Commission file number ~~001- 34481~~

001-34481

Mistras Group, Inc.

(Exact name of registrant as specified in its charter)



~~Delaware~~

	~~22-3341267~~
Delaware			22-3341267
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

195 Clarksville Road ~~Princeton Junction, New Jersey~~			~~08550~~
Princeton Junction,		New Jersey	08550
(Address of principal executive offices)			(Zip Code)

(609) 716-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

New York Stock Exchange

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.

ý Yes o No

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).

ý Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller

reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

Large accelerated filero

Accelerated filer

Non-accelerated filero

Smaller reporting companyo

☐

~~(Do not check if a smaller reporting company)~~

Emerging Growth Companyo

☐

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o☐ Yes ý No

As of ~~November 2, 2017,~~October 28, 2021, the registrant had ~~28,290,709~~29,458,243 shares of common stock ~~outstanding and 1,146,249 shares of treasury stock.~~

outstanding.

Table of Contents

TABLE OF CONTENTS



			PAGE
PART I—FINANCIAL INFORMATION

	ITEM 1.	Financial Statements	1

		Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2021 (unaudited) and December 31, ~~2016~~2020	1

		Unaudited Condensed Consolidated Statements of Income (Loss) for the three and nine months ended September 30, ~~2017~~2021 and September 30, ~~2016~~2020	2

		Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, ~~2017~~2021 and September 30, ~~2016~~2020	3

		Unaudited Condensed Consolidated Statements of Equity for the three and nine months ended September 30, 2021 and September 30, 2020	4

		Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2021 and September 30, ~~2016~~2020	45

		Notes to Unaudited Condensed Consolidated Financial Statements	56

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2027

	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	2737

	ITEM 4	Controls and Procedures	2737

PART II—OTHER INFORMATION

	ITEM 1.	Legal Proceedings	2838

	ITEM 1.A.	Risk Factors	2838

	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2838

	ITEM 3.	Defaults Upon Senior Securities	2838

	ITEM 4.	Mine Safety Disclosures	2838

	ITEM 5.	Other Information	2938

	ITEM 6.	Exhibits	3039

SIGNATURES			3140

(in thousands, except share and per share ~~data)~~data)

(in thousands, except per share ~~data)~~data)

(in ~~thousands)~~thousands)

Three months ended Nine months ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016

Net income (loss) $ (6,953 ) $ 7,255
$ (3,038 ) $ 13,475
Other comprehensive income:

Foreign currency translation adjustments 4,443
(2,641 ) 11,935
1,966
Comprehensive income (loss) (2,510 ) 4,614
8,897
15,441
Less: comprehensive income attributable to non-controlling interest 16
13
25
25
Comprehensive income (loss) attributable to Mistras Group, Inc. $ (2,526 ) $ 4,601
$ 8,872
$ 15,416


	Three months ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

Net Income (loss)	$	3,397	$	1,553	$	3,983	$	(99,634)
Other comprehensive income (loss):
Foreign currency translation adjustments	(5,472)		5,963		(3,117)		(4,924)
Comprehensive Income (Loss)	(2,075)		7,516		866		(104,558)
Less: net income (loss) attributable to noncontrolling interest	17		30		28		8
Less: Foreign currency translation adjustments attributable to noncontrolling interests	(3)		4		(2)		(2)
Comprehensive income (loss) attributable to Mistras Group, Inc	$	(2,089)	$	7,482	$	840	$	(104,564)

(in thousands)


	Three months ended
	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 June 30, 2021	$	29,432	$	294	$	236,125	$	(21,273)	$	(13,707)	$	201,439	$	210	$	201,649
Net income	—		—		—		3,380		—		3,380		17		3,397
Other comprehensive gain (loss), net of tax	—		—		—		—		(5,469)		(5,469)		(3)		(5,472)
Share-based payments	—		—		1,452		—		—		1,452		—		1,452
Net settlement of restricted stock units	26		—		—		—		—		—		—		—

Balance at September 30, 2021	29,458		$	294	$	237,577	$	(17,893)	$	(19,176)	$	200,802	$	224	$	201,026

Balance at June 30, 2020	29,110		$	291	$	231,724	$	(23,552)	$	(32,172)	$	176,291	$	172	$	176,463
Net loss	—		—		—		1,523		—		1,523		30		1,553
Other comprehensive gain (loss), net of tax	—		—		—		—		5,963		5,963		4		5,967
Share-based payments	—		—		1,593		—		—		1,593		—		1,593
Net settlement of options and restricted stock units	82		1		(50)		—		—		(49)		—		(49)

Balance at September 30, 2020	29,192		$	292	$	233,267	$	(22,029)	$	(26,209)	$	185,321	$	206	$	185,527


	Nine months ended
	Common Stock			Additional paid-in capital		Retained earnings (deficit)		Accumulated other comprehensive 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 income	—	—		—		3,955		—		3,955		28		3,983
Other comprehensive gain (loss), net of tax	—	—		—		—		(3,115)		(3,115)		(2)		(3,117)
Share-based payments	—	—		3,916		—		—		3,916		—		3,916
Net settlement of restricted stock units	224	2		(977)		—		—		(975)		—		(975)

Balance at September 30, 2021	29,458	$	294	$	237,577	$	(17,893)	$	(19,176)	$	200,802	$	224	$	201,026

Balance at December 31, 2019	28,945	$	289	$	229,205	$	77,613	$	(21,285)	$	285,822	$	200	$	286,022
Net loss	—	—		—		(99,642)		—		(99,642)		8		(99,634)
Other comprehensive gain (loss), net of tax	—	—		—		—		(4,924)		(4,924)		(2)		(4,926)
Share-based payments	—	—		4,391		—		—		4,391		—		4,391
Net settlement of restricted stock units	247	3		(329)		—		—		(326)		—		(326)


Balance at September 30, 2020	29,192	$	292	$	233,267	$	(22,029)	$	(26,209)	$	185,321	$	206	$	185,527

(in ~~thousands)~~thousands)


	Nine months ended September 30,
	2021		2020

Cash flows from operating activities
Net income (loss)	$	3,983	$	(99,634)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization	25,705		26,759
Impairment charges	—		106,062
Deferred income taxes	1,055		(16,831)
Share-based compensation expense	3,916		4,312

Fair value adjustments to contingent consideration	1,034		186
Foreign currency loss	366		1,965

Other	265		2,419
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions
Accounts receivable	(21,907)		20,319
Inventories	868		(1,845)
Prepaid expenses and other assets	(2,324)		(2,305)
Accounts payable	(751)		(2,357)
Accrued expenses and other liabilities	11,247		3,069
Income taxes payable	(988)		(328)
Net cash provided by operating activities	22,469		41,791
Cash flows from investing activities
Purchase of property, plant and equipment	(15,130)		(10,676)

Purchase of intangible assets	(887)		(311)
Acquisition of business, net of cash acquired	(441)		—
Proceeds from sale of equipment	964		429

Net cash used in investing activities	(15,494)		(10,558)
Cash flows from financing activities
Repayment of finance lease obligations	(3,032)		(3,078)
Proceeds from borrowings of long-term debt	—		2,245
Repayment of long-term debt	(12,121)		(4,334)
Proceeds from revolver	71,000		27,250
Repayment of revolver	(62,250)		(44,000)
Payment of financing costs	(550)		(1,497)
Payment of contingent consideration for business acquisitions	(938)		(1,337)
Taxes paid related to net share settlement of share-based awards	(975)		(326)

Net cash used in financing activities	(8,866)		(25,077)
Effect of exchange rate changes on cash and cash equivalents	(1,272)		944
Net change in cash and cash equivalents	(3,163)		7,100
Cash and cash equivalents at beginning of period	25,760		15,016
Cash and cash equivalents at end of period	$	22,597	$	22,116
Supplemental disclosure of cash paid
Interest, net	$	8,119	$	9,061
Income taxes, net of refunds	$	3,816	$	1,633
Noncash investing and financing
Equipment acquired through finance lease obligations	$	2,445	$	1,607

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Description of Business

The Company enhances value for its clients by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial 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.

While the Company cannot fully assess the impact that the factors discussed above will have on its operations at this time, there were certain impacts that the Company identified resulting in impairment charges in 2020. See Note 8-Goodwill, Note 9-Intangible Assetsand Note13-Leases for additional information.

The Company is currently unable to predict with certainty the overall impact that the factors discussed above may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine. The Company will

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

continue to monitor market conditions and respond accordingly. As of September 30, 2021, the cash balance was approximately $22.6 million.

Basis of Presentation

Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying ~~unaudited condensed consolidated financial statements~~Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the notes to the ~~audited consolidated financial statements~~Audited Consolidated Financial Statements contained in the ~~Company’s Transition~~Company's 2020 Annual Report on Form 10-K ~~(“2016 Transition Report”~~("2020 Annual Report") ~~for the transition period ended December 31, 2016, as filed with the Securities and Exchange Commission on March 20, 2017.~~.

Principles of Consolidation

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in Note 1–Summary of Significant Accounting Policiesand Practices in the 2020 Annual Report. On an ongoing basis, the Company evaluates its estimates and assumptions, including among other things, those related to revenue recognition, long-lived assets, goodwill and acquisitions. Since the date of the 2020 Annual Report, there have been no material changes to the Company's significant accounting policies.

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Income Taxes

We recognize the tax benefit from an uncertain tax position only if it is more 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 from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.

The Company’s effective income tax rate was approximately 50.8% and 25.9% for the three months ended September 30, 2021 and 2020, respectively. The Company’s effective income tax rate was approximately 44.4% and 13.6% for the nine months ended September 30, ~~2017. This customer accounted for 8% of accounts receivable as of September 30, 2017. One customer accounted for 14%~~2021 and ~~12% of our revenues~~2020, respectively.

The effective income tax rate for the three months ended September 30, 2021, was higher than the statutory rate due to a $1.2 million valuation allowance recorded during the period related to various state deferred tax assets and earnings in jurisdictions with higher income tax rates than the United States.The effective income tax rate for the three months ended September 30, 2020 approximated the statutory rate, as the favorable impact of the CARES Act was offset by the unfavorable impact of taxes in other jurisdictions and other permanent book to tax differences.

The effective income tax rate for the nine months ended September 30, ~~2016.~~

~~Significant Accounting Policies~~

Recent Accounting Pronouncements

The Company ~~adopted this guidance prospectively beginning~~derives the majority of its revenue by providing services on a time and material basis, and are short-term in ~~the first quarter~~nature. The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.

Table of ~~2017, and accordingly, is recording excess tax benefits and tax deficiencies as a component of income tax expense.~~

Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

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.

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 an available practical expedient that provides for revenue to be recognized 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 expects any significant remaining performance obligations to be satisfied within one year.

Contract Estimates

The majority of the Company's revenues 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 a 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 professionals. Factors that are considered in estimating the work to be completed include the availability of materials, the effect of any delays in the Company's project performance and the recoverability of 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.

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Revenue by Category

~~In August 2016,~~

The following series of tables present the ~~FASB issued ASU No. 2016-15,~~ ~~Statement~~Company's disaggregated revenue:

Revenue by industry was as follows:


Three Months Ended September 30, 2021	Services		International		Products		Corp/Elim		Total
Oil & Gas	$	88,508	$	8,620	$	370	$	—	$	97,498
Aerospace & Defense	12,717		3,897		101		—		16,715
Industrials	10,560		6,693		336		—		17,589
Power Generation & Transmission	11,412		2,615		660		—		14,687
Other Process Industries	8,819		3,035		32		—		11,886
Infrastructure, Research & Engineering	7,136		2,467		808		—		10,411
Other	5,824		1,773		1,001		(2,828)		5,770
Total	$	144,976	$	29,100	$	3,308	$	(2,828)	$	174,556


Three Months Ended September 30, 2020	Services		International		Products		Corp/Elim		Total
Oil & Gas	$	72,195	$	9,749	$	51	$	—	$	81,995
Aerospace & Defense	10,904		3,676		72		—		14,652
Industrials	12,209		5,261		442		—		17,912
Power Generation & Transmission	9,053		2,054		390		—		11,497
Other Process Industries	6,023		2,373		85		—		8,481
Infrastructure, Research & Engineering	5,309		2,245		1,223		—		8,777
Other	4,028		1,119		1,669		(2,236)		4,580
Total	$	119,721	$	26,477	$	3,932	$	(2,236)	$	147,894


Nine Months Ended September 30, 2021	Services		International		Products		Corp/Elim		Total
Oil & Gas	$	264,959	$	26,208	$	638	$	—	$	291,805
Aerospace & Defense	37,319		12,341		165		—		49,825
Industrials	30,621		17,736		1,081		—		49,438
Power Generation & Transmission	27,019		7,776		2,249		—		37,044
Other Process Industries	27,031		9,574		76		—		36,681
Infrastructure, Research & Engineering	15,479		9,477		2,777		—		27,733
Other	11,823		5,587		2,513		(6,481)		13,442
Total	$	414,251	$	88,699	$	9,499	$	(6,481)	$	505,968



Nine Months Ended September 30, 2020	Services		International		Products		Corp/Elim		Total
Oil & Gas	$	214,773	$	26,192	$	214	$	—	$	241,179
Aerospace & Defense	39,804		14,686		370		—		54,860
Industrials	35,374		13,997		1,349		—		50,720
Power Generation & Transmission	21,800		4,958		1,888		—		28,646
Other Process Industries	17,026		7,103		162		—		24,291
Infrastructure, Research & Engineering	12,820		6,726		3,683		—		23,229
Other	7,674		3,225		3,080		(5,110)		8,869
Total	$	349,271	$	76,887	$	10,746	$	(5,110)	$	431,794

Table of ~~Cash Flows (Topic 230).~~ ~~This amendment will provide guidance~~Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Revenue per key geographic location was as follows:


Three Months Ended September 30, 2021	Services		International		Products		Corp/Elim		Total
United States	$	122,506	$	221	$	1,562	$	(1,341)	$	122,948
Other Americas	21,681		1,446		133		(610)		22,650
Europe	491		26,378		499		(748)		26,620
Asia-Pacific	298		1,055		1,114		(129)		2,338
Total	$	144,976	$	29,100	$	3,308	$	(2,828)	$	174,556


Three Months Ended September 30, 2020	Services		International		Products		Corp/Elim		Total
United States	100,586		$	193	$	1,538	$	(912)	$	101,405
Other Americas	18,767		1,100		75		(124)		19,818
Europe	350		24,790		1,002		(1,088)		25,054
Asia-Pacific	18		394		1,317		(112)		1,617
Total	$	119,721	$	26,477	$	3,932	$	(2,236)	$	147,894


Nine Months Ended September 30, 2021	Services		International		Products		Corp/Elim		Total
United States	$	349,814	$	670	$	4,690	$	(2,627)	$	352,547
Other Americas	61,847		3,772		301		(1,482)		64,438
Europe	1,381		82,356		1,462		(2,105)		83,094
Asia-Pacific	1,209		1,901		3,046		(267)		5,889
Total	$	414,251	$	88,699	$	9,499	$	(6,481)	$	505,968



Nine Months Ended September 30, 2020	Services		International		Products		Corp/Elim		Total
United States	298,372		$	507	$	5,150	$	(2,433)	$	301,596
Other Americas	49,548		3,564		425		(370)		53,167
Europe	721		71,056		1,930		(2,129)		71,578
Asia-Pacific	630		1,760		3,241		(178)		5,453
Total	$	349,271	$	76,887	$	10,746	$	(5,110)	$	431,794

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 ~~presentation~~Consolidated Balance Sheets. 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 Company sometimes receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities. These assets and ~~classification of specific cash flow items to improve consistency within the statement of cash flows. ASU 2016-15 is effective for fiscal years,~~liabilities are aggregated on an individual contract basis and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the impact that ASU 2016-15 will have on its condensed consolidated financial statements and related disclosures.

~~In November 2016, the FASB issued ASU No. 2016-18,~~ ~~Statement of Cash Flows (Topic 230).~~ ~~This amendment will clarify the presentation of restricted cash~~reported on the ~~statement~~Consolidated Balance Sheets at the end of ~~cash flows. Amounts generally described as restricted cash~~each reporting period within accounts receivable, net or accrued expenses and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending cash balances on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted. The Company does not expect that ASU 2016-18 will have a material impact on its condensed consolidated financial statements and related disclosures.other current liabilities.

~~In January 2017, the FASB issued ASU No. 2017-04,~~ ~~Intangibles-Goodwill and Other (Topic 350).~~ This amendment eliminates Step Two of the goodwill impairment test. Under the amendments in this update, entities should perform the annual goodwill impairment test by comparing the carrying value of its reporting units to their fair value. An entity should record an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Tax deductibility of goodwill should be considered in evaluating any reporting unit's impairment loss to be taken. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company has early adopted ASU 2017-04 in the third quarter of 2017 for its condensed consolidated financial statements and related disclosures. See Notes 7 and 8 for information on the impairment of assets in the Products and Systems reporting unitRevenue recognized during the ~~three~~nine months ended September 30, ~~2017.~~

~~In May 2017,~~2021 and 2020 that was included in the ~~FASB issued ASU 2017-09,~~ ~~Compensation-Stock Compensation (Topic 718) Scope~~contract liability balance at the beginning of ~~Modification Accounting.~~ ~~This amendment provides guidance concerning which changes~~such year was $4.4 million for each period. Changes in the contract asset and liability balances during these periods were not materially impacted by any other factors. The Company applies a practical expedient to ~~the terms or conditions of~~expense incremental costs incurred related to obtaining a ~~share-based payment require an entity to apply modification accounting. Certain changes to stock awards, notably administrative changes, do not require modification accounting. There~~contract. The Company’s expenses are ~~three specific criteria that need~~expected to be ~~met~~amortized over a period less than one year.

3. Share-Based Compensation

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in order to prove that modification accounting is not required. ASU 2017-09 is effective for fiscal years, and interim period within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the impact that ASU 2017-09 will have on its condensed consolidated financial statements and related disclosures.thousands, except per share data)

2.~~Share-Based Compensation~~

The Company has share-based incentive awards outstanding to its eligible employees and non-employee directors under ~~three~~2 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 be granted under the ~~2007 and~~ 2009 ~~Plans,~~Plan, although ~~awards~~1 stock option award granted under the ~~2007 and~~ 2009 ~~Plans remain~~Plan remains outstanding in accordance with ~~their~~its terms. Awards granted under the 2016 Plan may be in the form of stock options, restricted stock units and other forms of share-based incentives, including performance restricted stock units, stock appreciation rights and deferred stock rights. At the annual shareholders meeting on May 19, 2020, the Company’s shareholders approved an amendment to increase the total number of shares that may be issued under the 2016 Plan by 2.0 million, for a total of 3.7 million shares that are authorized for issuance under the 2016 Plan.

Stock Options

For each of the three and nine months ended September 30, ~~2017~~2021 and ~~2016,~~2020, the Company did not recognize any share-based compensation expense related to the stock option ~~awards.~~

~~For~~award, as the ~~nine months ended September 30, 2017 and 2016, the Company did not recognize any share-based compensation expense and recognized less than $0.1 million, respectively, related to~~1 outstanding stock option ~~awards.~~

award was already fully vested. No unrecognized compensation costs remained related to the stock option ~~awards~~award as of September 30, ~~2017.~~2021.

~~No stock options were granted during the three and nine months ended September 30, 2017 and September 30, 2016.~~

AThe following table sets forth a summary of the stock option activity, ~~weighted average~~weighted-average exercise prices and options outstanding as of September 30, ~~2017~~2021 and ~~2016~~2020:


	Nine months ended September 30,
	2021			2020
	Common Stock Options	Weighted Average Exercise Price		Common Stock Options	Weighted Average Exercise Price
Outstanding at beginning of period:	5	$	22.35	5	$	22.35
Granted	—	$	—	—	$	—
Exercised	—	$	—	—	$	—
Expired or forfeited	—	$	—	—	$	—
Outstanding at end of period:	5	$	22.35	5	$	22.35

Restricted Stock Unit Awards

For the three months ended September 30, 2021 and September 30, 2020, the Company recognized share-based compensation expense related to restricted stock unit awards of $0.9 million and $1.1 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company recognized share-based compensation expense related to restricted stock unit awards of $2.7 million and $3.2 million, respectively. As of September 30, 2021, there was $6.8 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which is expected to be recognized over a remaining weighted-average period of 2.6 years. Upon vesting, restricted stock units are generally net share-settled to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock.

A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows:


	Nine months ended September 30,
	2021		2020
Restricted stock awards vested	238		183
Fair value of awards vested	$	2,670	$	719

A summary of the fully-vested common stock the Company issued to its 6 non-employee directors, in connection with its non-employee director compensation plan, is as follows:


	Nine months ended September 30,
	2021		2020
Awards issued	51		68
Grant date fair value of awards issued	$	525	$	326

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Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

For the nine months ended September 30,
2017 2016

Common
Stock
Options

Weighted
Average
Exercise
Price

Common
Stock
Options

Weighted
Average
Exercise
Price

Outstanding at beginning of period: 2,167
$ 13.33
2,265
$ 13.16

Granted —
$ —
—
$ —

Exercised (37 ) $ 7.39
(87 ) $ 9.83

Expired or forfeited —
$ —
—
$ —

Outstanding at end of period: 2,130
$ 13.43
2,178
$ 13.29

~~Restricted Stock Unit Awards~~

For the three months ended September 30, 2017 and September 30, 2016, the Company recognized share-based compensation expense related to restricted stock unit awards of $1.1 million and $1.2 million, respectively.

For the nine months ended September 30, 2017 and September 30, 2016, the Company recognized share-based compensation expense related to restricted stock unit awards of $3.4 million for each respective period. As of September 30, 2017, there was $8.1 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 2.4 years.

During the first nine months of 2017 and 2016, the Company granted approximately 21,000 and 22,000 shares, respectively, of fully-vested common stock to its five non-employee directors, as provided for under the Company's non-employee director compensation plan. These shares had grant date fair values of $0.4 million and $0.5 million, respectively, which was recorded as share-based compensation expense during the nine months ended September 30, 2017 and September 30, 2016, respectively.

During the first nine months of 2017 and 2016, approximately 175,000 and 182,000 restricted stock units vested for each period. The fair value of these units was $3.2 million and $4.5 million for each respective period. 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.

A summary of the Company's outstanding, non-vested restricted share units is ~~presented below:~~as follows:


	Nine months ended September 30,
	2021			2020
	Units	Weighted Average Grant-Date Fair Value		Units	Weighted Average Grant-Date Fair Value
Outstanding at beginning of period:	1,076	$	7.41	559	$	16.92
Granted	528	$	10.07	557	$	3.77
Released	(238)	$	10.98	(183)	$	18.44
Forfeited	(53)	$	8.90	(32)	$	9.87
Outstanding at end of period:	1,313	$	7.75	901	$	8.72

For the nine months ended September 30,
2017 2016
Units Weighted
Average
Grant-Date
Fair Value Units Weighted
Average
Grant-Date
Fair Value
Outstanding at beginning of period: 569
$ 20.81
595
$ 18.89
Granted 124
$ 21.21
218
$ 24.51
Released (175 ) $ 20.61
(182 ) $ 19.66
Forfeited (30 ) $ 21.21
(26 ) $ 19.24
Outstanding at end of period: 488
$ 20.97
605
$ 20.68

Performance Restricted Stock Units

The Company maintains Performance Restricted Stock Units (PRSUs) that have been granted to select executives and senior officers whose ultimate payout is based on the Company’s performance over a one-year period based on ~~three~~specific metrics ~~as defined: (1) Operating Income, (2) Adjusted EBITDAS and (3) Revenue. There also is a discretionary portion~~approved by the Compensation Committee of the ~~PRSUs~~Board of Directors of the Company.

For 2020, the Compensation Committee approved the following 4 metrics:

1.Revenue.

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.Free Cash Flow as a percentage of revenue.

4.Return on Average Book Equity defined as net income divided by average book value of shareholders equity.

The free cash flow and return on average book equity criteria are relative metrics, the performance of which are based upon how the Company performs relative to a peer group.

For 2021, the Compensation Committee made changes to the Company’s equity incentive compensation plan for its executive officers and approved the new target awards for 2021. For 2021, the 3 metrics are:

1.Free Cash Flow net 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 as defined in the 2020 metric section above.

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 2020), compared to the average share price during the 20-trading day period ending on the final measurement date (the last 20 trading days of 2021). Any cash dividends or distributions paid in 2021 will be 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 anticipated 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.

PRSUs are equity-classified and compensation costs are initially measured using the fair value of the underlying stock at the date of grant. Compensation costs related to the PRSUs 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

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

~~based on individual performance, at~~condition is not achieved, provided the ~~discretion of the Compensation Committee (Discretionary PRSUs). PRSUs and Discretionary~~employee requisite service has been rendered. PRSUs generally vest ratably on each of the first four anniversary dates upon completion of the performance period, for a total requisite service period of up to five years and have no dividend rights.

PRSUs are equity-classified and compensation costs are initially measured using the fair value of the underlying stock at the date of grant, assuming that the target performance conditions will be achieved. Compensation costs related to the PRSUs are subsequently adjusted for changes in the expected outcomes of the performance conditions.

Discretionary PRSUs are liability-classified and adjusted to fair value (with a corresponding adjustment to compensation expense) based upon the targeted number of shares to be awarded and the fair value of the underlying stock each reporting period until approved by the Compensation Committee, at which point they are classified as equity.

A summary of the Company's ~~Performance Restricted Stock Unit~~PRSU activity is ~~presented below:~~as follows:


	Nine months ended September 30,
	2021			2020
	Units	Weighted Average Grant-Date Fair Value		Units	Weighted Average Grant-Date Fair Value
Outstanding at beginning of period:	333	$	8.84	260	$	16.77
Granted	189	$	12.59	292	$	3.68
Performance condition adjustments	(195)	$	7.83	(145)	$	3.54
Released	(22)	$	13.63	(78)	$	15.43
Forfeited	—	$	—	—	$	—
Outstanding at end of period:	305	$	12.56	329	$	11.09

For the nine months ended September 30, 2017
Units Weighted
Average
Grant-Date
Fair Value
Outstanding at beginning of period: 290
$ 16.01

Granted 128
$ 20.42

Performance condition adjustments (67 ) $ 20.55

Released (64 ) $ 14.87

Forfeited —
$ —

Outstanding at end of period: 287
$ 17.07

During the nine months ended September 30, 2017, the Compensation Committee modified the awards issued during the transition period ended December 31, 2016 from a one-year performance period to a seven month performance period to align the awards with the change in the Company's fiscal year from May 31 to December 31. Accordingly, for the nine months ended2021 and September 30, ~~2017,~~2020, the Compensation Committee approved ~~these transition period~~the final calculation of the award metrics for calendar year 2020 and calendar year 2019, respectively. As a result, the calendar year 2020 PRSUs ~~which resulted in a reduction of~~decreased by approximately ~~3,000~~125,000 units (related to not achieving the 2020 Return on Average Book Equity metric) and the calendar year 2019 PRSUs increased by approximately 1,000 units. ~~There was a reduction of approximately 64,000~~Calendar year 2021 PRSUs decreased by 2,000 units ~~to the awards granted in 2017~~ during the nine months ended September 30, ~~2017.~~2021 based on forecasted results for calendar year 2021.

As of September 30, 2017, the liability related to Discretionary PRSUs was less than $0.1 million and is classified within accrued expenses and other current liabilities on the condensed consolidated balance sheet.

For the three months ended September 30, ~~2017~~2021 and September 30, ~~2016,~~2020, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately ~~$0.4~~$0.3 million and ~~$0.5~~$0.2 million, respectively.

For the nine months ended September 30, ~~2017~~2021 and September 30, ~~2016,~~2020, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately ~~$1.3~~$0.7 million ~~for each respective period.~~

and $0.8 million, respectively. At September 30, ~~2017,~~2021, there was ~~$2.7~~$1.6 million of total unrecognized compensation costs related to approximately ~~287,000~~305,000 non-vested ~~performance restricted stock units,~~PRSUs, which ~~are~~is expected to be recognized over a remaining ~~weighted average~~weighted-average period of ~~2.1~~2.2 years.

3.4. Earnings (loss) per Share

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

Basic earnings (loss) per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of (1) the weighted-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-average shares outstanding (denominator), diluted shares reflects: (i) 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 shares during the period and (ii) the pro forma vesting of restricted stock units.

~~The following table sets forth the computations~~

Table of ~~basic and diluted earnings per share:~~

Three months ended Nine months ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016

Basic earnings (loss) per share:

Numerator:

Net income (loss) attributable to Mistras Group, Inc. $ (6,968 ) $ 7,238
$ (3,059 ) $ 13,446
Denominator:

Weighted average common shares outstanding 28,274
29,051
28,465
28,966
Basic earnings (loss) per share $ (0.25 ) $ 0.25
$ (0.11 ) $ 0.46

Diluted earnings (loss) per share:

Numerator:

Net income (loss) attributable to Mistras Group, Inc. $ (6,968 ) $ 7,238
$ (3,059 ) $ 13,446
Denominator:

Weighted average common shares outstanding 28,274
29,051
28,465
28,966
Dilutive effect of stock options outstanding n/a
⁽¹⁾
814
n/a
⁽¹⁾
810
Dilutive effect of restricted stock units outstanding n/a
⁽²⁾
366
n/a
⁽²⁾
363
28,274
30,231
28,465
30,139
Diluted earnings (loss) per share $ (0.25 ) $ 0.24
$ (0.11 ) $ 0.45

~~(1) - For the three and nine months ended September 30, 2017, 716 and 802 shares, respectively were excluded from the calculation of diluted EPS due to the net loss for the respective periods.~~

~~(2) - For the three and nine months ended September 30, 2017, 308 and 337 shares, respectively, were excluded from the calculation of diluted EPS due to the net loss for the respective periods.~~

Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

The following table sets forth the computations of basic and diluted earnings per share:


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

Basic income (loss) per share
Numerator:
Net income (loss) attributable to Mistras Group, Inc.	$	3,380	$	1,523	$	3,955	$	(99,642)
Denominator:
Weighted average common shares outstanding	29,619		29,177		29,550		29,086
Basic income (loss) per share	$	0.11	$	0.05	$	0.13	$	(3.43)

Diluted income (loss) per share:
Numerator:
Net income (loss) attributable to Mistras Group, Inc.	$	3,380	$	1,523	$	3,955	$	(99,642)
Denominator:
Weighted average common shares outstanding	29,619		29,177		29,550		29,086
Dilutive effect of stock options outstanding	—		—		—		—
Dilutive effect of restricted stock units outstanding (1)	508		134		543		—
	30,127		29,311		30,093		29,086
Diluted income (loss) per share	$	0.11	$	0.05	$	0.13	$	(3.43)

_______________

4.~~Acquisitions~~

~~During~~(1) For the nine months ended September 30, ~~2017,~~2020, 213,000 shares related to restricted stock were excluded from the calculation of diluted EPS due to the net loss for the period.

5. Acquisitions

Acquisition-Related Expense

In the course of its acquisition activities, the Company ~~completed two acquisitions, one that performs mechanical services at height, located~~incurs costs in ~~Canada,~~connection with due diligence, such as professional fees, and ~~a company located in the U.S. that primarily performs chemical and specialty process services, primarily in the aerospace industry.~~

~~In these acquisitions,~~other expenses. Additionally, the Company ~~acquired~~adjusts the assets of the U.S. acquiree and 100% of the common stock of the Canada acquiree in exchange for aggregate consideration of $8.5 million in cash, contingent consideration up to $5.9 million to be earned based upon the acquired business achieving specific performance metrics over the initial three years of operations from the acquisition date and $1.6 million for working capital adjustments yet to be finalized. The Company accounted for these transactions in accordance with the acquisition method of accounting for business combinations.

The assets and liabilities of the businesses acquired in 2017 were included in the Company's condensed consolidated balance sheet based upon their estimated fair values on the date of acquisition as determined in a preliminary purchase price allocation, using available information and making assumptions management believes are reasonable. The Company is still in the process of completing its valuations of the assets acquired. The results of operations for these acquisitions are included in the Services segment's results from the date of acquisition. Goodwill of $4.3 million primarily relates to expected synergies and assembled workforce, of which $1.8 million is generally deductible for tax purposes. Other intangible assets, primarily related to customer relationships and covenants not to compete, were $8.4 million.

~~The Company's preliminary purchase price allocations are included in the table below, summarizing the estimated~~ fair value of acquisition-related contingent consideration liabilities on a quarterly basis. These amounts are reported as Acquisition-related expense, net on the ~~assets acquired~~Unaudited Condensed Consolidated Statements of Income (Loss) and ~~liabilities assumed at the date of acquisition:~~

2017
Number of Entities 2
Consideration transferred:
Cash paid $ 8,509
Working capital adjustments 1,604
Contingent consideration 4,126
Consideration transferred $ 14,239

Current assets $ 2,443
Property, plant and equipment 1,140
Intangible assets 8,436
Goodwill 4,271
Current liabilities (881 )
Long-term deferred tax liability (1,170 )
Net assets acquired $ 14,239

~~Revenues and operating income included in the condensed consolidated statement of operations for 2017 from these acquisitions~~were as follows for the ~~period subsequent to the closing of this transaction was approximately $9.1 million~~three and ~~$1.1 million, respectively. As these acquisitions were immaterial to the Company's 2017 results, no unaudited pro forma financial information has been included in this report for either acquisition.~~

~~The Company completed two acquisitions that provide NDT services, located in Canada, during the~~ nine months ended September 30, ~~2016.~~ 2021 and 2020:


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Due diligence, professional fees and other transaction costs	$	—	$	—	$	34	$	—
Adjustments to fair value of contingent consideration liabilities	246		709		1,034		186
Acquisition-related expense, net	$	246	$	709	$	1,068	$	186

The ~~Company acquired 100%~~Company's contingent consideration liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheets.

6. Accounts Receivable, net

Accounts receivable consisted of the ~~common stock~~following:

Table of ~~both acquirees in exchange for aggregate~~

~~consideration of $1.2 million in cash, $0.3 million of notes payable and contingent consideration estimated to be $0.4 million to~~

~~be earned based upon the acquired businesses achieving specific performance metrics over their initial three years of operations~~

~~from their acquisition dates.~~

Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

~~Acquisition-Related Expense~~


	September 30, 2021		December 31, 2020

Trade accounts receivable	$	135,644	$	115,841
Allowance for credit losses	(7,945)		(8,213)
Accounts receivable, net	$	127,699	$	107,628

~~In the course~~The Company had $21.0 million and $11.9 million of ~~its acquisition activities, the Company incurs costs in connection with due diligence, professional fees,~~unbilled revenue accrued as of September 30, 2021 and ~~other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a quarterly basis.~~December 31, 2020, respectively. These amounts are ~~recorded~~included in the trade accounts receivable balances above. Unbilled revenue is generally billed in the subsequent quarter to their revenue recognition. The Company considers unbilled receivables as ~~acquisition-related expense (benefit), net,~~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 ~~condensed consolidated statements~~credit loss estimate.

The Company was contracted to perform inspections of ~~income~~welds on various pipeline projects in Texas for a customer. As of December 31, 2019, 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 recorded a full reserve for this receivable during 2019 and ~~were as follows~~the status of this situation has not changed since 2019. See Note 14-Commitments and Contingencies for ~~the three and nine months ended September 30, 2017 and 2016:~~additional details.

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
Due diligence, professional fees and other transaction costs $ —
$ 28
$ 291
$ 577
Adjustments to fair value of contingent consideration liabilities (248 ) 356
(880 ) (676 )
Acquisition-related expense (benefit), net $ (248 ) $ 384
$ (589 ) $ (99 )

5.~~Accounts Receivable, net~~

~~Accounts receivable consisted of the following:~~

September 30, 2017 December 31, 2016

Trade accounts receivable $ 144,503
$ 133,704
Allowance for doubtful accounts (4,314 ) (2,852 )
Accounts receivable, net $ 140,189
$ 130,852

6.7. Property, Plant and Equipment, net

Property, plant and equipment consisted of the following:

Useful Life
(Years)
September 30, 2017 December 31, 2016

Land $ 1,909
$ 1,714
Buildings and improvements 30-40 22,735
19,261
Office furniture and equipment 5-8 13,941
12,574
Machinery and equipment 5-7 179,681
166,423
218,266
199,972
Accumulated depreciation and amortization (141,093 ) (126,823 )
Property, plant and equipment, net $ 77,173
$ 73,149


	Useful Life (Years)	September 30, 2021		December 31, 2020

Land		$	2,776	$	2,724
Buildings and improvements	30-40	25,057		25,731
Office furniture and equipment	5-8	20,697		19,902
Machinery and equipment	5-7	246,422		234,331
		294,952		282,688
Accumulated depreciation and amortization		(204,586)		(190,007)
Property, plant and equipment, net		$	90,366	$	92,681

Depreciation expense for the three months ended September 30, ~~2017~~2021 and ~~September 30, 2016~~2020 was ~~$5.7~~approximately $6.1 million and ~~$5.8~~$6.2 million, respectively.

Depreciation expense for the nine months ended September 30, ~~2017~~2021 and September 30, ~~2016~~2020 was ~~$16.8~~$18.4 million and ~~$17.6~~$18.3 million, respectively.

Table of Contents

~~7. Goodwill~~

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

8. Goodwill

Changes in the carrying amount of goodwill by segment is shown below:

Services International Products and Systems Total
Balance at December 31, 2016 $ 123,392
$ 33,351
$ 13,197
$ 169,940
Goodwill acquired during the period 4,271
—
—
4,271
Impairment charges —
—
(13,197 ) (13,197 )
Adjustments to preliminary purchase price allocations (211 ) —
—
(211 )
Foreign currency translation 1,028
3,873
—
4,901
Balance at September 30, 2017 $ 128,480
$ 37,224
$ —
$ 165,704


	Services		International		Products and Systems		Total
Balance at December 31, 2020	$	190,112	$	15,896	$	—	$	206,008
Goodwill acquired during the period	280		—		—		280

Adjustments to preliminary purchase price allocations	—		—		—		—
Foreign currency translation	189		(820)		—		(631)
Balance at September 30, 2021	$	190,581	$	15,076	$	—	$	205,657

The Company reviews goodwill for impairment on a reporting unit basis on October 1 of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.

During the ~~second~~first quarter of ~~2017, there were pending contract bids which management assessed as having a reasonable chance of success. These contract bids were not awarded~~2020, the Company’s market capitalization declined significantly compared to the ~~Company. As a result~~fourth quarter of ~~this missed opportunity,~~2019. Over the ~~annual forecasting process was accelerated, resulting in lower future operating profits and cash flows. As such, there were indicators that~~same period, the ~~carrying amount~~equity value of the Company’s peer group, and the overall U.S. stock market also declined significantly amid market volatility. In addition, oil prices had dropped significantly. These declines were driven in large part by the uncertainty surrounding the COVID-19 pandemic and other macroeconomic events such as the geopolitical tensions between OPEC and Russia. Based on these factors, the Company concluded that multiple triggering events occurred and, accordingly, an interim quantitative goodwill impairment test was performed as of the testing date for ~~the Products and Systems~~each reporting unit ~~may not be recoverable due to~~as of March 31, 2020 (“testing date”). During the ~~decline in~~first quarter of 2020, the ~~projected future cash flows.~~

~~The~~ Company also performed an analysis to determine any impairment of long-lived assets (see Note ~~8) as well as an analysis to determine any impairment of goodwill. For~~9-Intangible Assets) based on the ~~goodwill analysis, we used income and market approaches to estimate~~triggering events noted above.

Based upon the ~~fair value~~results of the ~~reporting unit, which requires significant judgment in evaluation~~interim quantitative goodwill impairment test during the first quarter of ~~economic and industry trends, estimated future cash flows, discount rates and other factors, and compared that fair value to~~2020, the ~~carrying value, and determined that the fair value of the reporting unit was less than the carrying value. The~~ Company recorded an aggregate impairment charge of ~~$13.2~~$77.1 million, which consisted of $57.2 million in the services reporting unit within the Services segment, and $19.3 million in the European reporting unit and $0.6 million in the Brazilian reporting unit, both within the International segment. The impairment was calculated based on the difference between the estimated fair value and the carrying value of the reporting ~~unit, which resulted~~units and are included in ~~an impairment~~Impairment charges on the Unaudited Condensed Consolidated Statements of Income (Loss) for the ~~entire amount~~three months ended March 31, 2020. Subsequent to March 31, 2020 through September 30, 2021, the Company did not identify any changes in circumstances that would indicate the carrying value of goodwill ~~for~~may not be recoverable. Significant adverse changes in future periods could negatively affect the ~~Products~~Company's key assumptions and ~~Systems reporting unit.~~may result in future goodwill impairment charges which could be material.

The Company's cumulative goodwill impairment as of September 30, ~~2017~~2021 and December 31, 2020 was ~~$23.1~~$100.2 million, of which $57.2 million related to the Services segment, $29.8 million related to the International segment and $13.2 million related to the Products and Systems ~~segment and $9.9 million related to the International~~ segment. As

Table of ~~December 31, 2016, the cumulative goodwill impairment was $9.9 million, which is within its International segment.~~

Contents

8.~~Intangible Assets~~

~~The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows:~~

September 30, 2017 December 31, 2016

Useful Life
(Years)

Gross
Amount

Accumulated
Amortization
Impairment
Net
Carrying
Amount

Gross
Amount

Accumulated
Amortization

Net
Carrying
Amount

Customer relationships 5-14 $ 92,488
$ (56,582 ) $ (170 ) $ 35,736
$ 81,559
$ (50,417 ) $ 31,142
Software/Technology 3-15 19,219
(13,804 ) (2,411 ) 3,004
18,128
(12,577 ) 5,551
Covenants not to compete 2-5 11,687
(10,227 ) —
1,460
11,143
(9,647 ) 1,496
Other 2-12 8,262
(6,188 ) (32 ) 2,042
7,266
(5,448 ) 1,818
Total $ 131,656
$ (86,801 ) $ (2,613 ) $ 42,242
$ 118,096
$ (78,089 ) $ 40,007

~~Amortization expense for the three months ended September 30, 2017 and September 30, 2016 was $2.4 million and $2.1 million, respectively.~~

~~Amortization expense for the nine months ended September 30, 2017 and September 30, 2016 was $6.8 million and $6.9 million, respectively.~~

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

9. Intangible Assets

The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows:


		September 30, 2021				December 31, 2020
	Useful Life (Years)	Gross Amount		Accumulated Amortization		Net Carrying Amount		Gross Amount		Accumulated Amortization		Impairment		Net Carrying Amount

Customer relationships	5-18	$	112,596	$	(79,208)	$	33,388	$	116,101	$	(75,649)	$	(2,206)	$	38,246
Software/Technology	3-15	52,013		(25,726)		26,287		77,326		(23,519)		(25,874)		27,933
Covenants not to compete	2-5	12,624		(12,350)		274		12,833		(12,162)		(212)		459
Other	2-12	10,698		(8,952)		1,746		11,120		(8,614)		(502)		2,004
Total		$	187,931	$	(126,236)	$	61,695	$	217,380	$	(119,944)	$	(28,794)	$	68,642

Amortization expense for the three months ended September 30, 2021 and 2020 was approximately $2.4 million and $2.6 million, respectively.

Amortization expense for the nine months ended September 30, 2021 and September 30, 2020 was $7.3 million and $8.5 million, respectively.

As described in Note 7,8-Goodwill, during the ~~Company performed an analysis~~first quarter of 2020, there were negative market indicators that were determined to ~~determine whether there was any~~be triggering events indicating a potential impairment of certain long-lived assets ~~for~~within asset groups in the Services, International, and Products and Systems ~~reporting unit. We~~segments, as well as Corporate. The asset groups are groupings of assets and liabilities determined at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability testing indicated that certain intangible assets and right of use assets (See Note 13-Leases) were potentially impaired. For asset groups that required an impairment measurement, similar to the valuations performed to determine the goodwill impairment, the Company used income and market approaches to estimate the fair value of the long-lived assets, which requires significant judgment in evaluation of the useful lives of the assets, economic and industry trends, estimated future cash flows, discount rates, and other factors. The result of the analysis was an aggregate impairment charge of ~~$2.4~~$28.8 million, which consisted of $25.9 million to software/technology, ~~$0.2~~$2.2 million to customer relationships, ~~and less than $0.1~~$0.5 million to other intangibles and $0.2 million to covenants not to compete, all of which are in the Services reporting unit within the Services segment and are included in ~~the impairment~~Impairment charges ~~line~~ on the ~~condensed consolidated statements~~Unaudited Condensed Consolidated Statements of ~~income~~Income (Loss) for the ~~three and~~ nine months ended September 30, ~~2017.~~2020.

9.~~Accrued Expenses and Other Current Liabilities~~

~~Accrued expenses and other current liabilities consisted of the following:~~

September 30, 2017 December 31, 2016

Accrued salaries, wages and related employee benefits $ 29,763
$ 23,442
Contingent consideration, current portion 2,999
1,826
Accrued workers’ compensation and health benefits 5,740
6,351
Deferred revenue 5,440
3,743
Litigation accrual 1,200
6,320
Other accrued expenses 20,466
17,015
Total accrued expenses and other liabilities $ 65,608
$ 58,697

~~10.Long-Term Debt~~

~~Long-term debt consisted~~Table of ~~the following:~~

September 30, 2017 December 31, 2016

Senior credit facility $ 95,050
$ 82,776
Notes payable 230
320
Other 9,013
4,200
Total debt 104,293
87,296
Less: Current portion (2,490 ) (1,379 )
Long-term debt, net of current portion $ 101,803
$ 85,917

~~Senior Credit Facility~~

The Company's revolving credit agreement with its banking group ("Credit Agreement") provides the Company with a $175.0 million revolving line of credit, which, under certain circumstances, can be increased to $225.0 million. The Company may borrow up to $30.0 million in non-U.S. Dollar currencies and use up to $10.0 million of the credit limit for the issuance of letters of credit. The Credit Agreement has a maturity date of October 30, 2019. As of September 30, 2017, the Company had borrowings of $95.1 million and a total of $5.0 million of letters of credit outstanding under the Credit Agreement.

Loans under the Credit Agreement bear interest at LIBOR plus an applicable LIBOR margin ranging from 1% to 1.75%, or a base rate less a margin of 1.25% to 0.375%, at the option of the Company, based upon the Company’s Funded Debt Leverage Ratio. Funded Debt Leverage Ratio is defined as the ratio of (1) all outstanding indebtedness for borrowed money and other interest-bearing indebtedness as of the date of determination to (2) EBITDA (which is (a) net income, less (b) income (or plus loss) from discontinued operations and extraordinary items, plus (c) income tax expenses, plus (d) interest expense, plus (e) depreciation, depletion, and amortization (including non-cash loss on retirement of assets), plus (f) stock compensation expense, less (g) cash expense related to stock compensation, plus or minus certain other adjustments) for the period of four consecutive fiscal quarters immediately preceding the date of determination. The Company has the benefit of the lowest margin if its Funded Debt Leverage Ratio is equal to or less than 0.5 to 1, and the margin increases as the ratio increases, to the maximum margin if the ratio is greater than 2.0 to 1. The Company will also bear additional costs for market disruption, regulatory changes effecting the lenders’ funding costs, and default pricing of an additional 2% interest rate margin on any

Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

10. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:


	September 30, 2021		December 31, 2020

Accrued salaries, wages and related employee benefits	$	38,470	$	30,214
Contingent consideration, current portion	1,736		1,300
Accrued workers’ compensation and health benefits	3,654		3,948
Deferred revenue	7,143		6,538
Pension accrual	2,519		2,519
Right-of-use liability - Operating	9,871		10,348
Other accrued expenses	24,919		23,633
Total	$	88,312	$	78,500

~~amounts not paid when due. Amounts borrowed~~

Long-term debt consisted of the following:


	September 30, 2021		December 31, 2020

Senior credit facility	$	128,522	$	120,312
Senior secured term loan, net of unamortized debt issuance costs of $0.3 million and $0.3 million, respectively	80,388		89,745

Other	6,944		10,159
Total debt	215,854		220,216
Less: Current portion	(18,988)		(10,678)
Long-term debt, net of current portion	$	196,866	$	209,538

Senior Credit Facility

The Company has a credit agreement with its banking group (as amended, the "Credit Agreement") which provides the Company with a revolving line of credit and a $100 million senior secured term loan A facility with a balance of $80.4 million as of September 30, 2021. Pursuant to the Amendment described below, the revolving line of credit was reduced from $165 million to $155 million on September 30, 2021 and will be reduced to $150 million on December 31, 2021. Both the revolving line of credit and the term loan A facility under the Credit Agreement ~~are secured by liens on substantially all~~have a maturity date of ~~the assets of the Company.~~December 12, 2023.

~~The Credit Agreement contains financial covenants requiring that~~On May 19, 2021, the Company ~~maintain a~~entered into the Fifth Amendment (the “Amendment”) to the Credit Agreement. The Amendment made the following changes:

•Removed the LIBOR floor of 1.0%, which provided that if LIBOR is below 1.0%, the interest rate will be calculated as if LIBOR is 1.0%. Now the actual LIBOR rate is used to calculate interest, even if LIBOR is below 1.0%. The LIBOR margins and base rate margins are unchanged but are based upon the new Total Consolidated Debt Leverage Ratio (defined below); previously the margin was based upon the Funded Debt Leverage Ratio.

•Requires the Company to maintain a Total Consolidated Debt Leverage Ratio not to exceed 4.00 to 1.0 as of ~~no greater than 3.25 to 1~~the end of each quarter through the quarter ending March 31, 2022, and ~~an Interest Coverage Ratio of at least 3.0 to 1. Interest Coverage Ratio is defined as~~for each quarter thereafter the ratio ~~as of any date of determination,~~shall not exceed 3.50 to 1.0.

◦Total Consolidated Debt Leverage Ratio means the ratio of (a) Total Consolidated Debt to (b) EBITDA (as defined in the Credit Agreement) for the ~~12 month period immediately preceding the date of determination, to (b)~~trailing four consecutive quarters.

◦Total Consolidated Debt means all ~~interest, premium payments, debt discount, fees, charges and related expenses~~indebtedness (including subordinated debt) of the Company on a consolidated basis (with a limited exception).

Table of Contents

Mistras Group, Inc. and ~~its subsidiaries~~Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in ~~connection with borrowed money (including capitalized interest)~~thousands, except per share data)

•If the Company incurs certain subordinated debt or in connection with the deferred purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, paid during the 12 month period immediately preceding the date of determination. The Credit Agreement also limits the Company’s ability to, among other ~~things, create liens, make investments, incur more~~permitted indebtedness, merge or consolidate, make dispositions of property, pay dividends and make distributions to stockholders, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements. The Credit Agreement does not limit 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,then the Company must ~~be in compliance~~maintain a Total Consolidated Debt Leverage Ratio not to exceed 4.50 to 1.0 and maintain a ratio of Senior Debt to EBITDA not to exceed 3.50 to 1.00, with Senior Debt being Total Consolidated Debt, less permitted subordinated debt.

•The Company must repay loans under the Credit Agreement with the ~~financial covenants on a pro forma basis after taking into account the acquisition,~~net proceeds from certain dispositions of assets under certain circumstances and limits investments in non-guarantor subsidiaries under certain circumstances if the ~~acquired business~~Company’s Total Consolidated Leverage Ratio is above 3.5 to 1.0.

•Quarterly payments on the term loan increased to $3.75 million through March 31, 2022, then to $5.0 million for each quarterly payment thereafter and a ~~separate subsidiary, in certain circumstances the lenders will receive the benefit of~~final balloon payment at maturity.

As a ~~guaranty~~result of the ~~subsidiary~~borrowing capacity reduction on the revolving loan line of credit, the Company expensed $0.1 million in unamortized capitalized debt issuance costs during the nine months ended September 30, 2021, which was included in Selling, general and ~~liens~~administrative expenses on ~~its assets~~the Unaudited Condensed Consolidated Statements of Income (Loss). The Company incurred $0.5 million in financing costs for the Amendment, of which $0.2 million of third party costs were expensed and ~~a pledge~~included in Selling, general and administrative expenses on the Unaudited Condensed Consolidated Statements of ~~its stock.~~Income (Loss).

Under the Credit Agreement, the Company may borrow up to $100 million in non-U.S. Dollar currencies and use up to $20 million of the credit limit for the issuance of letters of credit.

As of September 30, ~~2017,~~2021, the Company had borrowings of $209.2 million and a total of $4.3 million of letters of credit outstanding under the Credit Agreement. The Company has capitalized costs associated with debt modifications of $1.1 million as of September 30, 2021, which is included in Other Assets on the Condensed Consolidated Balance Sheets and will be amortized into interest expense over the remaining term of the Credit Agreement through December 12, 2023.

As of September 30, 2021, the Company was in compliance with the terms of the Credit ~~Agreement, and will~~Agreement. The Company continuously ~~monitor its~~monitors compliance with the covenants contained in its Credit Agreement. The Company believes that it is probable that the Company will be able to comply with the financial covenants in the Credit Agreement and that sufficient credit remains available under the Credit Agreement to meet the Company's liquidity needs. However, due to the uncertainties being caused by the COVID-19 pandemic, the significant volatility in oil prices, and volatility in the aerospace production, such matters cannot be predicted with certainty.

~~Notes Payable and~~ Other debt

Financial instruments measured at fair value on a recurring basis

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Nine months ended
September 30, 2017
Beginning balance $ 3,094
Acquisitions 4,126
Payments (554 )
Accretion of liability 198
Revaluation (1,078 )
Foreign currency translation 28
Ending balance $ 5,814


	Nine months ended September 30,
	2021		2020
Beginning balance	$	1,640	$	3,216
Acquisitions	—		200
Payments	(938)		(1,337)
Accretion of liability	—		33
Revaluation	1,034		153
Foreign currency translation	—		(23)
Ending balance	$	1,736	$	2,242

Financial instruments not measured at fair value on a recurring basis

The Company’s Condensed Consolidated Balance Sheets include the following related to operating leases:


Leases	Classification	September 30, 2021		December 31, 2020
Assets
ROU assets	Other Assets	$	42,043	$	46,728

Liabilities
ROU - current	Accrued expenses and other current liabilities	$	9,871	$	10,348
ROU liability - long-term	Other long-term liabilities	33,691		37,689
Total ROU liabilities		$	43,562	$	48,037

Included within the balance of operating leases is a lease for the Company’s headquarters which is with a related party. The ROU liability for this facility was approximately $3.1 million and $3.8 million as of September 30, 2021 and December 31, 2020, respectively. Total rent payments for this facility were approximately $0.3 million and $0.1 million for the three months ended September 30, 2021 and September 30, 2020, respectively. Total rent payments for this facility were approximately $1.0 million and $0.5 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. An agreement was reached with the related party to reduce rental payments by 20% and defer payments for 90 days for the lease of the Company’s headquarters, starting in June 2020 through December 2020 as part of COVID-19 related vendor concessions.

The total ROU assets attributable to finance leases were approximately $14.6 million and $15.8 million as of September 30, 2021 and December 31, 2020, respectively, which is included in Property, plant, and equipment, net on the Condensed Consolidated Balance Sheets.

As described in Note 9-Intangible Assets, the Company performed an analysis to determine whether there was any impairment of long-lived assets, which included the ROU assets, within the Services, International, and Products and Systems operating segments as well as Corporate. The result of the analysis was a $0.2 million impairment of a ROU asset in an asset group within the Services segment which is included in Impairment charges on the Unaudited Condensed Consolidated Statements of Loss for the nine months ended September 30, 2020.

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

The components of lease costs were as follows:


		Three months ended September 30,				Nine months ended September 30,
	Classification	2021		2020		2021		2020
Finance lease expense
Amortization of ROU assets	Depreciation and amortization	$	1,002	$	1,081	$	3,094	$	3,495
Interest on lease liabilities	Interest expense	177		207		550		650
Operating lease expense	Cost of revenue; Selling, general & administrative expenses	3,239		3,341		9,808		9,970
Short-term lease expense	Cost of revenue; Selling, general & administrative expenses	7		11		22		60
Variable lease expense	Cost of revenue; Selling, general & administrative expenses	532		(4)		1,956		441
Total		$	4,957	$	4,636	$	15,430	$	14,616

Additional information related to leases was as follows:


	Nine months ended September 30,
		2021			2020
Cash paid for amounts included in the measurement of lease liabilities for finance and operating leases
Finance - financing cash flows		$	3,032		$	3,078
Finance - operating cash flows		$	550		$	650
Operating - operating cash flows		$	9,870		$	9,819
ROU assets obtained in the exchange for lease liabilities
Finance leases		$	2,445		$	1,607
Operating leases		$	4,212		$	6,919
Weighted-average remaining lease term (in years)
Finance leases		5.5			5.9
Operating leases		5.3			5.9
Weighted-average discount rate
Finance leases		5.4		%	5.8		%
Operating leases		5.8		%	5.8		%

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Maturities of lease liabilities as of September 30, 2021 were as follows:


	Finance		Operating
Remainder of 2021	$	2,023	$	3,165
2022	4,602		11,595
2023	3,711		10,111
2024	2,778		7,843
2025	1,185		5,554
Thereafter	991		12,484
Total	15,290		50,752
Less: Present value discount	1,179		7,190
Lease liability	$	14,111	$	43,562

Legal Proceedings and Government Investigations

Litigation and Commercial Claims

any other damages incurred. The Company isfiled a ~~defendant~~lawsuit in the ~~lawsuit~~ ~~AGL Services Company v. Mistras Group, Inc.,~~ ~~pending in U.S.~~ District Court ~~for the Northern~~of Bexar County, Texas, 37th Judicial District, ~~of Georgia, filed November 2016. The case involves radiography work performed by the Company~~ in 2013 on the construction of a pipeline project in the U.S. The owner of the pipeline project has claimed damages of approximately $5.8 million and contends that certain of the radiography images the Company’s technicians prepared regarding the project did not meet the code quality interpretation standards required by the American Petroleum Institute. At a trial concluded on October 26, 2017, the jury awarded the plaintiff damages plus interest, which the Company believes is fully covered by insurance.

The Company’s subsidiary in France has been involved in a dispute with a former owner of a business purchased by the Company’s French subsidiary. The judgment is being appealed, but the Company recorded an ~~accrual for the judgment during the three months ended June 30, 2016. The loss for this matter is included in the accrual set forth above.~~

action captioned Mistras Group, Inc. v. Epic Y-Grade Pipeline LP, to recover the $1.4 million and ~~Subsidiaries~~

~~Notes~~other amounts due to ~~Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars~~the Company. The customer filed a counterclaim, alleging breach of contract and ~~shares in thousands, except per share data)~~

seeking recovery of its alleged damages. The Company isbelieves that any successful claim by the customer regarding the Company’s workmanship will be covered by insurance, subject to payment of a ~~defendant in a lawsuit,~~ ~~Triumph Aerostructures, LLC d/b/a Triumph Aerostructures-Vought Aircraft Division v. Mistras Group, Inc~~., pending in Texas State district court, 193rd Judicial District, Dallas County, Texas, filed September 2016. The plaintiff alleges Mistras delivered a defective Ultrasonic inspection system in 2014 and is alleging damages of approximately $2.3 million. The Company has established an accrual for this matter, which is included in the amount set forth above.

~~Government Investigations~~

In May 2015, the Company received a notice from the U.S. Environmental Protection Agency (“EPA”) that it performed a preliminary assessment at a leased facility the Company operates in Cudahy, California. Based upon the preliminary assessment, the EPA is conducting an investigation of the site, which includes taking groundwater and soil samples. The purpose of the investigation is to determine whether any hazardous materials were released from the facility. The Company has been informed that certain hazardous materials and pollutants have been found in the ground water in the general vicinity of 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 site of the Cudahy facility should be examined, along with numerous other sites in the vicinity.deductible. At this time, the Company is unable to determine whether it has any liability in connection with this matter and if so, the amount or range of any such liability, and accordingly, has not established any accruals for this matter. Accordingly, the Company recorded a reserve in the amount of $1.4 million during the twelve months ended December 31, 2019 for these past due receivables.

~~Acquisition-related~~NaN proceedings have been filed in California Superior Court for the County of Los Angeles regarding alleged violations of the California Labor Code. Both cases are captioned Justin Price v. Mistras Group, Inc., 1 being a purported class action lawsuit on behalf of current and former Mistras employees in California and the other was filed on behalf of the State of California under the California Private Attorney General Act on the basis of the same alleged violations. Both cases are requesting payment of all damages, including unpaid wages, and various fines and penalties available under California law. On May 4, 2021, the Company agreed to a settlement of all claims in the cases, which was more formally documented pursuant to a settlement agreement completed October 5, 2021. Pursuant to the settlement, the Company will pay $2.3 million to resolve the allegations in these proceedings and will be responsible for the employer portion of payroll taxes on the amount of the settlement allocated to wages. The settlement is subject to court approval and will cover claims for the period from June 2016 through July 31, 2021. The Company recorded expense of approximately $1.6 million during the three months ended March 31, 2021 related to this settlement, which is in addition to expense of $0.8 million the Company recorded during the three months ended December 31, 2020.

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Pension Related Contingencies

Severance and labor disputes

Acquisition and disposition related contingencies

During 2018, the Company sold a subsidiary in the Products and Systems segment. As part of the ~~Company’s acquisitions.~~sale, the Company entered into a three-year agreement to purchase products from the buyer, with a cumulative commitment of $2.3 million, of which $1.0 million is remaining as of September 30, 2021. The agreement is based on third-party pricing and the Company's planned purchase requirements over the three-year purchase period to meet the minimum contractual purchases. On August 3, 2021, the Company entered into an agreement and extended the period by twelve months.

•Services. This segment provides asset protection solutions ~~primarily~~predominantly in North America, with the largest concentration in the United States, ~~and the Canadian services business,~~followed by Canada, consisting primarily of ~~non-destructive testing and~~NDT, inspection, mechanical and engineering services that are used to evaluate ~~and maintain~~ the safety, structural integrity and reliability of critical energy, industrial and public ~~infrastructure.~~

infrastructure and commercial aerospace components. Software, digital and data services are included in this segment.

•International. This segment offers services, products and systems similar to those of the ~~Company’s~~ other ~~two~~ segments to ~~global~~select markets ~~principally in~~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.

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

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

The accounting policies of the reportable segments are the same as those described in Note 1-Description of Business and Basis of Presentation. Segment income from operations is one of the primary performance measures used by the chief operating decision maker, to assess the performance of each segment and make resource allocation decisions. Certain general and administrative costs such ~~intersegment~~as human resources, information technology and training are allocated to the segments. Segment income from operations excludes interest and other financial charges and income taxes. Corporate and other assets are comprised principally of cash, deposits, property, plant and equipment, domestic deferred taxes, deferred charges and other assets. Corporate loss from operations consists of administrative charges related to corporate personnel and other charges that cannot be readily identified for allocation to a particular segment.


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Revenue
Services	$	144,976	$	119,721	$	414,251	$	349,271
International	29,100		26,477		88,699		76,887
Products and Systems	3,308		3,932		9,499		10,746
Corporate and eliminations	(2,828)		(2,236)		(6,481)		(5,110)
	$	174,556	$	147,894	$	505,968	$	431,794


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Gross profit
Services	$	41,749	$	37,603	$	116,587	$	103,780
International	9,038		8,197		26,278		21,612
Products and Systems	1,422		1,628		4,655		3,834
Corporate and eliminations	7		(44)		33		(40)
	$	52,216	$	47,384	$	147,553	$	129,186

Table of Contents

Mistras Group, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Depreciation and amortization
Services	$	6,192	$	6,315	$	18,517	$	19,601
International	2,167		2,216		6,552		6,433
Products and Systems	221		248		664		756
Corporate and eliminations	(72)		(17)		(28)		(31)
	$	8,508	$	8,762	$	25,705	$	26,759


	September 30, 2021		December 31, 2020
Intangible assets, net
Services	$	53,634	$	58,917
International	6,911		8,664
Products and Systems	1,095		1,012
Corporate and eliminations	55		49
	$	61,695	$	68,642

~~Mistras Group, Inc. and Subsidiaries~~

~~Notes~~Refer to ~~Unaudited Condensed Consolidated Financial Statements~~

~~(tabular dollars and shares in thousands, except per share data)~~

Three months ended Nine months ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
Revenues

United States $ 114,249
$ 113,409
$ 344,808
$ 358,343
Other Americas 26,084
16,940
59,452
48,828
Europe 36,264
33,126
97,630
93,265
Asia-Pacific 2,973
5,336
11,436
14,170
$ 179,570
$ 168,811
$ 513,326
$ 514,606

(tabular dollars ~~and shares~~are in ~~thousands, except per share data)~~thousands)

~~14. Repurchase of Common Stock~~

~~On October 7, 2015, the Company's Board of Directors approved a $50 million stock repurchase plan. As part of this plan, on~~

~~August 17, 2016, the Company entered into an agreement with its CEO, Dr. Sotirios Vahaviolos, to purchase up to 1 million of~~

~~his shares, commencing in October 2016. Pursuant to the agreement, in general, the Company will purchase from Dr.~~

Vahaviolos up to $2 million of shares each month, at a 2% discount to the average daily closing price of the Company's common stock for the preceding month. During the nine months ended September 30, 2017, the Company purchased approximately 726,000 shares from Dr. Vahaviolos at an average price of $21.93 per share and an aggregate cost of $15.9 million. From the inception of the plan through September 30, 2017, the Company has purchased 1,000,000 shares from Dr. Vahaviolos at an average price of $21.92 per share for an aggregate cost of approximately $21.9 million and approximately 146,000 shares in the open market at an average price of $20.48 per share for an aggregate cost of approximately $3.0 million. All such repurchased shares are classified as ~~Treasury Stock~~ ~~on the condensed consolidated balance sheet. As of September 30, 2017, approximately $25.1 million remained available to repurchase shares under the stock repurchase plan.~~

•Forward-Looking Statements

•Note about Non-GAAP Measures

•Consolidated Results of Operations

•Liquidity and Capital Resources

•Critical Accounting Policies and Estimates

Forward-Looking Statements

At the time of this report, the COVID-19 pandemic is continuing to have a negative impact on us and ~~Exchange Commission (“SEC”).~~our key markets and is causing ongoing economic disruption worldwide, although the Company has nevertheless begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas. Our discussion below is qualified by the unknown impact that the COVID-19 pandemic will continue to have on our business and the economy in general, including the duration of the health risk the COVID-19 pandemic will cause and the resulting economic disruption.

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Mistras Group, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands)

•Services 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 structural integrity and reliability of critical energy, industrial and public ~~infrastructure.~~

infrastructure and commercial aerospace components. Software, digital and data services are included in this segment.

We have ~~been soft, driven by lower oil prices which~~continued providing our customers with innovative asset protection software ecosystem through our MISTRAS OneSuite platform. The software platform offers functions of MISTRAS' popular 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 50 plus applications being offered on one centralized platform.

We have ~~caused many~~continued to develop new technologies to provide monitoring of ~~the Company’s~~wind blade integrity through our Sensoria™ tool. Sensoria helps provide real-time monitoring and damage detection of wind turbine blades and allows our customers to ~~curtail spending for~~maximize uptime, performance and safety of wind turbine blades. This tool provides additional growth and expansion of our ~~services~~

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Mistras Group, Inc. and ~~products. However, during the fall~~Subsidiaries

Management's Discussion and Analysis of ~~2017, market conditions turned modestly positive~~Financial Condition and ~~we believe this will continue for the remainder of 2017 and through the spring of 2018.~~

Results of Operations

(tabular dollars are in thousands)

capabilities to serve both new and existing wind turbines and greatly enhances our product offerings within the renewable energy industry.

The COVID-19 pandemic uncertainty, significant volatility in oil prices and decreased traffic in the aerospace industry have adversely affected our workforce and operations, as well as the operations of our customers, suppliers and contractors beginning in 2020. These negative factors continue to cause volatility and uncertainty in the markets in which we operate, although we have nevertheless begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas where crude oil prices have exceeded pre-pandemic levels.

While we cannot fully assess the impact that the COVID-19 pandemic or the significant volatility in oil prices will continue to have on our operations at this time, there are certain impacts that we have identified resulting in impairment charges in 2020. See Note 8-Goodwill, Note 9-Intangible Assetsand Note13-Leases to the Notes to the Unaudited Condensed ~~consolidated~~Consolidated Financial Statements included in this Quarterly Report for additional information.

The Company has eliminated substantially all of the cost reduction initiatives undertaken in 2020, including re-installment of the savings plan employer match and increasing wages back to pre-pandemic amounts. Our cash position and liquidity remains strong. As of September 30, 2021, the cash balance was approximately $22.6 million.

In April 2021, the Biden Administration announced aggressive initiatives to battle climate change, which includes 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 on 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.

We are currently unable to predict the overall impact that the COVID-19 pandemic uncertainty, volatility in oil prices and climate change initiatives to reduce the use of fossil fuels may have on our business, results of operations, ~~for the three~~liquidity or in other ways which we cannot yet determine. We will continue to monitor market conditions and ~~nine months ended September 30, 2017 and September 30, 2016 were as follows:~~respond accordingly. Refer to Item 1A. Risk Factors in Part I of our 2020 Annual Report.

Three months ended Nine months ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
($ in thousands) ($ in thousands)
Revenues $ 179,570
$ 168,811
$ 513,326
$ 514,606
Gross profit 47,897
50,651
137,392
146,156
Gross profit as a % of Revenue 27 % 30 % 27 % 28 %
Total operating expenses 58,272
38,535
139,515
123,555
Operating expenses as a % of Revenue 32 % 23 % 27 % 24 %
Income (loss) from operations (10,375 ) 12,116
(2,123 ) 22,601
Income (loss) from Operations as a % of Revenue (6 )% 7 % — % 4 %
Interest expense 1,081
778
3,114
2,218
Income (loss) before (benefit) provision for income taxes (11,456 ) 11,338
(5,237 ) 20,383
(Benefit) provision for income taxes (4,503 ) 4,083
(2,199 ) 6,908
Net income (loss) (6,953 ) 7,255
(3,038 ) 13,475
Less: net income attributable to non-controlling interests, net of taxes 15
17
21
29
Net income (loss) attributable to Mistras Group, Inc. $ (6,968 ) $ 7,238
$ (3,059 ) $ 13,446

Note About Non-GAAP Measures

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Mistras Group, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands)

Results of Operations


	Three months ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
Revenues	$	174,556		$	147,894		$	505,968		$	431,794
Gross profit	52,216			47,384			147,553			129,186
Gross profit as a % of Revenue	29.9		%	32.0		%	29.2		%	29.9		%


Income (loss) from operations	9,236			5,742			15,864			(105,869)
Income (Loss) from Operations as a % of Revenue	5.3		%	3.9		%	3.1		%	(24.5)		%

Income before provision (benefit) for income taxes	6,910			2,097			7,170			(115,279)

Net income (loss)	3,397			1,553			3,983			(99,634)

Net income (loss) attributable to Mistras Group, Inc.	$	3,380		$	1,523		$	3,955		$	(99,642)

In the three months ended September 30, ~~2017,~~2021, total revenue increased 18.0% versus the comparable prior period. The increase was due to organic growth in our core business as our end markets recover from the effect of COVID-19. In addition, the Company realized low single-digit favorable revenue impact from foreign exchange rates. Services segment ~~revenues~~revenue increased 8%21.1% and International segment revenue increased 9.9%, due predominantly to ~~a combination~~recovery from the effect of ~~acquisition growth~~COVID-19 and ~~low single digit~~to single-digit favorable ~~impacts of~~revenue impact from foreign exchange rates and organic growth. The organic growth was achieved despite the negative impact of the 2017 hurricanes and continued weakness in a challenged region that includes a fairly large customer contract. International segment revenues increased 1%, driven by low single digit favorable impacts of foreign exchange rates, offset by a low single digit organic decline. Products and Systems segment revenues decreased by 8% driven by lower sales volume.rates.

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Mistras Group, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands)

In the nine months ended September 30, ~~2017,~~2021, total revenue increased 17.2% versus the comparable prior period. The increase was due to organic growth in our core business as our end markets recover from the effect of COVID-19. In addition, the Company realized low single-digit favorable revenue impact from foreign exchange rates. Our Services segment ~~revenues~~revenue increased ~~1%, as acquisition growth slightly offset a low single digit organic decline.~~18.5% due predominantly to recovery from the effect of COVID-19. International segment ~~revenues~~revenue increased ~~1%, as low single~~15.3% due to mid-single digit organic growth ~~slightly offset a low single~~and mid-single digit ~~unfavorable~~favorable revenue impact offrom foreign exchange rates. ~~Products segment revenues decreased 15% due to lower sales volume.~~


	Three months ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020

Gross profit
Services	$	41,749		$	37,603		$	116,587		$	103,780
% of segment revenue	28.8		%	31.4		%	28.1		%	29.7		%
International	9,038			8,197			26,278			21,612
% of segment revenue	31.1		%	31.0		%	29.6		%	28.1		%
Products and Systems	1,422			1,628			4,655			3,834
% of segment revenue	43.0		%	41.4		%	49.0		%	35.7		%
Corporate and eliminations	7			(44)			33			(40)
	$	52,216		$	47,384		$	147,553		$	129,186
% of total revenue	29.9		%	32.0		%	29.2		%	29.9		%

Three months ended Nine months ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
($ in thousands) ($ in thousands)
Gross profit

Services $ 34,729
$ 33,704
$ 100,432
$ 102,652
   % of segment revenue 25.3 % 26.5 % 25.3 % 26.0 %
International 10,432
13,133
29,720
33,673
   % of segment revenue 27.3 % 34.6 % 27.9 % 32.0 %
Products and Systems 2,753
3,686
7,313
9,475
   % of segment revenue 43.9 % 54.2 % 43.2 % 47.5 %
Corporate and eliminations (17 ) 128
(73 ) 356
$ 47,897
$ 50,651
$ 137,392
$ 146,156
   % of total revenue 26.7 % 30.0 % 26.8 % 28.4 %

Gross profit margin was ~~26.7%~~29.9% and ~~30.0%~~32.0% for the ~~three month~~three-month periods ended September 30, ~~2017~~2021 and ~~2016,~~2020, respectively. Gross profit margin decreased primarily due to unfavorable sales mix and higher level of reimbursable travel costs in the Services segment ~~gross profit margins had a year-on-year decline of 120 basis points to 25.3%~~partially offset by favorable sales mix and better utilization in the ~~three~~International and Products and Systems segments.

Gross profit margin was 29.2%and 29.9% for the nine months ended September 30, ~~2017, driven~~2021 and 2020, respectively. Gross profit margin remained flat primarily ~~by an adverse impact from the 2017 summer hurricanes, which reduced revenues by~~

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Mistras Group, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands)


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

Operating Expenses
Selling, general and administrative expenses	$	39,221	$	37,473	$	118,579	$	116,638

Impairment charges	—		—		—		106,062


Research and engineering	595		638		1,942		2,170
Depreciation and amortization	2,918		3,182		9,070		10,359

Legal settlement and litigation charges, net	—		(360)		1,030		(360)
Acquisitions-related expense	246		709		1,068		186

Operating expenses increased $1.3 million, or 3%, for the three months ended September 30, ~~2017~~2021 compared to ~~43.9%, driven~~the three months ended September 30, 2020. Selling, general and administrative expenses increased $1.7 million during the three months ended September 30, 2021 compared to the three months ended September 30, 2020, due to the Company reinstating several of the temporary cost reduction initiatives undertaken during 2020 in response to the COVID-19 pandemic, as further detailed in the Recent Developments section above. This increase was partially offset by ~~lower sales volumes.~~foreign currency exchange losses. Acquisition-related expense decreased $(0.5) million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 due to remeasurement of acquisition related contingent consideration.

~~Gross profit margin was 26.8% and 28.4%~~Operating expenses decreased $103.4 million, or 44%, for the nine months ended September 30, ~~2017 and 2016, respectively. Services segment gross profit margins declined by 70 basis points~~2021 compared to ~~25.3% in~~ the nine months ended September 30, ~~2017, driven~~2020, due predominantly to impairment charges of $106.1 million in 2020 as more fully described in Note 8–Goodwill and Note 9–Intangible Assets included in the Notes to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report. Excluding the 2020 impairment charges, operating expenses increased $2.7 million due to the Company reinstating several of the temporary cost reduction initiatives undertaken during 2020 in response to the COVID-19 pandemic, as further detailed in the Recent Developments section above, as well as a $1.2 million increase in net legal settlement and litigation charges primarily related to the Justin Price v. Mistras Group, Inc. matter more fully described in Note-14 Commitments and Contingenciesunder the "Litigation and Commercial Claims" section to the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report. These increases were partially offset by ~~the aforementioned 2017 hurricane impact~~foreign currency exchange losses. Depreciation and ~~also by a weak spring 2017 turnaround season which adversely impacted utilization of technicians. International segment gross margins declined by 410 basis points to 27.9% in~~amortization decreased $1.3 million during the nine months ended September 30, ~~2017, driven primarily by lower revenues in~~2021 compared to the ~~Company’s German subsidiary, as well poor margins~~nine months ended September 30, 2020, due to the 2020 impairment charges reducing the net book value on ~~a large contract and lower utilization~~certain of ~~technical labor in the UK. Products and Systems segment gross margin decreased by 430 basis points to 43.2%~~our intangible assets. Acquisition-related expense increased $0.9 million for the nine months ended September 30, ~~2017, driven by lower sales volumes.~~2021 compared to the nine months ended September 30, 2020 due to remeasurement of acquisition related contingent consideration.

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Mistras Group, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands)

The following table shows a reconciliation of the income (loss) from operations to income (loss) before special items for each of ~~the Company's~~our three segments, Corporate and ~~for~~Eliminations and the Company in total:


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

Services:
Income (loss) from operations (GAAP)	$	16,085	$	13,599	$	38,991	$	(57,058)

Impairment charges	—		—		—		86,200

Reorganization and other costs	—		58		97		125
Legal settlement and litigation charges, net	—		(360)		1,650		(360)
Acquisition-related expense, net	246		709		1,034		186
Income before special items (non-GAAP)	$	16,331	$	14,006	$	41,772	$	29,093
International:
Income (loss) from operations (GAAP)	$	1,169	$	(66)	$	2,158	$	(22,422)

Impairment charges	—		—		—		19,862
Reorganization and other costs	(2)		21		124		313

Income (loss) before special items (non-GAAP)	$	1,167	$	(45)	$	2,282	$	(2,247)
Products and Systems:
Loss from operations (GAAP)	$	(281)	$	(160)	$	(653)	$	(1,936)

Reorganization and other costs	—		5		27		5
Loss before special items (non-GAAP)	$	(281)	$	(155)	$	(626)	$	(1,931)
Corporate and Eliminations:
Loss from operations (GAAP)	$	(7,737)	$	(7,631)	$	(24,632)	$	(24,453)
Loss on debt modification	—				278		645
Legal settlement and litigation charges, net	—		—		(620)		—
Reorganization and other costs	—		14		—		137
Acquisition-related expense, net	—		—		34		—
Loss before special items (non-GAAP)	$	(7,737)	$	(7,617)	$	(24,940)	$	(23,671)
Total Company:
Income (loss) from operations (GAAP)	$	9,236	$	5,742	$	15,864	$	(105,869)

Impairment charges	—		—		—		106,062


Reorganization and other costs	(2)		98		248		580
Loss on debt modification	—		—		278		645
Legal settlement and litigation charges, net	—		(360)		1,030		(360)
Acquisition-related expense, net	246		709		1,068		186
Income before special items (non-GAAP)	$	9,480	$	6,189	$	18,488	$	1,244

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Mistras Group, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands)

~~46%.~~increased $3.3 million. As a percentage of ~~revenues,~~revenue, income before special items ~~declined~~increased by ~~370~~120 basis points to ~~3.9%~~5.4% in the three months ended September 30, ~~2017~~2021 from ~~7.6%~~4.2% in the three months ended September 30, ~~2016.~~2020.

Operating expenses increased $19.7 million during the three months ended September 30, 2017, driven primarily by the $15.8 million impairment charges, after completion of the analysis described above, for the Products and Systems segment, during the three months ended September 30, 2017 (See Notes 7 and 8). In addition, there was a $1.1 million increase in foreign currency transactional expenses, $1.2 million of additional operating expenses pertaining to Services segment acquisitions and $0.7 in Corporate segment expenses, primarily professional fees.

For the nine months ended September 30, ~~2017,~~2021, income (loss) from operations (GAAP) ~~decreased $24.7~~increased $121.7 million, ~~or 109%~~ compared with the ~~prior year, and~~nine months ended September 30, 2020, while income (loss) before special items (non-GAAP) ~~decreased $13.2 million, or 44%.~~increased $17.2 million. As a percentage of ~~revenues,~~revenue, income (loss) before special items ~~decreased~~increased by ~~260~~340 basis points to ~~3.2%~~3.7% in the nine months ended September 30, ~~2017, as compared to 5.8%~~2021 from 0.3% in the nine months ended September 30, ~~2016.~~

~~Operating expenses increased $16.0 million during~~2020. During the nine months ended September 30, ~~2017, driven primarily by the $15.8 million impairment charges in the Products and Systems segment. In addition, there was a $2.0 million increase in foreign currency transaction expenses for~~2021, the Company ~~$2.3 million~~experienced overall organic growth. Specifically, the Company has been recovering from the effect of COVID-19 which was more impactful to our financial results in 2020. During the nine months ended September 30, 2020, the COVID-19 initial outbreak and significant drop in oil prices had adversely affected our workforce and operations, as well as the operations of our customers, suppliers and contractors. Refer to Item 1A. Risk Factors in Part I of our 2020 Form 10-K, and the additional ~~operating expenses pertaining to Services segment acquisitions and $0.8 million~~risk factors included in Part II, Item 1.A. of ~~Corporate segment expenses, primarily professional fees. These increases were primarily offset by a $5.1 million decrease in litigation expenses~~this Form 10-Q for ~~the respective periods.~~further discussion.

Interest expense was approximately ~~$1.1~~$2.3 million and ~~$0.8~~$3.6 million for the three months ended September 30, ~~2017~~2021 and ~~2016, respectively, and $3.1~~2020, respectively. Interest expense was approximately $8.7 million and ~~$2.2~~$9.4 million for the nine months ended September 30, ~~2017~~2021 and ~~2016.~~2020, respectively. The ~~increases were~~decrease was a result of a change in the effective interest rate, due to ~~increased borrowings on~~a lower leverage ratio and the ~~Company's revolving line~~elimination of ~~credit.~~the minimum LIBOR floor.

The terms of our Credit Agreement are described in Note 11- Long-Term Debt of the Notes to the Unaudited Condensed Consolidated Financial Statements, under the heading "Senior Credit Facility".

~~The Company’s~~Our effective income tax rate was approximately ~~39%~~50.8% and ~~36%~~25.9% for the three months ended September 30, ~~2017~~2021 and ~~2016,~~2020, respectively. ~~The Company's~~Our effective income tax rate was approximately ~~42%~~44.4% and ~~34%~~13.6% for the nine months ended September 30, ~~2017~~2021 and ~~2016, respectively.~~ 2020.

The ~~increase in the~~Company's effective income tax rate for ~~these respective periods~~the three months ended September 30, 2021 was higher than the statutory rate primarily due to a ~~discrete item~~$1.2 million valuation allowance recorded during the period which was related to various state deferred tax assets and earnings in jurisdictions with higher income tax rates than the ~~impairment of goodwill and intangible assets in the Products and Systems reporting unit. Excluding this item, the~~United States. The effective income tax rate ~~would have been 35% and 36%, respectively,~~ for the three months ended September 30, 2020 approximated the statutory rate, as the favorable impact of the CARES Act was offset by the unfavorable impact of taxes in other jurisdictions and other permanent book to tax differences.

The income tax rate for the nine months ended September 30, ~~2017.~~2021 was higher than the statutory rate due to a $1.2 million valuation allowance recorded during the year related to various state deferred tax assets offset by the capitalization of certain non-US intercompany balances which resulted in a deductible foreign exchange loss in the US. The effective income tax rate for the nine months ended September 30, 2020 was lower than the statutory rate primarily due to impairments for which we did not realize income tax benefits, partially offset by income tax benefits of the CARES Act.

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Mistras Group, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands)

Liquidity and Capital Resources

Cash flows are summarized in the table below:

The terms of our Credit Agreement have not changed from those set forth in Part II, Item 7 of our 2016 Transition Report under the Section “Liquidity and Capital Resources”, under the heading “Cash Balance and Credit Facility Borrowings,” and Note 10 - ~~Long-Term Debt~~ ~~to these condensed consolidated financial statements in this Quarterly Report, under the heading “Senior Credit Facility.”~~

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Mistras Group, Inc. and Subsidiaries

Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands)

The terms of our Credit Agreement (as modified) are described in Note 11-Long-Term Debt of the Notes to the Unaudited Condensed Consolidated Financial Statements, under the heading "Senior Credit Facility".

Critical Accounting Policies and Estimates

See Note 14-Commitments and Contingencies to the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report for a description of our legal proceedings. There have been no material developments with regard to any matters disclosed under Part I, Item 3 ~~“Legal Proceedings”~~"Legal Proceedings" in our ~~2016 Transition~~2020 Annual Report, except as disclosed in such Note ~~12 (see below).~~

(a) Sales of Unregistered Securities

(b) Use of Proceeds from Public Offering of Common Stock

The following table sets forth the shares of our common stock we acquired during the quarter ~~pursuant to our publicly announced share repurchase plan and~~ as a result of the surrender of shares by employees to satisfy 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)

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs

July 31, 2021

—

August 31, 2021

—

September 30, 2021

—

Total Number of Shares (or

Average Price Paid per

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⁾

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	(unaudited)
	September 30, 2017			December 31, 2016				September 30, 2021		December 31, 2020
ASSETS							ASSETS	(unaudited)
Current Assets							Current Assets
Cash and cash equivalents	$	26,863		$	19,154		Cash and cash equivalents	$	22,597	$	25,760
Accounts receivable, net	140,189			130,852			Accounts receivable, net	127,699		107,628
Inventories	11,237			10,017			Inventories	12,178		13,134
Deferred income taxes	—			6,230
Prepaid expenses and other current assets	16,077			16,399			Prepaid expenses and other current assets	17,505		16,066
Total current assets	194,366			182,652			Total current assets	179,979		162,588
Property, plant and equipment, net	77,173			73,149			Property, plant and equipment, net	90,366		92,681
Intangible assets, net	42,242			40,007			Intangible assets, net	61,695		68,642
Goodwill	165,704			169,940			Goodwill	205,657		206,008
Deferred income taxes	2,108			1,086			Deferred income taxes	2,676		2,069
Other assets	2,829			2,593			Other assets	46,855		51,325
Total assets	$	484,422		$	469,427		Total assets	$	587,228	$	583,313
LIABILITIES AND EQUITY							LIABILITIES AND EQUITY
Current Liabilities							Current Liabilities
Accounts payable	$	8,925		$	6,805		Accounts payable	$	13,343	$	14,240
Accrued expenses and other current liabilities	65,608			58,697			Accrued expenses and other current liabilities	88,312		78,500
Current portion of long-term debt	2,490			1,379			Current portion of long-term debt	18,988		10,678
Current portion of capital lease obligations	6,261			6,488
Current portion of finance lease obligations							Current portion of finance lease obligations	3,773		3,765
Income taxes payable	4,576			4,342			Income taxes payable	1,676		2,664
Total current liabilities	87,860			77,711			Total current liabilities	126,092		109,847
Long-term debt, net of current portion	101,803			85,917			Long-term debt, net of current portion	196,866		209,538
Obligations under capital leases, net of current portion	8,349			9,682
Obligations under finance leases, net of current portion							Obligations under finance leases, net of current portion	10,338		11,115
Deferred income taxes	9,238			17,584			Deferred income taxes	9,195		8,236
Other long-term liabilities	9,510			7,789			Other long-term liabilities	43,711		47,358
Total liabilities	216,760			198,683			Total liabilities	386,202		386,094
Commitments and contingencies							Commitments and contingencies	0		0
Equity							Equity
Preferred stock, 10,000,000 shares authorized	—			—			Preferred stock, 10,000,000 shares authorized	—		—
Common stock, $0.01 par value, 200,000,000 shares authorized, 29,434,816 and 29,216,745 shares issued	294			292
Common stock, $0.01 par value, 200,000,000 shares authorized, 29,457,605 and 29,234,143 shares issued and outstanding							Common stock, $0.01 par value, 200,000,000 shares authorized, 29,457,605 and 29,234,143 shares issued and outstanding	294		292
Additional paid-in capital	221,149			217,211			Additional paid-in capital	237,577		234,638
Treasury stock, at cost, 1,146,249 and 420,258 shares	(24,923		)	(9,000		)
Retained earnings	88,744			91,803
Accumulated Deficit							Accumulated Deficit	(17,893)		(21,848)
Accumulated other comprehensive loss	(17,789		)	(29,724		)	Accumulated other comprehensive loss	(19,176)		(16,061)
Total Mistras Group, Inc. stockholders’ equity	267,475			270,582			Total Mistras Group, Inc. stockholders’ equity	200,802		197,021
Non-controlling interests	187			162			Non-controlling interests	224		198
Total equity	267,662			270,744			Total equity	201,026		197,219
Total liabilities and equity	$	484,422		$	469,427		Total liabilities and equity	$	587,228	$	583,313



	Nine months ended
	September 30, 2017			September 30, 2016

Cash flows from operating activities
Net income (loss)	$	(3,038	)	$	13,475
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization	23,644			24,563
Impairment charges	15,810			—
Deferred income taxes	(4,755		)	512
Share-based compensation expense	5,179			5,161
Bad debt provision for unexpected customer bankruptcy	1,200			—
Fair value adjustments to contingent consideration	(880		)	(582		)
Other	226			(2,017		)
Changes in operating assets and liabilities, net of effect of acquisitions
Accounts receivable	(4,017		)	9,968
Inventories	(838		)	200
Prepaid expenses and other assets	995			(2,777		)
Accounts payable	1,466			(1,761		)
Accrued expenses and other liabilities	668			5,247
Income taxes payable	(434		)	120
Net cash provided by operating activities	35,226			52,109
Cash flows from investing activities
Purchase of property, plant and equipment	(14,413		)	(11,238		)
Purchase of intangible assets	(941		)	(1,106		)
Acquisition of businesses, net of cash acquired	(8,356		)	(1,200		)
Proceeds from sale of equipment	1,194			1,057
Net cash used in investing activities	(22,516		)	(12,487		)
Cash flows from financing activities
Repayment of capital lease obligations	(4,878		)	(6,703		)
Proceeds from borrowings of long-term debt	5,599			761
Repayment of long-term debt	(1,638		)	(12,187		)
Proceeds from revolver	38,400			38,200
Repayment of revolver	(26,900		)	(49,000		)
Payment of contingent consideration for business acquisitions	(554		)	(2,919		)
Purchases of treasury stock	(15,923		)	—
Taxes paid related to net share settlement of share-based awards	(1,497		)	(2,146		)
Excess tax benefit from share-based compensation	—			646
Proceeds from exercise of stock options	277			857
Net cash used in financing activities	(7,114		)	(32,491		)
Effect of exchange rate changes on cash and cash equivalents	2,113			(221		)
Net change in cash and cash equivalents	7,709			6,910
Cash and cash equivalents
Beginning of period	19,154			9,599
End of period	$	26,863		$	16,509
Supplemental disclosure of cash paid
Interest	$	3,031		$	2,454
Income taxes	$	2,868		$	9,562
Noncash investing and financing
Equipment acquired through capital lease obligations	$	2,824		$	7,408
Issuance of notes payable and other debt obligations, primarily related to acquisitions	$	—		$	325



ý☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



o☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



	For the nine months ended September 30,
	2017				2016
	Common Stock Options		Weighted Average Exercise Price		Common Stock Options		Weighted Average Exercise Price
Outstanding at beginning of period:	2,167		$	13.33	2,265		$	13.16
Granted	—		$	—	—		$	—
Exercised	(37	)	$	7.39	(87	)	$	9.83
Expired or forfeited	—		$	—	—		$	—
Outstanding at end of period:	2,130		$	13.43	2,178		$	13.29



	2017
Number of Entities	2
Consideration transferred:
Cash paid	$	8,509
Working capital adjustments	1,604
Contingent consideration	4,126
Consideration transferred	$	14,239

Current assets	$	2,443
Property, plant and equipment	1,140
Intangible assets	8,436
Goodwill	4,271
Current liabilities	(881		)
Long-term deferred tax liability	(1,170		)
Net assets acquired	$	14,239


Exhibit No.		Description

~~Exhibit No.~~	~~Description~~




10.1		Settlement Agreement, dated October 5, 2021, regarding the settlement of the two legal proceedings captioned Price v. Mistras Group, Inc

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Schema Document

101.CAL		XBRL Calculation Linkbase Document

101.LAB		XBRL Labels Linkbase Document

101.PRE		XBRL Presentation Linkbase Document

101.DEF		XBRL Definition Linkbase Document



			MISTRAS GROUP, INC.

			By:			/s/ ~~Jonathan H. Wolk~~Edward J. Prajzner
						~~Jonathan H. Wolk~~Edward J. Prajzner
						~~Senior~~ Executive Vice President, ~~Chief Operating Officer,~~ Chief Financial Officer and Treasurer
						(Principal Financial and Accounting Officer and duly authorized officer)