | $ | 2,414 | $ | 1,714 | |||||||||||||||||||||||||||
| Building and improvements | 30-40 | 24,003 | 19,261 | ||||||||||||||||||||||||||||
| Office furniture and equipment | 5-8 | 14,230 | 9,069 | ||||||||||||||||||||||||||||
| Machinery and equipment | 5-7 | 191,721 | 169,928 | ||||||||||||||||||||||||||||
| 232,368 | 199,972 | ||||||||||||||||||||||||||||||
| Accumulated depreciation and amortization | (145,225 | ) | (126,823 | ) | |||||||||||||||||||||||||||
| Property, plant and equipment, net | $ | 87,143 | $ | 73,149 | |||||||||||||||||||||||||||
Depreciation expense was approximately $22.4$25.6 million, $14.0 million, $22.9$24.1 million, and $22.2$25.2 million for the yearyears ended December 31, 2017, the transition period ended December 31, 20162023, 2022 and fiscal 2016 and 2015,2021, respectively.
7. Acquisitions and Dispositions
| Year ended December 31, 2017 | Transition Period | |||||
| Number of entities | 3 | 3 | ||||
| Cash paid | $ | 83,963 | $ | 8,295 | ||
| Working capital adjustments | 150 | — | ||||
| Notes payable | — | 325 | ||||
| Contingent consideration | 3,407 | 1,630 | ||||
| Consideration paid | $ | 87,520 | $ | 10,250 | ||
| Current net assets | $ | 7,165 | $ | 1,632 | ||
| Debt and other long-term liabilities | (2,848 | ) | (214 | ) | ||
| Property, plant and equipment | 11,115 | 953 | ||||
| Deferred tax asset (liability) | (1,278 | ) | 392 | |||
| Intangibles | 31,671 | 3,367 | ||||
| Goodwill | 41,695 | 4,120 | ||||
| Net assets acquired | $ | 87,520 | $ | 10,250 | ||
Acquisition-Related expense
In the course of its acquisition activities, the Company incurs costs in connection with due diligence, such as professional fees, and other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a quarterly basis. These amounts are recorded as acquisition-related (benefit) expense, net, on the consolidated statementsConsolidated Statements of incomeIncome (Loss) and were as follows for the yearyears ended December 31, 2017, the transition period ended December 31, 20162023, 2022 and fiscal 2016 and 2015:2021 (in thousands):
| For the year ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Due diligence, professional fees and other transaction costs | $ | 9 | $ | 31 | $ | 5 | |||||||||||
| Adjustments to fair value of contingent consideration liabilities | — | 45 | 1,128 | ||||||||||||||
| Acquisition-related expense, net | $ | 9 | $ | 76 | $ | 1,133 | |||||||||||
| For the year ended December 31, | For the Transition Period ended December 31, | For the year ended May 31, | |||||||||||||
| 2017 | 2016 | 2016 | 2015 | ||||||||||||
| Due diligence, professional fees and other transaction costs | $ | 945 | $ | 231 | $ | 629 | $ | 215 | |||||||
| Adjustments to fair value of contingent consideration liabilities | $ | (463 | ) | $ | 265 | $ | (2,082 | ) | $ | (5,382 | ) | ||||
| Acquisition-related (benefit) expense, net | $ | 482 | $ | 496 | $ | (1,453 | ) | $ | (5,167 | ) | |||||
8. Goodwill
The changes in the carrying amount of goodwill by segment is shown below:below (in thousands):
| North America | International | Products and Systems | Total | ||||||||||||||||||||
| Balance at December 31, 2021 | $ | 190,656 | $ | 14,783 | $ | — | $ | 205,439 | |||||||||||||||
| Foreign currency translation | (4,946) | (858) | — | (5,804) | |||||||||||||||||||
| Balance at December 31, 2022 | $ | 185,710 | $ | 13,925 | $ | — | $ | 199,635 | |||||||||||||||
| Impairment charges | — | (13,799) | — | (13,799) | |||||||||||||||||||
| Foreign currency translation | 1,644 | (126) | — | 1,518 | |||||||||||||||||||
| Balance at December 31, 2023 | $ | 187,354 | $ | — | $ | — | $ | 187,354 | |||||||||||||||
| Services | International | Products and Systems | Total | ||||||||||||
| Balance at May 31, 2016 | $ | 119,683 | $ | 36,340 | $ | 13,197 | $ | 169,220 | |||||||
| Goodwill acquired during the year | 4,120 | — | — | 4,120 | |||||||||||
| Adjustments to preliminary purchase price allocations | (19 | ) | — | — | (19 | ) | |||||||||
| Foreign currency translation | (392 | ) | (2,989 | ) | — | (3,381 | ) | ||||||||
| Balance at December 31, 2016 | $ | 123,392 | $ | 33,351 | $ | 13,197 | $ | 169,940 | |||||||
| Goodwill acquired during the year | 41,695 | — | — | 41,695 | |||||||||||
| Impairment charge | — | — | (13,197 | ) | (13,197 | ) | |||||||||
| Adjustments to preliminary purchase price allocations | (211 | ) | — | — | (211 | ) | |||||||||
| Foreign currency translation | 925 | 4,286 | — | 5,211 | |||||||||||
| Balance at December 31, 2017 | $ | 165,801 | $ | 37,637 | $ | — | $ | 203,438 | |||||||
64
In performing the interim quantitative goodwill as well as long-lived assets (see Note 9). Forimpairment test and consistent with prior practice, the goodwill analysis, we used income and market approaches to estimateCompany determined the fair value of each of the reporting unit, which required significant judgment in evaluationunits using a combination of economicthe income approach and industry trends,the market approach by assessing each of these valuation methodologies based upon availability and relevance of comparable Company data and determining the appropriate weighting.
Under the income approach, the fair value for each of the reporting units was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company used internal forecasts, updated for recent events, to estimate future cash flows using a terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on the Company’s most recent views of the long-term outlook for each reporting unit. The Company's internal forecasts include assumptions about future profitability, including the expected demand for the Company’s goods and services. Due to the inherent uncertainties involved in making estimates and assumptions, actual results may differ from those assumed in the forecasts. The Company derived the discount rates using a capital asset pricing model and other factors, and compared that fair valueanalyzing published rates for industries relevant to the carrying value,reporting units to estimate the cost of equity financing. The Company used discount rates that are commensurate with the risks and determined thatuncertainties inherent in the fair valuerespective businesses and in the Company's internally developed forecasts and which are updated for recent events. Increased interest rates in the current period increased the discount rate associated with the reporting units which contributed to an unfavorable decrease in the reporting units value.
The market approach valuation was derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses was based on the markets in which the reporting units operate, considering risk profiles, size, geography, and diversity of products and services.
Based upon the results of the reporting unit was less thaninterim quantitative goodwill impairment test, the carrying value. The Company recorded an impairment charge of $13.2$13.8 million within the International reporting units. The impairment was calculated based on the difference between the estimated fair value and the carrying value of the reporting unit, which resultedunits and is included in anGoodwill impairment charges on the condensed consolidated statements of the entire amount of goodwillincome (loss) for the Products and Systems reporting unit.
The Company's cumulative goodwill impairment as of December 31, 20162023 was $9.9$114.0 million, all of which is within its$57.2 million related to the North America segment, $43.6 million related to the International segment and $13.2 million related to the Products and Systems segment.
9. Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets were as follows:follows (in thousands):
| December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Useful Life (Years) | Gross Amount | Accumulated Amortization | Net Carrying Amount | Gross Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||||||||||
| Customer relationships | 5-18 | $ | 110,780 | $ | (90,506) | $ | 20,274 | $ | 109,683 | $ | (84,130) | $ | 25,553 | ||||||||||||||||||||||||||||||||||
| Software/Technology | 3-15 | 55,053 | (32,230) | 22,823 | 51,028 | (28,669) | 22,359 | ||||||||||||||||||||||||||||||||||||||||
| Covenants not to compete | 2-5 | 12,536 | (12,488) | 48 | 12,488 | (12,416) | 72 | ||||||||||||||||||||||||||||||||||||||||
| Other | 2-12 | 10,466 | (9,617) | 849 | 10,389 | (9,358) | 1,031 | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | 188,835 | $ | (144,841) | $ | 43,994 | $ | 183,588 | $ | (134,573) | $ | 49,015 | |||||||||||||||||||||||||||||||||||
| December 31, | December 31, | ||||||||||||||||||||||||||||
| 2017 | 2016 | ||||||||||||||||||||||||||||
Useful Life (Years) | Gross Amount | Accumulated Amortization | Impairment | Net Carrying Amount | Gross Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||
| Customer relationships | 5-14 | $ | 113,299 | $ | (58,107 | ) | $ | (170 | ) | $ | 55,022 | $ | 81,559 | $ | (50,417 | ) | $ | 31,142 | |||||||||||
| Software/Technology | 3-15 | 19,523 | (14,133 | ) | (2,411 | ) | 2,979 | 18,128 | (12,577 | ) | 5,551 | ||||||||||||||||||
| Covenants not to compete | 2-5 | 12,510 | (10,438 | ) | — | 2,072 | 11,143 | (9,647 | ) | 1,496 | |||||||||||||||||||
| Other | 2-5 | 10,109 | (6,411 | ) | (32 | ) | 3,666 | 7,266 | (5,448 | ) | 1,818 | ||||||||||||||||||
| Total | $ | 155,441 | $ | (89,089 | ) | $ | (2,613 | ) | $ | 63,739 | $ | 118,096 | $ | (78,089 | ) | $ | 40,007 | ||||||||||||
Amortization expense for the yearyears ended December 31, 2017, the transition period ended December 31, 20162023, 2022 and the years ended May 31, 2016 and 20152021, was approximately $9.0$8.5 million, $5.2 million, $9.6$9.1 million, and $11.1$9.7 million, respectively, including amortization of software/technology for these periods of $0.7$2.9 million, $0.5 million, $1.0$2.9 million, and $0.9$3.0 million, respectively.
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Amortization expense in each of the five years and thereafter subsequent to December 31, 20172023 related to the Company’s intangible assets is expected to be as follows:follows (in thousands):
| Expected Amortization Expense | |||||
| 2024 | $ | 9,054 | |||
| 2025 | 6,829 | ||||
| 2026 | 6,120 | ||||
| 2027 | 4,752 | ||||
| 2028 | 4,620 | ||||
| Thereafter | 12,619 | ||||
| Total | $ | 43,994 | |||
Expected Amortization Expense | |||
| 2018 | $ | 10,117 | |
| 2019 | 8,952 | ||
| 2020 | 7,483 | ||
| 2021 | 6,411 | ||
| 2022 | 6,076 | ||
| Thereafter | 24,700 | ||
| Total | $ | 63,739 | |
10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:following (in thousands):
| December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Accrued salaries, wages and related employee benefits | $ | 27,372 | $ | 26,684 | |||||||
| Contingent consideration | — | 937 | |||||||||
| Accrued workers' compensation and health benefits | 4,385 | 3,660 | |||||||||
| Deferred revenue | 7,136 | 7,521 | |||||||||
| Right-of-use liability - Operating | 10,686 | 10,376 | |||||||||
| Pension accrual | 2,458 | 2,519 | |||||||||
| Other accrued expenses | 32,294 | 26,147 | |||||||||
| Total accrued expenses and other current liabilities | $ | 84,331 | $ | 77,844 | |||||||
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Accrued salaries, wages and related employee benefits | $ | 27,185 | $ | 23,442 | |||
| Contingent consideration | 3,430 | 1,826 | |||||
| Accrued workers' compensation and health benefits | 5,181 | 6,351 | |||||
| Deferred revenues | 6,338 | 3,743 | |||||
| Legal settlement accrual | 1,600 | 6,320 | |||||
| Other accrued expenses | 21,827 | 17,015 | |||||
| Total accrued expenses and other current liabilities | $ | 65,561 | $ | 58,697 | |||
11. Long-Term Debt
Long-term debt consistsconsisted of the following:following (in thousands):
| December 31, | |||||||
| 2017 | 2016 | ||||||
| Senior credit facility | $ | 156,948 | $ | 82,776 | |||
| Notes payable | 228 | 320 | |||||
| Other | 9,702 | 4,200 | |||||
| Total debt | 166,878 | 87,296 | |||||
| Less: Current portion | (2,358 | ) | (1,379 | ) | |||
| Long-term debt, net of current portion | $ | 164,520 | $ | 85,917 | |||
| December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Senior credit facility | $ | 71,150 | $ | 65,250 | |||||||
| Senior secured term loan, net of unamortized debt issuance costs of $0.4 million and $0.5 million | 115,253 | 121,399 | |||||||||
| Other | 3,996 | 4,602 | |||||||||
| Total debt | 190,399 | 191,251 | |||||||||
| Less: Current portion | (8,900) | (7,425) | |||||||||
| Long-term debt, net of current portion | $ | 181,499 | $ | 183,826 | |||||||
Senior Credit Facility
Prior to entering into the New Credit Agreement (defined and described below), the Company had a credit agreement with its banking group (the "Credit Agreement") which provided the Company with a $150 million revolving credit facility and a $100 million term loan. The Credit Agreement was most recently amended on May 19, 2021 and had a maturity date of December 12, 2023.
On December 8, 2017,August 1, 2022, the Company entered into a Fourth Amended and Restatednew credit agreement (the “New Credit Agreement”) which replaced the prior Credit Agreement (“Credit Agreement”).and provides the Company with a $190 million, 5-year committed revolving credit facility and a $125 million term loan with a balance of $115.3 million as of December 31, 2023. The New Credit Agreement increasedpermits the Company’s revolving line of credit from $175.0 million to $250.0 million and provides that under certain circumstances the line of credit can be increased to $300.0 million. The Company may continue to borrow up to $30.0$100 million in non-U.S. Dollarnon-US dollar currencies and to use up to $10.0$20 million of the credit limit for the issuance of letters of credit. TheBoth the revolving line of credit and the term loan under the New Credit Agreement have a maturity date of theJuly 30, 2027.
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The New Credit Agreement is December 7, 2022. At December 31, 2017,has the Company had borrowings of $156.9 millionfollowing key terms, conditions and letters offinancial covenants:
•Borrowings bear interest at Secured Overnight Financing Rate ("SOFR") plus a credit of $4.9 million were outstanding under the Credit Agreement. The Company has capitalized costs of $0.8 million associated with debt modifications.
◦Total Consolidated Debt Leverage Ratio means the ratio of (a) Total Consolidated Debt to 2%, or a base rate less a margin of 1.25% to 0.375%, at(b) EBITDA (as defined in the optionNew Credit Agreement) for the trailing four consecutive fiscal quarters.
◦Total Consolidated Debt means all indebtedness (including subordinated debt) of the Company based upon the Company’s Funded Debt Leverage Ratio. Funded Debt Leverage Ratio is generally the ratio of (1) all outstanding indebtedness for borrowed money and other interest-on a consolidated basis.
•The Credit Agreement contains financial covenants requiring that the Company has to maintain a FundedTotal Consolidated Debt Leverage Ratio of no greatermore than 3.54.0 to 11.0 at the end of each quarter through June 30, 2023 and an Intereststepping down to a maximum permitted ratio of no more than 3.75 to 1.0 for the remainder of the term.
•As of December 31, 2023, the Fixed Charge Coverage Ratio was modified from a ratio of at least 3.01.25 to 1. Interest Coverage Ratio means the1.0 to a ratio as of any date of determination, of (a) EBITDA1.1 to 1.0 for the 12 month period immediately preceding the date of determination, to (b) all interest, premium payments, debt discount, fees, charges and related expensesduration of the Company and its subsidiaries in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, paid during the 12 month period immediately preceding the date of determination. The Company can elect to increase the Funded Debt Leverage Ratio to 3.75 to 1 temporarily for four fiscal quarters immediately following the fiscal quarter in which the Company acquires another business. The Company can make this election twice during the term of the Credit Agreement.
•The New Credit Agreement limits the Company’s ability to, among other things, create liens, make investments, incur more indebtedness, merge or consolidate, make dispositions of property, pay dividends, and make distributions to stockholders or repurchase our stock, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements.
•The New Credit Agreement does not limit the Company’s ability to acquire other businesses or companies except that the acquired business or company must be in the Company's line of business, the Company must be in compliance with the financial covenants on a pro forma basis after taking into account the acquisition, and if the acquiredCompany must provide written notice at least five business isdays prior to the date of an acquisition of $10 million or more.
•Quarterly payments on the term loan of $1.56 million through June 30, 2024, then increasing to $2.34 million through June 30, 2025, and to $3.12 million for each quarterly payment thereafter through maturity.
The New Credit Agreement was accounted for as a separate subsidiary,modification, and the Company expensed $0.8 million in certain circumstancesunamortized capitalized debt issuance costs and fees during the lenders will receivethree months ended September 30, 2022, which was included in selling, general and administrative expenses on the benefitConsolidated Statements of a guarantyIncome (Loss). The Company incurred $1.6 million in financing costs for the New Credit Agreement, of which $0.2 million of third party costs were expensed and included in selling, general and administrative expenses on the subsidiary and liens on its assets and a pledgeConsolidated Statements of its stock.Income (Loss).
As of December 31, 2017,2023, the Company had borrowings of $186.4 million and a total of $2.9 million of letters of credit outstanding under the New Credit Agreement. The Company has capitalized costs associated with debt modifications of $1.2 million as of December 31, 2023, which is included in Other assets on the Consolidated Balance Sheet and will be amortized into interest expense over the remaining term of the Credit Agreement through July 30, 2027.
As of December 31, 2023, the Company was in compliance with the terms of the New Credit Agreement. The Company continuously monitors compliance with the covenants contained in the New Credit Agreement. The Company believes that it is probable that the Company will be able to comply with the financial covenants in the New Credit Agreement and has undertakenthat sufficient credit remains available under the New Credit Agreement to continuously monitor compliancemeet the Company's liquidity needs. However, such matters cannot be predicted with these covenants.certainty.
The Company's other debt includes local bank financing provided at the local subsidiary levelslevel used to support working capital requirements and fund capital expenditures. At December 31, 2017,2023, there was an aggregate of approximately $9.7$4.0 million
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outstanding, payable at various times from 2018 to 2029.through 2030. Monthly payments rangerange from $1$1 thousand to $18 thousand. Interest$19 thousand and interest rates range from 0.6%0.4% to 6.2%3.5%.
Scheduled principal payments due under all borrowing agreements in each of the five years and thereafter subsequent to December 31, 20172023 are as follows:follows (in thousands):
| 2024 | $ | 9,208 | |||
| 2025 | 11,968 | ||||
| 2026 | 12,875 | ||||
| 2027 | 155,524 | ||||
| 2028 | 824 | ||||
| Thereafter | — | ||||
| Total | $ | 190,399 | |||
| 2018 | $ | 2,358 | |
| 2019 | 1,664 | ||
| 2020 | 1,243 | ||
| 2021 | 892 | ||
| 2022 | 157,728 | ||
| Thereafter | 2,993 | ||
| Total | $ | 166,878 | |
12. Fair Value Measurements
The Company performs fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and Disclosures.Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a three levelthree-level hierarchy that prioritizes the inputs used to measure fair value. The three levels of the hierarchy are defined as follows:
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 — Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.
Level 3 — Unobservable inputs reflecting the Company’s own assumptions about inputs that market participants would use in pricing the asset or liability based on the best information available.
Financial instruments measured at fair value on a recurring basis
The fair value of contingent consideration liabilities was estimated using a discounted cash flow technique with significant
inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The
significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected
future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the
obligation, and as calculated in accordance with the terms of the applicable acquisition agreements.
The following table represents the changes in the fair value of Level 3 contingent consideration:consideration (in thousands):
| December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Balance at the beginning of the period: | $ | 937 | $ | 1,830 | ||||||||||
| Acquisitions | — | — | ||||||||||||
| Payments | (937) | (938) | ||||||||||||
| Accretion of liability | — | — | ||||||||||||
| Revaluation | — | 45 | ||||||||||||
| Foreign currency translation | — | — | ||||||||||||
| Balance at the end of the period: | $ | — | $ | 937 | ||||||||||
| Balance at May 31, 2016 | $ | 2,075 | ||
| Acquisitions | 1,630 | |||
| Payments | (795 | ) | ||
| Accretion of liability | 136 | |||
| Revaluation | 126 | |||
| Foreign currency translation | (78 | ) | ||
| Balance at December 31, 2016 | $ | 3,094 | ||
| Acquisitions | 3,407 | |||
| Payments | (560 | ) | ||
| Accretion of liability | 272 | |||
| Revaluation | (735 | ) | ||
| Foreign currency translation | 30 | |||
| Balance at December 31, 2017 | $ | 5,508 | ||
Financial instruments not measured at fair value on a recurring basis
The Company has evaluated current market conditions and borrower credit quality and has determined that the carrying value
of its long-term debt approximates fair value. The fair value of the Company’s notes payable and capitalfinance lease obligations
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approximates their carrying amounts based on anticipated interest rates which management believes would currently be
available to the Company for similar issuances of debt.
13. Share-Based Compensation
The Company hasgrants share-based incentive awards outstanding to its eligible employees and Directorsnon-employee directors under three employee stock ownershiptwo equity incentive plans: (i) the 2007 Stock Option Plan (the 2007 Plan), (ii) the 2009 Long-Term Incentive Plan (the 2009 Plan)"2009 Plan") and (iii)(ii) the 2016 Long-Term Incentive Plan.Plan (the "2016 Plan"). No further awards may behave been granted under either the 2007 Plan or the 2009 Plan although awardssince the 2016 Plan was approved by stockholders in 2016, and the remaining option award granted under the 2007 Plan and 2009 Plan remain outstanding in accordance with their terms.expired during the three months ended March 31, 2022. Awards granted under the 2016 Plan may be in the form of stock options, restricted stock units, restricted stock and other forms of share-based incentives, including performanceperformance-based restricted stock units, stock appreciation rights and deferred stock rights. TheAt the annual stockholders meeting on May 23, 2022, the Company’s stockholders approved an amendment to increase the total number of shares that may be issued under the 2016 Plan allowsby 1.2 million, for a total of 4.9 million shares that are authorized for issuance under the grant of awards of up to approximately 1,700,000 shares of common stock,2016 plan, of which 1,438,000approximately 1,400,000 shares were available for future grants as of December 31, 2017. As of December 31, 2017, there was an aggregate of approximately 2,130,000 stock options outstanding and approximately 724,000 unvested restricted stock units outstanding under the 2009 Plan and the 2007 Plan.2023.
Stock Options
For each of the years ended December 31, 2016,2022 and 2021, the Company did not haverecognize any share-based compensation expense related to stock option awards. For each ofawards, as the fiscal years ended May 31, 2016 and 2015, the Company recognized share-based compensation expense related toone outstanding stock option awards of less than $0.1 million.award was already fully vested. No stock options were granted during the year ended December 31, 2017, the transition period ended December 31, 2016 or the years ended May 31, 2016 and 2015. As of December 31, 2017, no unrecognized compensation costs remained related to the stock option awards. Cash proceeds from, and the intrinsic value ofIn addition, there were no stock options exercised during the yearyears ended December 31, 2017, the transition period ended December 31, 20162023, 2022 and the years ended May 31, 2016 and 2015 were as follows:2021.
| For the year ended December 31, | For the Transition Period ended December 31, | For the year ended May 31, | |||||||||||||
| 2017 | 2016 | 2016 | 2015 | ||||||||||||
| Cash proceeds from options exercised | $ | 275 | $ | 604 | $ | 543 | $ | 750 | |||||||
| Aggregate intrinsic value of options exercised | 580 | 993 | 658 | 563 | |||||||||||
| For the year ended December 31, | For the Transition Period ended December 31, | For the year ended May 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2016 | 2015 | 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock Options | Weighted Average Exercise Price | Common Stock Options | Weighted Average Exercise Price | Common Stock Options | Weighted Average Exercise Price | Common Stock Options | Weighted Average Exercise Price | Common Stock Options | Weighted Average Exercise Price | Common Stock Options | Weighted Average Exercise Price | Common Stock Options | Weighted Average Exercise Price | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Outstanding at beginning of year: | 2,167 | $ | 13.33 | 2,232 | $ | 13.21 | 2,287 | $ | 13.13 | 2,352 | $ | 13.09 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Granted | — | $ | — | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercised | (37 | ) | $ | 7.39 | (65 | ) | $ | 9.27 | (55 | ) | $ | 9.87 | (65 | ) | $ | 11.54 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Expired or forfeited | — | $ | — | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Outstanding at end of year: | 2,130 | $ | 13.43 | 2,167 | $ | 13.33 | 2,232 | $ | 13.21 | 2,287 | $ | 13.13 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock Issuances to Non-Employee Directors
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| For the year ended December 31, 2017 | ||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||
| Range of Exercise Prices | Total Options Outstanding | Weighted Average Remaining Life (Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||
| $10.00-$11.54 | 35 | 1.1 | $ | 10.54 | 35 | $ | 10.54 | |||||||||||
| $13.46-$22.35 | 2,095 | 1.7 | $ | 13.48 | 2,095 | $ | 13.48 | |||||||||||
| 2,130 | 2,130 | |||||||||||||||||
| Aggregate Intrinsic Value | $ | 21,374 | $ | 21,374 | ||||||||||||||
| For the year ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Awards issued | 133 | 70 | 51 | ||||||||||||||
| Grant date fair value of awards issued | $ | 750 | $ | 450 | $ | 525 | |||||||||||
Restricted Stock Unit Awards
Restricted Stock Units generally vest ratably on each of the first four anniversary dates of issuance. The Company recognized approximately $4.5$4.9 million, $3.7 million and $3.5 million of share-based compensation for the yearyears ended December 31, 2017, $2.6 million of share-based compensation for the transition period ended December 31, 2016, $4.4 million of share-based compensation in fiscal 20162023, 2022 and $4.7 million of share-based compensation in fiscal 20152021, respectively, related to restricted stock unit awards. As of December 31, 2017,2023, there werewas approximately $8.2$6.9 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which are expected to be recognized over a remaining weighted average period of 2.32.5 years. Approximately 185,000 restricted stock units vested in the year ended December 31, 2017, of which the fair value of these units was $3.4 million. Approximately 207,000 restricted stock units vested in the transition period ended December 31, 2016, of which the fair value of these units was $5.1 million. Approximately 223,000 restricted stock units vested in fiscal 2016 and 232,000 restricted stock units vested in fiscal 2015. The fair value of these units was $3.5 million and $5.2 million, respectively. Upon vesting, restricted stock units are generally net share-settled to cover the required minimum withholding tax and the remaining amount is converted into an equivalent number of shares of common stock.
| For the year ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Awards issued | 683 | 401 | 317 | ||||||||||||||
| Grand date fair value of awards issued | $ | 4,269 | $ | 2,524 | $ | 3,434 | |||||||||||
A summary of the Company granted approximately 10,000 shares of fully-vested common stock to its five non-employee directors, in connection with its non-employee director compensation plan, which shares had a grant date fair value of approximately $0.3 million. During the years ended May 31, 2016Company's outstanding, non-vested restricted share units is as follows (in thousands, except per share amounts and 2015, the Company granted approximately 28,000 and 21,000 shares, respectively, of fully-vested common stock to its five non-employee directors, in connection with its non-employee director compensation plan. These shares had a grant date fair value of approximately $0.5 million and $0.4 million, respectively, which is included in the share-based compensation expense recorded during the years ended May 31, 2016 and 2015.years):
| For the year ended December 31, | For the transition period ended December 31, | For the year ended May 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the year ended December 31, | For the year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Units | Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Outstanding at beginning of period: | 569 | $ | 20.81 | 575 | $ | 18.85 | 564 | $ | 20.47 | 628 | $ | 19.37 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Granted | 183 | $ | 21.26 | 219 | $ | 24.48 | 264 | $ | 16.73 | 192 | $ | 21.87 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Released | (185 | ) | $ | 20.49 | (207 | ) | $ | 19.40 | (223 | ) | $ | 20.40 | (232 | ) | $ | 18.17 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeited | (35 | ) | $ | 21.45 | (18 | ) | $ | 19.55 | (30 | ) | $ | 19.26 | (24 | ) | $ | 20.57 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Outstanding at end of period: | 532 | $ | 21.05 | 569 | $ | 20.81 | 575 | $ | 18.85 | 564 | $ | 20.47 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Performance Restricted Stock Units
The Company maintains Performance Restricted Stock Units (PRSUs)("PRSUs") that have been granted to select executives and senior officers whose ultimate payout ispayouts may vary between zero and 200% of the target award, based on the Company’s performance over a one-year period based on threespecific metrics as defined: (1) Operating Income, (2) Adjusted EBITDAS and (3) Revenue. There is a discretionary portion of the PRSUs based on individual performance, at the discretion ofapproved by the Compensation Committee (Discretionary PRSUs)of the Board of Directors of the Company.
For 2022, the Compensation Committee of the Board of Directors utilized the same performance metrics for the Company's PRSUs awarded in 2022 as it utilized for the 2021 PRSUs. The three metrics were:
1.Free Cash Flow defined asnet cash provided by operating activities less purchases of property, plant, equipment and intangible assets and is subject to adjustments approved by the Compensation Committee.
2.Adjusted EBITDA defined as net income attributable to the Company plus: interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense and certain acquisition related costs
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(including transaction due diligence costs and adjustments to the fair value of contingent consideration), foreign exchange (gain) loss and, if applicable, certain special items which are noted.
3.Total Shareholder Return ("TSR") measures the total return to shareholders of the Company during 2021 versus the total return to the shareholders of a predefined peer group of companies that provide inspection, testing, certification or similar industrial services. The return will be measured by the year over year percent change in share price. The share prices used to calculate the return are the average share price during the 20-trading day period ending on the initial measurement date (the last 20 trading days of 2021), compared to the average share price during the 20-trading day period ending on the final measurement date (the last 20 trading days of 2022). Any cash dividends or distributions paid in 2022 were added to calculate the return to shareholders during the year. TSR is considered a market condition for which the fair value of PRSUs with this condition is determined using a Monte Carlo valuation model. Key assumptions in the Monte Carlo valuation model included:
a.Expected Volatility. Expected volatility of the Company’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate 1-year performance period.
b.Dividend Yield. The dividend yield assumption was based on historical and Discretionaryanticipated dividend payouts (assumed at zero).
c.Risk-Free Interest Rate. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate 1-year performance measurement period.
For 2023, the Compensation Committee of the Board of Directors used different performance metrics for PRSUs approved in that year. The three metrics are:
1.Free Cash Flow defined asnet cash provided by operating activities less purchases of property, plant, equipment and intangible assets and is subject to adjustments approved by the Compensation Committee.
2.Adjusted EBITDA defined as net income attributable to the Company plus: interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense and certain acquisition related costs (including transaction due diligence costs and adjustments to the fair value of contingent consideration), foreign exchange (gain) loss and, if applicable, certain special items which are noted.
3.Revenue
PRSUs are equity-classified and compensation costs related to PRSUs with performance conditions are initially measured using the fair value of the underlying stock at the date of grant. Compensation costs related to the PRSUs with performance conditions are subsequently adjusted for changes in the expected outcomes of the performance conditions. Compensation cost related to the PRSUs with a market condition is not reversed if the market condition is not achieved, provided the employee requisite service has been rendered. Earned PRSUs generally vest ratably on each of the first four anniversary dates uponfollowing completion of the performance period, for a total requisite service period of up to five years and have no dividend rights.
A summary of the Company's Performance Restricted Stock UnitPRSU activity is presented below:as follows (in thousands, except per share amounts and years):
| For the year ended December 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | ||||||||||||||||||||||||||||||
| Outstanding at beginning of period: | 371 | $ | 9.96 | 388 | $ | 10.07 | 333 | $ | 8.84 | ||||||||||||||||||||||||||
| Granted | 282 | $ | 8.50 | 341 | $ | 6.55 | 189 | $ | 12.59 | ||||||||||||||||||||||||||
| Performance condition adjustments, net | (305) | $ | 8.34 | (285) | $ | 7.71 | (56) | $ | 9.27 | ||||||||||||||||||||||||||
| Released | (204) | $ | 6.59 | (73) | $ | 5.17 | (78) | $ | 8.15 | ||||||||||||||||||||||||||
| Forfeited | (84) | $ | 6.95 | — | $ | — | — | $ | — | ||||||||||||||||||||||||||
| Outstanding at end of period: | 60 | $ | 9.33 | 371 | $ | 9.96 | 388 | $ | 10.07 | ||||||||||||||||||||||||||
| For the year ended December 31, 2017 | For the Transition Period ended December 31, 2016 | ||||||||||||
| Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | ||||||||||
| Outstanding at beginning of period: | 290 | $ | 16.01 | 328 | $ | 17.02 | |||||||
| Granted | 128 | $ | 20.42 | 105 | $ | 24.90 | |||||||
| Performance condition adjustments, net | (68 | ) | $ | 20.55 | (54 | ) | $ | 24.49 | |||||
| Released | (72 | ) | $ | 15.82 | (89 | ) | $ | 24.50 | |||||
| Forfeited | — | $ | — | — | $ | — | |||||||
| Outstanding at end of period: | 278 | $ | 17.00 | 290 | $ | 16.01 | |||||||
For the year ended December 31, 2017, 128,0002023, 282,000 PRSUs were granted. There was a 65,000305,000 net unit reduction to these awards, which represents Company performance below target, during the year ended December 31, 2017. As of2023.
For the year ended December 31, 2017,2022, 341,000 PRSUs were granted. There was a 285,000 net unit reduction to these awards, which represents Company performance below target, during the aggregate liability relatedyear ended December 31, 2022.
71
For the year ended December 31, 2021, 189,000 PRSUs were granted. There was a 56,000 unit reduction to 13,000 outstanding Discretionary PRSUs was less than $0.1 million and is classified within accrued expenses and other liabilities onthese awards, which represents Company performance against target, during the consolidated balance sheet.year ended December 31, 2021.
Compensation expense related to all PRSUs described above was $1.7$0.7 million, $1.7 million, $1.6$1.2 million, and $1.5$1.4 million for the yearyears ended December 31, 2017, the transition period ended December 31, 20162023, 2022 and the years ended May 31, 2016 and 2015,2021, respectively. At December 31, 2017,2023, there was $2.3$0.2 million of total unrecognized compensation costs related to approximately 278,000 nonvested60,000 unvested performance restricted stock units. These costs are expected to be recognized over a weighted-average period of approximately 2.01.5 years.
For the yearyears ended December 31, 2017, the transition period ended December 31, 20162023, 2022 and the fiscal years ended May 31, 2016 and 2015,2021, the income tax benefit recognized on all share based compensation arrangements referenced above was approximately $2.2$0.8 million, $1.6 million, $2.2 million and $2.3$1.4 million, respectively.
14. Income Taxes
Income (loss) before provision (benefit) for income taxes is as follows:follows (in thousands):
| For the year ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Income (loss) before provision (benefit) for income taxes from: | |||||||||||||||||
| U.S. operations | $ | (6,900) | $ | 439 | $ | 1,527 | |||||||||||
| Foreign operations | (11,765) | 8,855 | 5,761 | ||||||||||||||
| Income (loss) before provision (benefit) for income taxes | $ | (18,665) | $ | 9,294 | $ | 7,288 | |||||||||||
| For the year ended December 31, | For the Transition Period ended December 31, | For the year ended May 31, | |||||||||||||
| 2017 | 2016 | 2016 | 2015 | ||||||||||||
| (Loss) income before provision for income taxes from: | |||||||||||||||
| U.S. operations | $ | (7,303 | ) | $ | 5,116 | $ | 27,772 | $ | 26,893 | ||||||
| Foreign operations | 7,077 | 10,365 | 10,643 | (1,162 | ) | ||||||||||
| (Loss) Earnings before income taxes | $ | (226 | ) | $ | 15,481 | $ | 38,415 | $ | 25,731 | ||||||
The provision (benefit) for income taxes consists of the following:following (in thousands):
| For the year ended December 31, | For the Transition Period ended December 31, | For the year ended May 31, | |||||||||||||
| 2017 | 2016 | 2016 | 2015 | ||||||||||||
| Current | |||||||||||||||
| Federal | $ | 3,558 | $ | 1,990 | $ | 9,156 | $ | 8,489 | |||||||
| States and local | 39 | 483 | 1,537 | 1,177 | |||||||||||
| Foreign | 3,131 | 3,569 | 3,672 | 1,493 | |||||||||||
| Reserve for uncertain tax positions | 71 | (39 | ) | (529 | ) | (48 | ) | ||||||||
| Total current | 6,799 | 6,003 | 13,836 | 11,111 | |||||||||||
| Deferred | |||||||||||||||
| Federal | (3,857 | ) | 6 | 82 | (145 | ) | |||||||||
| States and local | (810 | ) | (28 | ) | (51 | ) | (126 | ) | |||||||
| Foreign | (437 | ) | (514 | ) | (557 | ) | (2,416 | ) | |||||||
| Total deferred | (5,104 | ) | (536 | ) | (526 | ) | (2,687 | ) | |||||||
| Net change in valuation allowance | 247 | 403 | 455 | 1,316 | |||||||||||
| Net deferred | (4,857 | ) | (133 | ) | (71 | ) | (1,371 | ) | |||||||
| Provision for income taxes | $ | 1,942 | $ | 5,870 | $ | 13,765 | $ | 9,740 | |||||||
| For the year ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Current | |||||||||||||||||
| Federal | $ | 1,372 | $ | (644) | $ | (182) | |||||||||||
| States and local | 705 | 464 | 246 | ||||||||||||||
| Foreign | 2,063 | 3,251 | 3,641 | ||||||||||||||
| Reserve for uncertain tax positions | 16 | 136 | (186) | ||||||||||||||
| Total current provision (benefit) | $ | 4,156 | $ | 3,207 | $ | 3,519 | |||||||||||
| Deferred | |||||||||||||||||
| Federal | $ | (2,005) | $ | (435) | $ | (309) | |||||||||||
| States and local | (122) | 242 | (138) | ||||||||||||||
| Foreign | (1,439) | (1,614) | (1,884) | ||||||||||||||
| Reserve for uncertain tax positions | — | — | 155 | ||||||||||||||
| Total deferred benefit | (3,566) | (1,807) | (2,176) | ||||||||||||||
| Net change in valuation allowance | (1,810) | 1,320 | 2,052 | ||||||||||||||
| Net deferred benefit | (5,376) | (487) | (124) | ||||||||||||||
| Total provision (benefit) for income taxes | $ | (1,220) | $ | 2,720 | $ | 3,395 | |||||||||||
The provision (benefit) for income taxes differs from the amount computed by applying the statutory federal tax rate to income tax as follows:
follows (in thousands):
72
| For the year ended December 31, | For the Transition period ended December 31, | For the years ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Federal tax at statutory rate | $ | (79 | ) | 35.0 | % | $ | 5,418 | 35.0 | % | Federal tax at statutory rate | $ | (3,920) | 21.0 | 21.0 | % | $ | 1,952 | 21.0 | 21.0 | % | $ | 1,527 | 21.0 | 21.0 | % | |||||||||||||||||||||||||||||||||||||||||
| State taxes, net of federal benefit | (502 | ) | 221.6 | % | 296 | 1.9 | % | State taxes, net of federal benefit | 611 | (3.3) | (3.3) | % | 622 | 6.7 | 6.7 | % | 75 | 1.0 | 1.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Foreign tax | 217 | (95.8 | )% | (573 | ) | (3.7 | )% | Foreign tax | 274 | (1.5) | (1.5) | % | 218 | 2.3 | 2.3 | % | 380 | 5.2 | 5.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Contingent consideration | (63 | ) | 27.7 | % | (4 | ) | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill impairment | Goodwill impairment | 2,901 | (15.5) | % | — | — | % | — | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nondeductible compensation | Nondeductible compensation | 716 | (3.8) | % | — | — | % | 119 | 1.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| US taxation of foreign earnings | US taxation of foreign earnings | 98 | (0.5) | % | 100 | 1.1 | % | (1,041) | (14.3) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Permanent differences | 377 | (166.4 | )% | 373 | 2.4 | % | Permanent differences | 485 | (2.6) | (2.6) | % | 363 | 3.9 | 3.9 | % | 373 | 5.1 | 5.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Transition tax, net of foreign tax credits | 3,942 | (1,741.4 | )% | — | — | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Federal tax rate change due to the Tax Act | (1,956 | ) | 864.0 | % | — | — | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Research & Development Credit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Research & Development Credit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Research & Development Credit | (602) | 3.2 | % | (1,716) | (18.5) | % | (214) | (2.9) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in valuation allowance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in valuation allowance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in valuation allowance | (1,810) | 9.7 | % | 1,320 | 14.2 | % | 2,052 | 28.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of foreign tax rate changes | Impact of foreign tax rate changes | — | % | (246) | (2.6) | % | 49 | 0.7 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | (241 | ) | 106.5 | % | (43 | ) | (0.3 | )% | Other | 27 | (0.1) | (0.1) | % | 107 | 1.2 | 1.2 | % | 75 | 1.0 | 1.0 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Change in valuation allowance | 247 | (109.1 | )% | 403 | 2.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total provision for income taxes | $ | 1,942 | (857.9 | )% | $ | 5,870 | 37.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total provision (benefit) for income taxes | Total provision (benefit) for income taxes | $ | (1,220) | 6.5 | % | $ | 2,720 | 29.3 | % | $ | 3,395 | 46.6 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||