UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| | | | |
ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172022
Or
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o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __ to __
Commission file number 001- 34481
Mistras Group, Inc.
(Exact name of registrant as specified in its charter)
| | 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 | | MG | | 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):
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| | | | | | | | | | | | | |
Large accelerated filero | o |
| Accelerated filer | x |
Non-accelerated filero | o |
| 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,July 29, 2022, the registrant had 28,290,70929,806,941 shares of common stock outstanding and 1,146,249 shares of treasury stock.outstanding.
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
ITEM 1.Financial Statements
Mistras Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)data)
| | | (unaudited) | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | | June 30, 2022 | | December 31, 2021 |
ASSETS | |
| | |
| ASSETS | (unaudited) | | |
Current Assets | |
| | |
| Current Assets | | | |
Cash and cash equivalents | $ | 26,863 |
| | $ | 19,154 |
| Cash and cash equivalents | $ | 18,609 | | | $ | 24,110 | |
Accounts receivable, net | 140,189 |
| | 130,852 |
| Accounts receivable, net | 129,572 | | | 109,511 | |
Inventories | 11,237 |
| | 10,017 |
| Inventories | 12,967 | | | 12,686 | |
Deferred income taxes | — |
| | 6,230 |
| |
Prepaid expenses and other current assets | 16,077 |
| | 16,399 |
| Prepaid expenses and other current assets | 11,768 | | | 15,031 | |
Total current assets | 194,366 |
| | 182,652 |
| Total current assets | 172,916 | | | 161,338 | |
Property, plant and equipment, net | 77,173 |
| | 73,149 |
| Property, plant and equipment, net | 80,585 | | | 86,578 | |
Intangible assets, net | 42,242 |
| | 40,007 |
| Intangible assets, net | 54,278 | | | 59,381 | |
Goodwill | 165,704 |
| | 169,940 |
| Goodwill | 203,106 | | | 205,439 | |
Deferred income taxes | 2,108 |
| | 1,086 |
| Deferred income taxes | 1,232 | | | 2,174 | |
Other assets | 2,829 |
| | 2,593 |
| Other assets | 43,425 | | | 47,285 | |
Total assets | $ | 484,422 |
| | $ | 469,427 |
| Total assets | $ | 555,542 | | | $ | 562,195 | |
LIABILITIES AND EQUITY | |
| | |
| LIABILITIES AND EQUITY | | | |
Current Liabilities | |
| | |
| Current Liabilities | | | |
Accounts payable | $ | 8,925 |
| | $ | 6,805 |
| Accounts payable | $ | 17,328 | | | $ | 12,870 | |
Accrued expenses and other current liabilities | 65,608 |
| | 58,697 |
| Accrued expenses and other current liabilities | 84,835 | | | 83,863 | |
Current portion of long-term debt | 2,490 |
| | 1,379 |
| Current portion of long-term debt | 21,227 | | | 20,162 | |
Current portion of capital lease obligations | 6,261 |
| | 6,488 |
| |
Current portion of finance lease obligations | | Current portion of finance lease obligations | 3,844 | | | 3,765 | |
Income taxes payable | 4,576 |
| | 4,342 |
| Income taxes payable | 148 | | | 755 | |
Total current liabilities | 87,860 |
| | 77,711 |
| Total current liabilities | 127,382 | | | 121,415 | |
Long-term debt, net of current portion | 101,803 |
| | 85,917 |
| Long-term debt, net of current portion | 179,162 | | | 182,403 | |
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 | 9,444 | | | 9,752 | |
Deferred income taxes | 9,238 |
| | 17,584 |
| Deferred income taxes | 8,566 | | | 8,385 | |
Other long-term liabilities | 9,510 |
| | 7,789 |
| Other long-term liabilities | 36,727 | | | 39,328 | |
Total liabilities | 216,760 |
| | 198,683 |
| Total liabilities | 361,281 | | | 361,283 | |
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, 29,807,038 and 29,546,263 shares issued and outstanding | | Common stock, $0.01 par value, 200,000,000 shares authorized, 29,807,038 and 29,546,263 shares issued and outstanding | 297 | | | 295 | |
Additional paid-in capital | 221,149 |
| | 217,211 |
| Additional paid-in capital | 240,697 | | | 238,687 | |
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 | (18,708) | | | (17,988) | |
Accumulated other comprehensive loss | (17,789 | ) | | (29,724 | ) | Accumulated other comprehensive loss | (28,287) | | | (20,311) | |
Total Mistras Group, Inc. stockholders’ equity | 267,475 |
| | 270,582 |
| Total Mistras Group, Inc. stockholders’ equity | 193,999 | | | 200,683 | |
Non-controlling interests | 187 |
| | 162 |
| Non-controlling interests | 262 | | | 229 | |
Total equity | 267,662 |
| | 270,744 |
| Total equity | 194,261 | | | 200,912 | |
Total liabilities and equity | $ | 484,422 |
| | $ | 469,427 |
| Total liabilities and equity | $ | 555,542 | | | $ | 562,195 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.Unaudited Condensed Consolidated Financial Statements.
Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income (Loss)
(in thousands, except per share data)data)
| | | Three months ended | | Nine months ended | | Three months ended June 30, | | Six months ended June 30, |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 | | 2022 | | 2021 | | 2022 | | 2021 |
| |
| | |
| | | | | | | | | | | | |
Revenue | $ | 179,570 |
| | $ | 168,811 |
| | $ | 513,326 |
| | $ | 514,606 |
| Revenue | $ | 179,031 | | | $ | 177,677 | | | $ | 340,693 | | | $ | 331,412 | |
Cost of revenue | 126,316 |
| | 112,754 |
| | 360,144 |
| | 352,027 |
| Cost of revenue | 119,980 | | | 116,787 | | | 235,738 | | | 225,030 | |
Depreciation | 5,357 |
| | 5,406 |
| | 15,790 |
| | 16,423 |
| Depreciation | 5,493 | | | 5,554 | | | 11,505 | | | 11,045 | |
Gross profit | 47,897 |
| | 50,651 |
| | 137,392 |
| | 146,156 |
| Gross profit | 53,558 | | | 55,336 | | | 93,450 | | | 95,337 | |
Selling, general and administrative expenses | 38,217 |
| | 34,995 |
| | 113,491 |
| | 107,266 |
| Selling, general and administrative expenses | 40,676 | | | 39,719 | | | 82,712 | | | 79,358 | |
Impairment charges | 15,810 |
| | — |
| | 15,810 |
| | — |
| |
Bad debt provision for troubled customers, net of recoveries | | Bad debt provision for troubled customers, net of recoveries | 289 | | | — | | | 289 | | | — | |
| Legal settlement and insurance recoveries, net | | Legal settlement and insurance recoveries, net | (153) | | | — | | | (994) | | | 1,030 | |
Research and engineering | 555 |
| | 643 |
| | 1,749 |
| | 1,928 |
| Research and engineering | 522 | | | 620 | | | 1,073 | | | 1,347 | |
Depreciation and amortization | 2,738 |
| | 2,513 |
| | 7,854 |
| | 8,140 |
| Depreciation and amortization | 2,635 | | | 3,078 | | | 5,430 | | | 6,152 | |
Litigation charges | 1,200 |
| | — |
| | 1,200 |
| | 6,320 |
| |
Acquisition-related expense (benefit), net | (248 | ) | | 384 |
| | (589 | ) | | (99 | ) | |
Income (loss) from operations | (10,375 | ) | | 12,116 |
| | (2,123 | ) | | 22,601 |
| |
Acquisition-related expense, net | | Acquisition-related expense, net | 13 | | | 545 | | | 63 | | | 822 | |
Income from operations | | Income from operations | 9,576 | | | 11,374 | | | 4,877 | | | 6,628 | |
Interest expense | 1,081 |
| | 778 |
| | 3,114 |
| | 2,218 |
| Interest expense | 2,117 | | | 3,155 | | | 4,055 | | | 6,368 | |
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 |
| |
Earnings (loss) per common share: | |
| | |
| | | | | |
Income before provision (benefit) for income taxes | | Income before provision (benefit) for income taxes | 7,459 | | | 8,219 | | | 822 | | | 260 | |
Provision (benefit) for income taxes | | Provision (benefit) for income taxes | 2,793 | | | 2,274 | | | 1,509 | | | (326) | |
Net Income (Loss) | | Net Income (Loss) | 4,666 | | | 5,945 | | | (687) | | | 586 | |
Less: net income attributable to noncontrolling interests, net of taxes | | Less: net income attributable to noncontrolling interests, net of taxes | 23 | | | 8 | | | 33 | | | 11 | |
Net Income (Loss) attributable to Mistras Group, Inc. | | Net Income (Loss) attributable to Mistras Group, Inc. | $ | 4,643 | | | $ | 5,937 | | | $ | (720) | | | $ | 575 | |
| Earnings (loss) per common share | | Earnings (loss) per common share | | | | |
Basic | $ | (0.25 | ) | | $ | 0.25 |
| | $ | (0.11 | ) | | $ | 0.46 |
| Basic | $ | 0.15 | | | $ | 0.20 | | | $ | (0.02) | | | $ | 0.02 | |
Diluted | $ | (0.25 | ) | | $ | 0.24 |
| | $ | (0.11 | ) | | $ | 0.45 |
| Diluted | $ | 0.15 | | | $ | 0.20 | | | $ | (0.02) | | | $ | 0.02 | |
Weighted average common shares outstanding: | |
| | |
| | | | | |
Weighted-average common shares outstanding: | | Weighted-average common shares outstanding: | | | | |
Basic | 28,274 |
| | 29,051 |
| | 28,465 |
| | 28,966 |
| Basic | 29,957 | | | 29,602 | | | 29,840 | | | 29,514 | |
Diluted | 28,274 |
| | 30,231 |
| | 28,465 |
| | 30,139 |
| Diluted | 30,233 | | | 30,136 | | | 29,840 | | | 30,039 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.Unaudited Condensed Consolidated Financial Statements.
Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(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 June 30, | | Six Months Ended June 30, | |
| 2022 | | 2021 | | 2022 | | 2021 | | | |
| | | | | | | | | | |
Net Income (loss) | $ | 4,666 | | | $ | 5,945 | | | $ | (687) | | | $ | 586 | | | | |
Other comprehensive income (loss): | | | | | | | | | | |
Foreign currency translation adjustments | (8,531) | | | 2,947 | | | (7,976) | | | 2,355 | | | | |
Comprehensive Income (Loss) | (3,865) | | | 8,892 | | | (8,663) | | | 2,941 | | | | |
Less: net income attributable to noncontrolling interest | 23 | | | 8 | | | 33 | | | 11 | | | | |
Less: Foreign currency translation adjustments attributable to noncontrolling interests | — | | | 1 | | | — | | | 1 | | | | |
Comprehensive income (loss) attributable to Mistras Group, Inc | $ | (3,888) | | | $ | 8,883 | | | $ | (8,696) | | | $ | 2,929 | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.Unaudited Condensed Consolidated Financial Statements.
Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Equity
(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 March 31, 2022 | $ | 29,720 | | | $ | 297 | | | $ | 239,656 | | | $ | (23,351) | | | $ | (19,756) | | | $ | 196,846 | | | $ | 239 | | | $ | 197,085 | | |
Net income | — | | | — | | | — | | | 4,643 | | | — | | | 4,643 | | | 23 | | | 4,666 | | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (8,531) | | | (8,531) | | | — | | | (8,531) | | |
Share-based compensation | — | | | — | | | 1,255 | | | — | | | — | | | 1,255 | | | — | | | 1,255 | | |
Net settlement of restricted stock units | 87 | | | — | | | (214) | | | — | | | — | | | (214) | | | — | | | (214) | | |
| | | | | | | | | | | | | | | | |
Balance at June 30, 2022 | 29,807 | | | $ | 297 | | | $ | 240,697 | | | $ | (18,708) | | | $ | (28,287) | | | $ | 193,999 | | | $ | 262 | | | $ | 194,261 | | |
| | | | | | | | | | | | | | | | |
Balance at March 31, 2021 | $ | 29,347 | | | $ | 293 | | | $ | 235,413 | | | $ | (27,210) | | | $ | (16,653) | | | $ | 191,843 | | | $ | 201 | | | $ | 192,044 | | |
Net income | — | | | — | | | — | | | 5,937 | | | — | | | 5,937 | | | 8 | | | 5,945 | | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 2,946 | | | 2,946 | | | 1 | | | 2,947 | | |
Share-based payments | — | | | — | | | 1,202 | | | — | | | — | | | 1,202 | | | — | | | 1,202 | | |
Net settlement of restricted stock units | 85 | | | 1 | | | (490) | | | — | | | — | | | (489) | | | — | | | (489) | | |
| | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | 29,432 | | | $ | 294 | | | $ | 236,125 | | | $ | (21,273) | | | $ | (13,707) | | | $ | 201,439 | | | $ | 210 | | | $ | 201,649 | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six 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 December 31, 2021 | 29,546 | | | $ | 295 | | | $ | 238,687 | | | $ | (17,988) | | | $ | (20,311) | | | $ | 200,683 | | | $ | 229 | | | $ | 200,912 | |
Net income (loss) | — | | | — | | | — | | | (720) | | | — | | | (720) | | | 33 | | | (687) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (7,976) | | | (7,976) | | | — | | | (7,976) | |
Share-based compensation | — | | | — | | | 2,770 | | | — | | | — | | | 2,770 | | | — | | | 2,770 | |
Net settlement of restricted stock units | 261 | | | 2 | | | (760) | | | — | | | — | | | (758) | | | — | | | (758) | |
| | | | | | | | | | | | | | | |
Balance at June 30, 2022 | 29,807 | | | $ | 297 | | | $ | 240,697 | | | $ | (18,708) | | | $ | (28,287) | | | $ | 193,999 | | | $ | 262 | | | $ | 194,261 | |
| | | | | | | | | | | | | | | |
Balance at December 31, 2020 | 29,234 | | | $ | 292 | | | $ | 234,638 | | | $ | (21,848) | | | $ | (16,061) | | | $ | 197,021 | | | $ | 198 | | | $ | 197,219 | |
Net income | — | | | — | | | — | | | 575 | | | — | | | 575 | | | 11 | | | 586 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 2,354 | | | 2,354 | | | 1 | | | 2,355 | |
Share-based compensation | — | | | — | | | 2,464 | | | — | | | — | | | 2,464 | | | — | | | 2,464 | |
Net settlement of restricted stock units | 198 | | | 2 | | | (977) | | | — | | | — | | | (975) | | | — | | | (975) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at June 30, 2021 | 29,432 | | | $ | 294 | | | $ | 236,125 | | | $ | (21,273) | | | $ | (13,707) | | | $ | 201,439 | | | $ | 210 | | | $ | 201,649 | |
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)thousands) | | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 |
| | | |
Cash flows from operating activities | | | |
Net income (loss) | $ | (687) | | | $ | 586 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities | | | |
Depreciation and amortization | 16,935 | | | 17,197 | |
| | | |
Deferred income taxes | (80) | | | (152) | |
Share-based compensation expense | 2,770 | | | 2,464 | |
| | | |
Fair value adjustments to contingent consideration | 45 | | | 788 | |
Foreign currency loss | 4 | | | 932 | |
| | | |
Other | 709 | | | (64) | |
Changes in operating assets and liabilities, net of effect of acquisitions | | | |
Accounts receivable | (23,035) | | | (15,577) | |
Inventories | (430) | | | 279 | |
Prepaid expenses and other assets | 5,198 | | | 299 | |
Accounts payable | 4,790 | | | 3,751 | |
Accrued expenses and other liabilities | 2,676 | | | 9,053 | |
Income taxes payable | (553) | | | (1,430) | |
Payment of contingent consideration liability in excess of acquisition-date fair value | (533) | | | — | |
Net cash provided by operating activities | 7,809 | | | 18,126 | |
Cash flows from investing activities | | | |
Purchase of property, plant and equipment | (6,692) | | | (10,188) | |
| | | |
Purchase of intangible assets | (399) | | | (618) | |
Acquisition of business, net of cash acquired | — | | | (411) | |
Proceeds from sale of equipment | 592 | | | 899 | |
| | | |
Net cash used in investing activities | (6,499) | | | (10,318) | |
Cash flows from financing activities | | | |
Repayment of finance lease obligations | (2,138) | | | (2,050) | |
| | | |
Repayment of long-term debt | (9,507) | | | (7,957) | |
Proceeds from revolver | 56,000 | | | 37,000 | |
Repayment of revolver | (48,250) | | | (37,500) | |
Payment of financing costs | — | | | (550) | |
Payment of contingent consideration for business acquisitions | (405) | | | (938) | |
Taxes paid related to net share settlement of share-based awards | (756) | | | (975) | |
| | | |
Net cash used in financing activities | (5,056) | | | (12,970) | |
Effect of exchange rate changes on cash and cash equivalents | (1,755) | | | (656) | |
Net change in cash and cash equivalents | (5,501) | | | (5,818) | |
Cash and cash equivalents at beginning of period | 24,110 | | | 25,760 | |
Cash and cash equivalents at end of period | $ | 18,609 | | | $ | 19,942 | |
Supplemental disclosure of cash paid | | | |
Interest, net | $ | 3,525 | | | $ | 5,898 | |
Income taxes, net of refunds | $ | (3,466) | | | $ | 3,135 | |
Noncash investing and financing | | | |
Equipment acquired through finance lease obligations | $ | 2,039 | | | $ | 1,623 | |
|
| | | | | | | |
| 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 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.Unaudited Condensed Consolidated Financial Statements.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
1.Description of Business and Basis of Presentation
Description of Business
Mistras Group, Inc. and subsidiaries ("the Company")(the Company) is a leading “one source” globalmultinational provider of integrated technology-enabled asset protection solutions usedhelping to evaluatemaximize the structural integritysafety and reliability ofoperational uptime for civilization’s most critical energy, industrial and public infrastructure. Thecivil assets.
Backed by an innovative, data-driven asset protection portfolio, proprietary technologies, strong commitment to Environmental, Social, and Governance (ESG) initiatives and decades-long legacy of industry leadership, the Company combines industry-leading products and technologies, expertise in mechanical integrity (MI), non-destructive testing (NDT) and mechanical services and proprietary data analysis software to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity assessments and management. These mission critical solutions enhance customers’ ability to extend the useful life of their assets, increase productivity, minimize repair costs, comply with governmental safety and environmental regulations, manage risk and avoid catastrophic disasters. The Company serves a global customer base of companieshelps clients with asset-intensive infrastructure including companies in the oil and gas, fossilaerospace and nucleardefense, industrials, power generation and transmission (including alternative and renewable energy, public infrastructure, chemicals, commercial aerospace and defense, transportation, primary metals and metalworking, pharmaceutical/biotechnology and food processingenergy), other process industries and infrastructure, research and engineering institutions.and other industries towards achieving and maintaining operational excellence. By supporting these organizations that help fuel our vehicles and power our society; inspecting components that are trusted for commercial, defense, and space craft; and building real-time monitoring systems to help avoid catastrophic incidents, the Company helps the world at large.
The Company enhances value for its clients by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial Internet of Things ("IoT")-connected digital software and monitoring solutions, including OneSuite™, which serves as an ecosystem platform, pulling together all of the Company’s software and data services capabilities, for the benefit of its customers.
The Company’s core capabilities also include non-destructive testing (“NDT”) field inspections enhanced by advanced robotics, laboratory quality control and assurance testing, sensing technologies and NDT equipment, asset and mechanical integrity engineering services, and light mechanical maintenance and access services.
Recent Developments
Issues related to the COVID-19 coronavirus (COVID-19) have subsided significantly, but COVID-19 is still causing some disruption in domestic and international markets although conditions continue to improve during 2022 as compared to 2021. The Russian-Ukrainian conflict is creating disruption in the oil & gas market and the supply chain in general, which is resulting in some disruption to our business operations. With oil prices high, refineries are working at full capacity and are deferring maintenance and inspection work as much as possible, which is impacting our business as well.
Overall, the Company has taken actions to help ensure the health and safety of Company employees and those of its customers and suppliers; maintain business continuity and financial strength and stability; and serve customers as they provide essential products and services to the world.
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.
The Company is currently unable to predict with certainty the overall impact that the factors discussed above and the effect of the Russian-Ukrainian conflict may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine. To date, the Company’s European operations have begun to see increased costs associated with higher energy costs, among others, due in part to the Russian-Ukrainian conflict. The Company will continue to monitor market conditions and respond accordingly.
Basis of Presentation
The condensed consolidated financial statementsUnaudited Condensed Consolidated Financial Statements contained in this report are unaudited.have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") and Securities and Exchange Commission ("SEC") guidance allowing for reduced disclosure for interim periods. In the opinion of management, the condensed consolidated financial statementsUnaudited Condensed Consolidated Financial Statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the fiscal years ending December 31, 20172022 and 2016. December 31, 2021.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
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 statementsUnaudited Condensed Consolidated Financial Statements should be read in conjunction with the notes to the audited consolidated financial statementsAudited Consolidated Financial Statements contained in the Company’s Transition2021 Annual Report on Form 10-K (“2016 Transition Report”("2021 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
The accompanying unaudited condensed consolidated financial statementsUnaudited Condensed Consolidated Financial Statements include the accounts of Mistras Group, Inc. as well as its wholly-owned subsidiaries, majority-owned subsidiaries and its wholly and majority-owned subsidiaries.consolidated variable interest entities (VIE). For subsidiaries in which the Company’s ownership interest is less than 100%, the non-controlling interests are reported in stockholders’ equity in the accompanying condensed consolidated balance sheets.Condensed Consolidated Balance Sheets. The non-controlling interests in net income,results, net of tax, is classified separately in the accompanying condensed consolidated statementsUnaudited Condensed Consolidated Statements of income.Income (Loss). All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations of companies acquired are included from the date of acquisition.
On January 3, 2017, the Company's Board of Directors approved a change in the Company's fiscal year end from May 31 to December 31, effective December 31, 2016. The transition period was for the seven months ended December 31, 2016 ("the transition period"). Prior to this change, the Company's International segment was consolidated on a one month lag. Therefore, for this interim report, the condensed consolidated income statements include a one month lag for the International segment for the three and nine months ended September 30, 2016. Management does not believe that any events occurred during the one-month lag period that would have a material effect on the Company’s condensed consolidated financial statements. The one- month lag was removed with the change in the Company's fiscal year noted above, and accordingly, the condensed consolidated income statements do not include a one month lag for the International segment's results for the three and nine months ended September 30, 2017.
Reclassification
Certain amounts in prior periods have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the Company'sCompany’s financial condition or results of operations as previously reported.
Customers
For each of the three and six months ended June 30, 2022 and 2021, no customer represented 10% or more of the Company’s revenue.
Significant Accounting Policies
The Company’s significant accounting policies are disclosed in Note 1–Summary of Significant Accounting Policiesand Practices in the 2021 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 2021 Annual Report, there have been no material changes to the Company’s significant accounting policies.
Income Taxes
Income taxes are accounted for under the asset and liability method. We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred tax assets primarily consist of net operating loss carry forwards, or NOLs. A valuation allowance is provided if it is more likely than not that some or all of a deferred income tax asset will not be realized. A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current and prior years.
As of June 30, 2022, management concluded that it is more likely than not that a substantial portion of the Company’s deferred tax assets will be realized.
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 37.4% and 27.7% for the three months ended June 30, 2022 and 2021, respectively. The Company’s effective income tax rate was approximately 183.6% and (125.4)% for the six months ended June 30, 2022 and 2021, respectively.
The effective income tax rate for the three months ended June 30, 2022, was higher than the statutory rate primarily due to a $0.7 million valuation allowance recorded on a foreign jurisdiction. The effective income tax rate for the three months ended
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
June 30, 2021 was higher than the statutory rate due to earnings in jurisdictions with higher income tax rates than the United States.
One customer, primarily generated fromThe valuation allowance of $0.7 million has been recorded to recognize only the Services segment, accounted for approximately 10% and 11%portion of our revenues for the three and nine months ended September 30, 2017. This customer accounted for 8% of accounts receivable as of September 30, 2017. One customer accounted for 14% and 12% of our revenues for the three and nine months ended September 30, 2016.
Significant Accounting Policies
The Company’s significant accounting policies are disclosed in Note 2 — Summary of Significant Accounting Policies in the Company's 2016 Transition Report. On an ongoing basis, the Company evaluates its estimates and assumptions, including among other things, those related to revenue recognition, valuations of accounts receivable, long-lived assets, goodwill, deferred tax assets and uncertain tax positions. Since the datethat are more likely than not to be realized. The amount of the 2016 Transition Report, there have beendeferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no material changeslonger present and additional weight is given to subjective evidence such as our projections for growth.
The effective income tax rate for the Company's significant accounting policies.six months ended June 30, 2022 was higher than the statutory rate due primarily to a $0.7 million valuation allowance recorded during the period which was related to a foreign jurisdiction. The effective income tax rate for the six months ended June 30, 2021 was lower than the statutory rate due to capitalization of certain non-US intercompany balances which resulted in a deductible foreign exchange loss in the US.
Recent Accounting Pronouncements
In August 2015,March 2020 and updated in January 2021, the FASB issued ASU 2020-04 and 2021-01, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-14, Reporting.” The amendments provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating applicable contracts and the available expedients provided by the new guidance.
2. Revenue
The Company derives the majority of its revenue by providing services on a time and material basis, and are short-term in nature. The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (Topic 606): Deferral.
Performance Obligations
The Company provides highly integrated and bundled inspection services to its customers. The majority of the Effective Date, which defersCompany’s contracts have a single performance obligation as the effective date of ASU 2014-09 for all entities by one year. This updatepromise to transfer the individual goods or services is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Earlier applicationnot separately identifiable from other promises in the contracts and is, permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. ASU 2014-09 will become effective for us beginning 2018, which is when we plan to adopt this standard. The ASU permits two methods of adoption: retrospectivelytherefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each prior reporting period presented (full retrospective method),performance obligation using the Company’s best estimate of the standalone selling price of each distinct good or retrospectivelyservice 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 cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The ASU also requires expanded disclosures relatingvalue to the nature, amount, timing,customer of the entity’s performance completed to date. Fixed fee arrangements are determined based on expected labor, material, and uncertaintyoverhead to be consumed on fulfillment of such services. For these arrangements, revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assetsis recognized from the costs to obtain or fulfillon a contract. cost-to-cost method tracked on an input basis.
The Company plans to adopt this guidance using the cumulative catch-up method. We are still in the process of evaluating the effect of adoption on our condensed consolidated financial statements and are currently assessing our contracts with customers across each of its global operating segments. Our assessment is not yet complete and therefore we are unable to quantify the potential impacts. However, as most of our projects are short-term in nature and billed on at time and materials basis, we do not currently anticipate that the adoption of ASU 2014-09 will result in substantial changes to the overall pattern or timingmajority of our revenue recognition.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.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This amendment will simplify the presentation of deferred tax assets and liabilities on the balance sheet and require all deferred tax assets and liabilitiesThe Company expects any significant remaining performance obligations to be treated as non-current. ASU 2015-17 is effective for fiscal years, and interim periodssatisfied within those fiscal years beginning after December 15, 2016, with early adoption permitted. The Company adopted this guidance prospectively beginning in the first quarterone year.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This amendment supersedes previous accounting guidance (Topic 840) and requires all leases, with the exception of leases with a term of 12 months or less, to be recorded on the balance sheet as lease assets and lease liabilities. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2018, with early adoption permitted. The standard requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is evaluating the effect that ASU 2016-02 will have on its condensed consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation (Topic 718). This amendment simplifies certain aspects of accounting for share-based payment transactions, which include accounting for income taxes and the related impact on the statement of cash flows, an option to account for forfeitures when they occur in addition to the existing guidance to estimate the forfeitures of awards, classification of awards as either equity or liabilities and classification on the statement of cash flows for employee taxes paid to tax authorities on shares withheld for vesting. ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2016, with early adoption permitted. The Company adopted this guidance prospectively beginning in the first quarter 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)
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.
Revenue by Category
The following series of tables present the Company’s disaggregated revenue:
Revenue by industry was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2022 | Services | | International | | Products | | Corp/Elim | | Total |
Oil & Gas | $ | 93,098 | | | $ | 8,028 | | | $ | 139 | | | $ | — | | | $ | 101,265 | |
Aerospace & Defense | 17,300 | | | 5,118 | | | 26 | | | — | | | 22,444 | |
Industrials | 9,794 | | | 6,506 | | | 333 | | | — | | | 16,633 | |
Power generation & Transmission | 8,378 | | | 1,997 | | | 678 | | | — | | | 11,053 | |
Other Process Industries | 11,641 | | | 3,754 | | | 14 | | | — | | | 15,409 | |
Infrastructure, Research & Engineering | 3,183 | | | 2,193 | | | 442 | | | — | | | 5,818 | |
Petrochemical | 3,584 | | | 55 | | | — | | | — | | | 3,639 | |
Other | 2,550 | | | 1,959 | | | 1,020 | | | (2,759) | | | 2,770 | |
Total | $ | 149,528 | | | $ | 29,610 | | | $ | 2,652 | | | $ | (2,759) | | | $ | 179,031 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2021 | Services | | International | | Products | | Corp/Elim | | Total |
Oil & Gas | $ | 85,831 | | | $ | 9,533 | | | $ | 212 | | | $ | — | | | $ | 95,576 | |
Aerospace & Defense | 12,779 | | | 4,127 | | | 29 | | | — | | | 16,935 | |
Industrials | 11,242 | | | 6,194 | | | 418 | | | — | | | 17,854 | |
Power generation & Transmission | 10,073 | | | 3,183 | | | 830 | | | — | | | 14,086 | |
Other Process Industries | 10,356 | | | 3,627 | | | 35 | | | — | | | 14,018 | |
Infrastructure, Research & Engineering | 5,174 | | | 3,254 | | | 825 | | | — | | | 9,253 | |
Petrochemical | 5,936 | | | 47 | | | — | | | — | | | 5,983 | |
Other | 3,586 | | | 1,986 | | | 854 | | | (2,454) | | | 3,972 | |
Total | $ | 144,977 | | | $ | 31,951 | | | $ | 3,203 | | | $ | (2,454) | | | $ | 177,677 | |
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2022 | Services | | International | | Products | | Corp/Elim | | Total |
Oil & Gas | $ | 179,711 | | | $ | 15,600 | | | $ | 177 | | | $ | — | | | $ | 195,488 | |
Aerospace & Defense | 32,322 | | | 10,058 | | | 134 | | | — | | | 42,514 | |
Industrials | 18,801 | | | 12,034 | | | 835 | | | — | | | 31,670 | |
Power generation & Transmission | 12,200 | | | 4,559 | | | 1,523 | | | — | | | 18,282 | |
Other Process Industries | 21,934 | | | 7,272 | | | 15 | | | — | | | 29,221 | |
Infrastructure, Research & Engineering | 5,689 | | | 4,232 | | | 1,339 | | | — | | | 11,260 | |
Petrochemical | 6,629 | | | 133 | | | — | | | — | | | 6,762 | |
Other | 5,188 | | | 3,860 | | | 1,565 | | | (5,117) | | | 5,496 | |
Total | $ | 282,474 | | | $ | 57,748 | | | $ | 5,588 | | | $ | (5,117) | | | $ | 340,693 | |
In August 2016, the FASB issued ASU No. 2016-15, Statement | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Six Months Ended June 30, 2021 | Services | | International | | Products | | Corp/Elim | | Total |
Oil & Gas | $ | 165,051 | | | $ | 17,469 | | | $ | 268 | | | $ | — | | | $ | 182,788 | |
Aerospace & Defense | 24,602 | | | 8,444 | | | 64 | | | — | | | 33,110 | |
Industrials | 20,061 | | | 11,043 | | | 745 | | | — | | | 31,849 | |
Power generation & Transmission | 15,607 | | | 5,161 | | | 1,589 | | | — | | | 22,357 | |
Other Process Industries | 18,212 | | | 6,539 | | | 44 | | | — | | | 24,795 | |
Infrastructure, Research & Engineering | 8,343 | | | 7,010 | | | 1,969 | | | — | | | 17,322 | |
Petrochemical | 11,400 | | | 119 | | | — | | | — | | | 11,519 | |
Other | 5,999 | | | 3,814 | | | 1,512 | | | (3,653) | | | 7,672 | |
Total | $ | 269,275 | | | $ | 59,599 | | | $ | 6,191 | | | $ | (3,653) | | | $ | 331,412 | |
Revenue per key geographic location was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2022 | Services | | International | | Products | | Corp/Elim | | Total |
United States | $ | 126,286 | | | $ | 334 | | | $ | 1,492 | | | $ | (567) | | | $ | 127,545 | |
Other Americas | 22,553 | | | 1,376 | | | 168 | | | (1,105) | | | 22,992 | |
Europe | 415 | | | 27,353 | | | 514 | | | (955) | | | 27,327 | |
Asia-Pacific | 274 | | | 547 | | | 478 | | | (132) | | | 1,167 | |
Total | $ | 149,528 | | | $ | 29,610 | | | $ | 2,652 | | | $ | (2,759) | | | $ | 179,031 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2021 | Services | | International | | Products | | Corp/Elim | | Total |
United States | $ | 122,762 | | | $ | 241 | | | $ | 1,668 | | | $ | (895) | | | $ | 123,776 | |
Other Americas | 21,288 | | | 1,149 | | | 101 | | | (809) | | | 21,729 | |
Europe | 596 | | | 30,084 | | | 503 | | | (745) | | | 30,438 | |
Asia-Pacific | 331 | | | 477 | | | 931 | | | (5) | | | 1,734 | |
Total | $ | 144,977 | | | $ | 31,951 | | | $ | 3,203 | | | $ | (2,454) | | | $ | 177,677 | |
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2022 | Services | | International | | Products | | Corp/Elim | | Total |
United States | $ | 240,221 | | | $ | 507 | | | $ | 2,843 | | | $ | (1,222) | | | $ | 242,349 | |
Other Americas | 40,605 | | | 2,717 | | | 184 | | | (1,714) | | | 41,792 | |
Europe | 1,159 | | | 53,273 | | | 1,094 | | | (1,879) | | | 53,647 | |
Asia-Pacific | 489 | | | 1,251 | | | 1,467 | | | (302) | | | 2,905 | |
Total | $ | 282,474 | | | $ | 57,748 | | | $ | 5,588 | | | $ | (5,117) | | | $ | 340,693 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Six Months Ended June 30, 2021 | Services | | International | | Products | | Corp/Elim | | Total |
United States | $ | 227,308 | | | $ | 449 | | | $ | 3,128 | | | $ | (1,286) | | | $ | 229,599 | |
Other Americas | 40,166 | | | 2,326 | | | 168 | | | (872) | | | 41,788 | |
Europe | 890 | | | 55,978 | | | 963 | | | (1,357) | | | 56,474 | |
Asia-Pacific | 911 | | | 846 | | | 1,932 | | | (138) | | | 3,551 | |
Total | $ | 269,275 | | | $ | 59,599 | | | $ | 6,191 | | | $ | (3,653) | | | $ | 331,412 | |
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 presentationConsolidated 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 classificationliabilities are aggregated on an individual contract basis and reported on the Consolidated Balance Sheets at the end of specific cash flow items to improve consistencyeach reporting period within accounts receivable, net or accrued expenses and other current liabilities.
Revenue recognized during the statementsix months ended June 30, 2022 and 2021 that was included in the contract liability balance at the beginning of cash flows. ASU 2016-15 is effectivesuch year was $1.4 million and $3.3 million, for fiscal years,each period. Changes in the contract asset and interimliability balances during these periods within those fiscal years beginning after December 15, 2017, with early adoption permitted.were not materially impacted by any other factors. The Company is evaluating the impact that ASU 2016-15 will have on its condensed consolidated financial statements andapplies a practical expedient to expense incremental costs incurred 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 on the statement of cash flows. Amounts generally described as restricted cash 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.to obtaining a contract. The Company does not expect that ASU 2016-18 will have a material impact on its condensed consolidated financial statements and related disclosures.
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 lossCompany’s expenses are expected 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 unit during the three months ended September 30, 2017.amortized over a period less than one year.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting. This amendment provides guidance concerning which changes to the terms or conditions of 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 are three specific criteria that need to be met 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.
2.3. Share-Based Compensation
The Company hasgrants share-based incentive awards outstanding to its eligible employees and non-employee directors under three2 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 20072009 Plan, and 2009 Plans, although awardsthe remaining stock option award granted under the 2007 and 2009 Plans remain outstanding in accordance with their terms.Plan expired during the three months ended March 31, 2022. Awards granted under the 2016 Plan may be in the form of stock options, restricted stock units 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 23, 2022, the Company’s shareholders approved an amendment to increase the total number of shares that may be issued under the 2016 Plan by 1.2 million, for a total of 4.9 million shares that are authorized for issuance under the 2016 Plan, of which approximately 1,600,000 shares were available for future grants as of June 30, 2022.
Stock Options
For each of the three and six months ended SeptemberJune 30, 20172022 and 2016,2021, the Company did not recognize any share-based compensation expense related to the stock option awards.
Foraward, 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 to1 outstanding stock option awards.
award was already fully vested. No unrecognized compensation costs remained related to stock option awards as of September 30, 2017.
No stock options were granted during the three and nine months ended September 30, 2017 and September 30, 2016.
A summary of the stock option activity, weighted average exercise prices and options outstandingaward as of SeptemberJune 30, 2017 and 2016 is as follows:2022.
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 |
| |
The following table sets forth a summary of the stock option activity, weighted-average exercise prices and options outstanding as of June 30, 2022 and 2021: | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, | |
| 2022 | | 2021 | |
| 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 | (5) | | | $ | 22.35 | | | — | | | $ | — | | |
Outstanding at end of period: | — | | | $ | — | | | 5 | | | $ | 22.35 | | |
Restricted Stock Unit Awards
For the three months ended SeptemberJune 30, 20172022 and SeptemberJune 30, 2016,2021, the Company recognized share-based compensation expense related to restricted stock unit awards of $1.1$0.9 million and $1.2$0.9 million, respectively.
For the ninesix months ended SeptemberJune 30, 20172022 and September 30, 2016,2021, the Company recognized share-based compensation expense related to restricted stock unit awards of $3.4$1.9 million for each respective period.and $1.8 million, respectively. As of SeptemberJune 30, 2017,2022, there was $8.1$8.6 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which areis expected to be recognized over a remaining weighted averageweighted-average period of 2.42.9 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'svesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows: | | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 |
Restricted stock awards vested | 326 | | | 238 | |
Fair value of awards vested | $ | 2,164 | | | $ | 2,670 | |
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: | | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 |
Awards issued | 34 | | | 25 | |
Grant date fair value of awards issued | $ | 225 | | | $ | 258 | |
A summary of the Company’s outstanding, non-vested restricted share units is presented below:as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 |
| Units | | Weighted Average Grant-Date Fair Value | | Units | | Weighted Average Grant-Date Fair Value |
Outstanding at beginning of period: | 1,208 | | | $ | 7.96 | | | 1,076 | | | $ | 7.41 | |
Granted | 675 | | | $ | 7.65 | | | 528 | | | $ | 10.07 | |
Released | (326) | | | $ | 10.03 | | | (238) | | | $ | 10.98 | |
Forfeited | (20) | | | $ | 8.49 | | | (39) | | | $ | 8.77 | |
Outstanding at end of period: | 1,537 | | | $ | 7.38 | | | 1,327 | | | $ | 7.78 | |
|
| | | | | | | | | | | | | |
| 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 |
|
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
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 threespecific metrics as defined: (1) Operating Income, (2) Adjusted EBITDAS and (3) Revenue. There also is a discretionary portion of the PRSUs
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 the discretion ofapproved by the Compensation Committee (Discretionary PRSUs)of the Board of Directors of the Company.
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 were:
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 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.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 Discretionaryanticipated dividend payouts (assumed at zero).
c.Risk-Free Interest Rate. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate 1-year performance measurement period.
For 2022, the Compensation Committee retained the Company’s prior year equity incentive compensation plan for its executive officers including utilizing the same metrics, as defined above, and approved the new target awards for 2022.
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 condition is not achieved, provided the 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 UnitCompany’s PRSU activity is presented below:as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 |
| Units | | Weighted Average Grant-Date Fair Value | | Units | | Weighted Average Grant-Date Fair Value |
Outstanding at beginning of period: | 388 | | | $ | 10.07 | | | 333 | | | $ | 8.84 | |
Granted | 341 | | | $ | 6.55 | | | 189 | | | $ | 12.59 | |
Performance condition adjustments | (163) | | | $ | 8.34 | | | (193) | | | $ | 7.80 | |
Released | (17) | | | $ | 6.85 | | | (22) | | | $ | 13.63 | |
Forfeited | — | | | $ | — | | | — | | | $ | — | |
Outstanding at end of period: | 549 | | | $ | 9.12 | | | 307 | | | $ | 12.56 | |
|
| | | | | | | |
| 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 ended September 30, 2017, the Compensation Committee approved these transition period PRSUs, which resulted in a reductionTable of approximately 3,000 units. There was a reduction of approximately 64,000 units to the awards granted in 2017 during the nine months ended September 30, 2017.
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 and September 30, 2016, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.4 million and $0.5 million, respectively.
For the nine months ended September 30, 2017 and September 30, 2016, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $1.3 million for each respective period.
At September 30, 2017, there was $2.7 million of total unrecognized compensation costs related to approximately 287,000 non-vested performance restricted stock units, which are expected to be recognized over a remaining weighted average period of 2.1 years.
3.Earnings per Share
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
During the six months ended June 30, 2022 and June 30, 2021, the Compensation Committee approved the final calculation of the award metrics for calendar year 2021 and calendar year 2020, respectively. As a result, the calendar year 2022 PRSUs decreased by approximately 163,000 units during the six months ended June 30, 2022 as a result of the final calculation of the 2021 award and based on forecasted results for 2022 as compared to performance metrics determined by the Compensation Committee.
For the three months ended June 30, 2022 and June 30, 2021, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.3 million and $0.3 million, respectively. For the six months ended June 30, 2022 and June 30, 2021, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.6 million and $0.4 million, respectively. At June 30, 2022, there was $2.0 million of total unrecognized compensation costs related to approximately 549,000 non-vested PRSUs, which is expected to be recognized over a remaining weighted-average period of 2.2 years.
4. Earnings (loss) per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) 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 of basic and diluted earnings (loss) per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Basic earnings (loss) per share | | | | | | | |
Numerator: | | | | | | | |
Net income (loss) attributable to Mistras Group, Inc. | $ | 4,643 | | | $ | 5,937 | | | $ | (720) | | | $ | 575 | |
Denominator: | | | | | | | |
Weighted average common shares outstanding | 29,957 | | | 29,602 | | | 29,840 | | | 29,514 | |
Basic earnings (loss) per share | $ | 0.15 | | | $ | 0.20 | | | $ | (0.02) | | | $ | 0.02 | |
| | | | | | | |
Diluted earnings (loss) per share: | | | | | | | |
Numerator: | | | | | | | |
Net income (loss) attributable to Mistras Group, Inc. | $ | 4,643 | | | $ | 5,937 | | | $ | (720) | | | $ | 575 | |
Denominator: | | | | | | | |
Weighted average common shares outstanding | 29,957 | | | 29,602 | | | 29,840 | | | 29,514 | |
Dilutive effect of stock options outstanding | — | | | — | | | — | | | — | |
Dilutive effect of restricted stock units outstanding (1) | 276 | | | 534 | | | — | | | 525 | |
| 30,233 | | | 30,136 | | | 29,840 | | | 30,039 | |
Diluted earnings (loss) per share | $ | 0.15 | | | $ | 0.20 | | | $ | (0.02) | | | $ | 0.02 | |
|
| | | | | | | | | | | | | | | |
| 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 ninesix months ended SeptemberJune 30, 2017, 716 and 8022022, 1,412,073 shares respectivelyrelated to restricted stock were excluded from the calculation of diluted EPS due to the net loss for the respective periods.period.
(2) - For the three and nine months ended September 30, 2017, 308 and 337 shares, respectively, were excluded from the calculation
5. Acquisitions
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
4.Acquisitions
DuringIn the ninecourse of its acquisition activities, the Company incurs costs in connection with due diligence, such as professional fees, and other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a quarterly basis. These amounts are reported as Acquisition-related expense, net on the Unaudited Condensed Consolidated Statements of Income (Loss) and were as follows for the three and six months ended SeptemberJune 30, 2017,2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Due diligence, professional fees and other transaction costs | $ | 13 | | | $ | — | | | $ | 18 | | | $ | 34 | |
Adjustments to fair value of contingent consideration liabilities | — | | | 545 | | | 45 | | | 788 | |
Acquisition-related expense, net | $ | 13 | | | $ | 545 | | | $ | 63 | | | $ | 822 | |
As of June 30, 2022, the Company completed two acquisitions, one that performs mechanical services at height, locatedCompany’s contingent consideration liabilities are included in Canada,Accrued expenses and a company located inother current liabilities on the U.S. that primarily performs chemical and specialty process services, primarily in the aerospace industry.Condensed Consolidated Balance Sheets.
In these acquisitions, the Company acquired the assets
6. Accounts Receivable, net
Accounts receivable consisted 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. following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| | | |
Trade accounts receivable | $ | 133,600 | | | $ | 112,739 | |
Allowance for credit losses | (4,028) | | | (3,228) | |
Accounts receivable, net | $ | 129,572 | | | $ | 109,511 | |
The Company accounted for these transactions in accordance with the acquisition methodhad $18.8 million and $11.9 million of accounting for business combinations.
The assetsunbilled revenue accrued as of June 30, 2022 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 acquisitionsDecember 31, 2021, respectively. These amounts are included in the Services segment's resultstrade accounts receivable balances above. Unbilled revenue is generally billed in the subsequent quarter to their revenue recognition. The Company considers unbilled receivables as short-term in nature as they are normally converted to trade receivables within 90 days, thus future changes in economic conditions will not have a significant effect on the credit loss estimate.
The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of December 31, 2019, approximately $1.4 million of past due receivables were outstanding from this customer. The Company received notice from the date of acquisition. Goodwill of $4.3 million primarily relates to expected synergiescustomer 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 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 the assets acquired 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 for the period subsequent to the closingstatus of this transaction was approximately $9.1 millionsituation has not changed since 2019. See Note 14-Commitments 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 reportContingencies for either acquisition.additional details.
The Company completed two acquisitions that provide NDT services, located in Canada, during the nine months ended September 30, 2016. The Company acquired 100%
7. Property, Plant and Equipment, net
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
In the course of its acquisition activities, the Company incurs costs in connection with due diligence, professional fees, and other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a quarterly basis. These amounts are recorded as acquisition-related expense (benefit), net, on the condensed consolidated statements of income and were as follows for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| 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.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) | | June 30, 2022 | | December 31, 2021 |
| | | | | |
Land | | | $ | 2,526 | | | $ | 2,762 | |
Buildings and improvements | 30-40 | | 24,380 | | | 24,787 | |
Office furniture and equipment | 5-8 | | 19,482 | | | 16,620 | |
Machinery and equipment | 5-7 | | 244,205 | | | 250,166 | |
| | | 290,593 | | | 294,335 | |
Accumulated depreciation and amortization | | | (210,008) | | | (207,757) | |
Property, plant and equipment, net | | | $ | 80,585 | | | $ | 86,578 | |
Depreciation expense for the three months ended SeptemberJune 30, 20172022 and September 30, 20162021 was $5.7approximately $5.8 million and $5.8$6.2 million, respectively.
Depreciation expense for the ninesix months ended SeptemberJune 30, 20172022 and September 30, 20162021 was $16.8$12.3 million and $17.6$12.3 million, respectively.
7.8. Goodwill
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
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, 2021 | $ | 190,656 | | | $ | 14,783 | | | $ | — | | | $ | 205,439 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Foreign currency translation | (1,188) | | | (1,145) | | | — | | | (2,333) | |
Balance at June 30, 2022 | $ | 189,468 | | | $ | 13,638 | | | $ | — | | | $ | 203,106 | |
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 quarter of 2017, there were pending contract bids which management assessed as having a reasonable chance of success. These contract bids were not awarded to the Company. As a result of this missed opportunity, the annual forecasting process was accelerated, resulting in lower future operating profits and cash flows. As such, there were indicators that the carrying amount of the goodwill for the Products and Systems reporting unit may not be recoverable due to the decline in the projected future cash flows.
The Company performed an analysis to determinea quantitative annual impairment test as of October 1, 2021 and the Company did not identify any impairment of long-lived assets (see Note 8) as well as an analysis to determine any impairment of goodwill. For the goodwill analysis, we used income and market approaches to estimate the fair value of the reporting unit, which requires significant judgmentchanges in evaluation of economic and industry trends, estimated future cash flows, discount rates and other factors, and comparedcircumstances that fair value to the carrying value, and determined that the fair value of the reporting unit was less than the carrying value. The Company recorded an impairment charge of $13.2 million, based on the difference between the fair value andwould indicate the carrying value of goodwill may not be recoverable. Additionally, through June 30, 2022, the reporting unit, which resultedCompany did not identify any changes in an impairment ofcircumstances that would indicate the entire amountcarrying value of goodwill formay not be recoverable. Significant adverse changes in future periods could negatively affect the ProductsCompany’s key assumptions and Systems reporting unit.
The Company's cumulativemay result in future goodwill impairment ascharges which could be material.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2022 | | December 31, 2021 |
| Useful Life (Years) | | Gross Amount | | Accumulated Amortization | | | | Net Carrying Amount | | Gross Amount | | Accumulated Amortization | | | | Net Carrying Amount |
| | | | | | | | | | | | | | | | | |
Customer relationships | 5-18 | | $ | 109,922 | | | $ | (81,443) | | | | | $ | 28,479 | | | $ | 112,109 | | | $ | (80,319) | | | | | $ | 31,790 | |
Software/Technology | 3-15 | | 51,903 | | | (27,500) | | | | | 24,403 | | | 52,265 | | | (26,415) | | | | | 25,850 | |
Covenants not to compete | 2-5 | | 12,570 | | | (12,420) | | | | | 150 | | | 12,623 | | | (12,390) | | | | | 233 | |
Other | 2-12 | | 10,477 | | | (9,231) | | | | | 1,246 | | | 10,574 | | | (9,066) | | | | | 1,508 | |
Total | | | $ | 184,872 | | | $ | (130,594) | | | | | $ | 54,278 | | | $ | 187,571 | | | $ | (128,190) | | | | | $ | 59,381 | |
As described in Note 7, the Company performed an analysis to determine whether there was any impairment of long-lived assets for the Products and Systems reporting unit. We 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 impairment of $2.4 million to software/technology, $0.2 million to customer relationships and less than $0.1 million to other intangibles, which are included in the impairment charges line on the condensed consolidated statements of incomeAmortization expense for the three and nine months ended SeptemberJune 30, 2017.2022 and 2021 was approximately $2.3 million and $2.5 million, respectively.
Amortization expense for the six months ended June 30, 2022 and June 30, 2021 was $4.6 million and $4.9 million, respectively. 9.
10. 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 |
|
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| | | |
Accrued salaries, wages and related employee benefits | $ | 34,147 | | | $ | 33,816 | |
Contingent consideration, current portion | 938 | | | 1,830 | |
Accrued workers’ compensation and health benefits | 4,054 | | | 3,994 | |
Deferred revenue | 8,350 | | | 6,202 | |
Pension accrual | 2,519 | | | 2,519 | |
Right-of-use liability - Operating | 10,034 | | | 10,040 | |
Other accrued expenses | 24,793 | | | 25,462 | |
Total | $ | 84,835 | | | $ | 83,863 | |
10.Long-Term Debt
Long-term debt consisted 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
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)
11. Long-Term Debt
Long-term debt consisted of the following: | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| | | |
Senior credit facility | $ | 127,250 | | | $ | 119,500 | |
Senior secured term loan, net of unamortized debt issuance costs of $0.1 million and $0.2 million, respectively | 67,976 | | | 76,673 | |
| | | |
Other | 5,163 | | | 6,392 | |
Total debt | 200,389 | | | 202,565 | |
Less: Current portion | (21,227) | | | (20,162) | |
Long-term debt, net of current portion | $ | 179,162 | | | $ | 182,403 | |
Senior Credit Facility
amounts not paid when due. Amounts borrowed
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 $68.0 million as of June 30, 2022. Pursuant to the Amendment described below, the revolving line of credit was reduced from $155 million 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 allhave a maturity date of the assets of the Company.December 12, 2023.
The Credit Agreement contains financial covenants requiring thatOn May 19, 2021, the Company maintain aentered 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 4.0 to 1.0 as of no greater than 3.25 to 1the 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 asfor each quarter thereafter the ratio as of any date of determination,shall not exceed 3.5 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 expensesindebtedness (including subordinated debt) of the Company and its subsidiaries in connection with borrowed money (including capitalized interest)on a consolidated basis (with a limited exception).
•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 morepermitted 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 compliancemaintain a Total Consolidated Debt Leverage Ratio not to exceed 4.5 to 1.0 and maintain a ratio of Senior Debt to EBITDA not to exceed 3.5 to 1.0, 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 businessCompany’s Total Consolidated Leverage Ratio is above 3.5 to 1.0.
•Quarterly payments on the term loan increased from $3.75 million to $5.0 million during the quarter ended June 30, 2022 with a separate subsidiary, in certain circumstances the lenders will receive the benefit offinal balloon payment at maturity.
As a guarantyresult of the subsidiaryborrowing capacity reduction on the revolving loan line of credit, the Company expensed $0.1 million in unamortized capitalized debt issuance costs during the year ended December 31, 2021, which was included in selling, general and liensadministrative expenses on its assetsthe 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 pledgeincluded in selling, general and administrative expenses on the 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.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
As of SeptemberJune 30, 2017,2022, the Company had borrowings of $195.3 million and a total of $3.0 million of letters of credit outstanding under the Credit Agreement. The Company has capitalized costs associated with debt modifications of $0.7 million as of June 30, 2022, 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 June 30, 2022, the Company was in compliance with the terms of the Credit Agreement, and willAgreement. The Company continuously monitor itsmonitors 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.
On August 1, 2022, the Company entered into an agreement for a new Senior Credit Facility. See Note 16-Subsequent Events for additional details.
Notes Payable and Other debt
In connection with certain of its acquisitions, the Company issued subordinated notes payable to the sellers. The maturity of the notes that remain outstanding are three years from the date of acquisition and bear interestCompany’s other debt includes bank financing provided at the prime rate for the Banklocal subsidiary level used to support working capital requirements and fund capital expenditures. At June 30, 2022, there was an aggregate of Canada, currently 3.2% as of September 30, 2017. Interest expense is recorded in the condensed consolidated statements of income.approximately $5.2 million outstanding, payable at various times through 2030. Monthly payments range from $1.0 thousand to $15.0 thousand and interest rates range from 0.4% to 3.5%.
11.12. Fair Value Measurements
The Company performs fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a three level hierarchy that prioritizes the inputs used to measure fair value.
Financial instruments measured at fair value on a recurring basis
The fair value of contingent consideration liabilities was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the applicable acquisition agreements.
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 represents the changes in the fair value of Level 3 contingent consideration:
|
| | | | |
| | 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 |
|
| | | | | | | | | | | | | | |
| | Six months ended June 30, |
| | 2022 | | 2021 |
Beginning balance | | $ | 1,831 | | | $ | 1,640 | |
Acquisitions | | — | | | — | |
Payments | | (938) | | | (938) | |
Accretion of liability | | — | | | — | |
Revaluation | | 45 | | | 788 | |
Foreign currency translation | | — | | | — | |
Ending balance | | $ | 938 | | | $ | 1,490 | |
Financial instruments not measured at fair value on a recurring basis
The Company has evaluated current market conditions and borrower credit quality and has determined that the carrying value of its long-term debt approximates fair value. The fair value of the Company’s notes payable and capitalfinance lease obligations
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
approximates their carrying amounts based on anticipated interest rates which management believes would currently be available to the Company for similar issuances of debt.
12.
The Company’s Condensed Consolidated Balance Sheets include the following related to right-of-use ("ROU") | | | | | | | | | | | | | | | | | | | | |
Leases | | Classification | | June 30, 2022 | | December 31, 2021 |
Assets | | | | | | |
ROU assets | | Other assets | | $ | 40,399 | | | $ | 42,451 | |
| | | | | | |
Liabilities | | | | | | |
ROU - current | | Accrued expenses and other current liabilities | | $ | 10,034 | | | $ | 10,040 | |
ROU liability - long-term | | Other long-term liabilities | | 31,769 | | | 34,030 | |
Total ROU liabilities | | | | $ | 41,803 | | | $ | 44,070 | |
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 $2.2 million and $2.9 million as of June 30, 2022 and December 31, 2021, respectively. Total rent payments for this facility were approximately $0.2 million and $0.3 million for the three months ended June 30, 2022 and June 30, 2021, respectively. Total rent payments for this facility were approximately $0.5 million and $0.7 million for the six months ended June 30, 2022 and June 30, 2021, respectively. An agreement was reached with the related party to reduce rental payments by 12.5% for the lease of the Company’s headquarters, effective February 2022 as part of a voluntary reduction.
The total ROU assets attributable to finance leases were approximately $12.8 million and $13.8 million as of June 30, 2022 and December 31, 2021, respectively, which is included in Property, plant, and equipment, net on the Condensed Consolidated Balance Sheets.
The components of lease costs were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three months ended June 30, | Six months ended June 30, |
| | Classification | | 2022 | | 2021 | 2022 | | 2021 |
Finance lease expense | | | | | | | | | |
Amortization of ROU assets | | Depreciation and amortization | | $ | 1,023 | | | $ | 1,029 | | $ | 2,036 | | | $ | 2,091 | |
Interest on lease liabilities | | Interest expense | | 156 | | | 181 | | 314 | | | 373 | |
Operating lease expense | | Cost of revenue; Selling, general & administrative expenses | | 3,203 | | | 3,274 | | 6,401 | | | 6,577 | |
Short-term lease expense | | Cost of revenue; Selling, general & administrative expenses | | 3 | | | 8 | | 9 | | | 14 | |
Variable lease expense | | Cost of revenue; Selling, general & administrative expenses | | 551 | | | 551 | | 1,088 | | | 1,418 | |
Total | | | | $ | 4,936 | | | $ | 5,043 | | $ | 9,848 | | | $ | 10,473 | |
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Additional information related to leases was as follows: | | | | | | | | | | | | | | | | | |
| | | Six months ended June 30, |
| | | | | 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities for finance and operating leases | | | | | | | |
Finance - financing cash flows | | | | | $ | 2,138 | | | $ | 2,050 | |
Finance - operating cash flows | | | | | $ | 314 | | | $ | 373 | |
Operating - operating cash flows | | | | | $ | 6,302 | | | $ | 6,620 | |
ROU assets obtained in the exchange for lease liabilities | | | | | | | |
Finance leases | | | | | $ | 2,039 | | | $ | 1,623 | |
Operating leases | | | | | $ | 4,378 | | | $ | 2,828 | |
Weighted-average remaining lease term (in years) | | | | | | | |
Finance leases | | | | | 5.3 | | 5.6 |
Operating leases | | | | | 5.0 | | 5.5 |
Weighted-average discount rate | | | | | | | |
Finance leases | | | | | 5.2 | % | | 5.4 | % |
Operating leases | | | | | 5.5 | % | | 5.8 | % |
Maturities of lease liabilities as of June 30, 2022 were as follows: | | | | | | | | | | | |
| Finance | | Operating |
Remainder of 2022 | $ | 3,449 | | | $ | 6,104 | |
2023 | 4,191 | | | 11,570 | |
2024 | 3,279 | | | 9,400 | |
2025 | 1,709 | | | 6,903 | |
2026 | 1,068 | | | 5,052 | |
Thereafter | 602 | | | 9,100 | |
Total | 14,298 | | | 48,129 | |
Less: Present value discount | 1,010 | | | 6,326 | |
Lease liability | $ | 13,288 | | | $ | 41,803 | |
14. Commitments and Contingencies
Legal Proceedings and Government Investigations
The Company is subject to periodicperiodically involved in lawsuits, investigations and claims that arise in the ordinary course of business. The Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it. Except possibly for certain ofpossible losses from the matters described below, the Company does not believe that any currently pending or threatened legal proceeding to which the Company is or is likely to become a party will have a material adverse effect on its business, results of operations, cash flows or financial condition. The costs of defenseincurred by the Company to defend lawsuits, investigations and claims and amounts that may be recovered against the Company pays to other parties because of these matters may be covered by insurance for certain matters. The Company has accrued an aggregatein some circumstances.
Litigation and Commercial Claims
The Company settled a consolidated purported class and collective action that resulted from the consolidation of two cases originally filed in California state court in April 2015. In connection with the settlement, the Company recorded a pre-tax charge of $6.3 million during the three months ended June 30, 2016 and paid the settlement in February 2017.
The Company is a defendant in the lawsuit AGL Services Company v. Mistras Group, Inc., pending in U.S. District Court for the Northern 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.
Contents
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Litigation and Commercial Claims
The Company iswas contracted to perform inspections of welds on various pipeline projects in Texas for a defendantcustomer. As of June 30, 2022, approximately $1.4 million of past due receivables were outstanding from this customer. The customer provided the Company with notice in December 2019, alleging that the Company’s inspection of 66 welds (out of approximately 16,000 welds inspected) were not in compliance with the contract, claimed approximately $7.6 million in damages, and requested that the Company pay these damages and any other damages incurred. The Company filed a lawsuit Triumph Aerostructures, LLC d/b/a Triumph Aerostructures-Vought Aircraft Division v.in the District Court of Bexar County, Texas, 37th Judicial District, in an action captioned Mistras Group, Inc., pending in Texas State district court, 193rd Judicial District, Dallas County, Texas,Inc. v. Epic Y-Grade Pipeline LP, to recover the $1.4 million and other amounts due to the Company. The customer filed September 2016. The plaintiff alleges Mistras delivered a defective Ultrasonic inspection system in 2014counterclaim, alleging breach of contract and is alleging damagesseeking recovery of approximately $2.3 million.its alleged damages. The Company has established an accrual for this matter, which is included inbelieves that any successful claim by the amount set forth above.
Government Investigations
In May 2015,customer regarding the Company receivedCompany’s workmanship will be covered by insurance, subject to payment of 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-relatedNaN 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. The two cases have been consolidated and 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, as amended as of May 3, 2022. 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 received preliminary court approval on May 12, 2022, but is still subject to final 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.
Pension Related Contingencies
Certain of Company’s subsidiaries had significant reductions in their unionized workers in 2018. The collective bargaining agreements for these employees required contributions for these employees to national multi-employer pension funds. The reduction in employees resulted in a subsidiary incurring a complete withdrawal to one of the pension funds under the Employee Retirement Income Security Act of 1974 ("ERISA"), which was fully satisfied in 2019. The Company has determined that the subsidiary is likely to incur partial or complete withdrawal liability to the other pension fund. The balance of the estimated total amount of this potential liability as of June 30, 2022 is approximately $2.5 million, which were incurred in 2018 and 2019.
Severance and labor disputes
During December 2019, the Company executed an agreement to sell the rights of certain customer "staff leasing" contracts related to its German subsidiary for total consideration of approximately $0.1 million, effective January 1, 2020. No other assets or liabilities other than those employee benefits related to employees working on the customer contracts were included in the sale. As of June 30, 2022, the Company has approximately $0.1 million of accrued estimated severance payment obligations, which takes into account the Company’s estimate with respect to the employees that have been or will be transitioned to the German subsidiaries' other customers. The $0.1 million of estimated obligations is net of $0.4 million in payments made and $1.0 million in reversals due to employees being transitioned to customer contracts.
The Company was entitled to indemnification on certain labor claims from the sellers of a company acquired by its Brazilian subsidiary. The Company and the sellers entered into a settlement agreement for approximately $1.0 million, which provided for payment in 2 installments, the first for approximately 31% of the settlement and the second for the remaining 69%. The first installment in the amount of approximately $0.3 million was paid by the sellers in December 2020 and the Company recognized that amount as a gain in selling, general and administrative expenses in the same period. The remaining payment for $0.6 million was received in the first quarter of 2021 and the Company recognized that amount as a gain in selling, general and administrative expenses in the same period.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Acquisition and disposition related contingencies
The Company is liable for contingent consideration in connection with certain of its acquisitions. As of SeptemberJune 30, 2017,2022, total potential acquisition-related contingent consideration ranged from zero to approximately $8.6$1.9 million and would be payable upon the achievement of specific performance metrics by certain of the acquired companies over the next 2.8 years of operations. See Note 4 - Acquisitions to these condensed consolidated financial statements for further discussionthree months.
During 2018, the Company sold a subsidiary in the Products and Systems segment. As part of the 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 $0.8 million is remaining as of June 30, 2022. 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. As of June 30, 2022, approximately $0.8 million is remaining on the amended purchase commitment. The agreement is based on third party pricing and the Company’s acquisitions.planned purchase requirements over the duration of the extension to meet the minimum contractual purchases.
13.15. Segment Disclosure
The Company’s three3 operating segments are:
•Services. This segment provides asset protection solutions primarilypredominantly 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 andNDT, 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 globalselect markets principally inwithin Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.
•Products and Systems. 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.
Costs incurred for general corporate services, including finance, legal, and certain other costs that are provided to the segments are reported within Corporate and eliminations. During the first quarter of 2022 the Company finalized a transfer pricing study which resulted in additional costs being allocated from Corporate to the operating segments with the majority of the costs allocated to the Services segment. These costs are reflected in operating income (loss) of each segment. Sales to the International segment from the Products and Systems segment and subsequent sales by the International segment of the same items are recorded and reflected in the operating performance of both segments. Additionally, engineering charges and royalty fees charged to the Services and International segments by the Products and Systems segment are reflected in the operating performance of each segment. Allsegment
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 transactionsas human resources, information technology and training are eliminated inallocated to the Company’s consolidatedsegments. Segment income from operations excludes interest and other financial reporting.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.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Selected consolidated financial information by segment for the periods shown was as follows (intercompanyfollows: (with intercompany transactions are eliminated in Corporate and eliminations):
| | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
| 2022 | | 2021 | 2022 | | 2021 |
Revenue | | | | | | |
Services | $ | 149,528 | | | $ | 144,977 | | $ | 282,474 | | | $ | 269,275 | |
International | 29,610 | | | 31,951 | | 57,748 | | | 59,599 | |
Products and Systems | 2,652 | | | 3,203 | | 5,588 | | | 6,191 | |
Corporate and eliminations | (2,759) | | | (2,454) | | (5,117) | | | (3,653) | |
| $ | 179,031 | | | $ | 177,677 | | $ | 340,693 | | | $ | 331,412 | |
| | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
| 2022 | | 2021 | 2022 | | 2021 |
Gross profit | | | | | | |
Services | $ | 42,954 | | | $ | 43,761 | | $ | 73,479 | | | $ | 74,837 | |
International | 9,440 | | | 9,615 | | 17,630 | | | 17,240 | |
Products and Systems | 1,157 | | | 1,952 | | 2,325 | | | 3,233 | |
Corporate and eliminations | 7 | | | 8 | | 16 | | | 27 | |
| $ | 53,558 | | | $ | 55,336 | | $ | 93,450 | | | $ | 95,337 | |
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Revenues | |
| | |
| | | | |
Services | $ | 137,194 |
| | $ | 127,153 |
| | $ | 397,565 |
| | $ | 395,089 |
|
International | 38,200 |
| | 37,922 |
| | 106,360 |
| | 105,275 |
|
Products and Systems | 6,268 |
| | 6,807 |
| | 16,925 |
| | 19,955 |
|
Corporate and eliminations | (2,092 | ) | | (3,071 | ) | | (7,524 | ) | | (5,713 | ) |
| $ | 179,570 |
| | $ | 168,811 |
| | $ | 513,326 |
| | $ | 514,606 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Gross profit | |
| | |
| | | | |
Services | $ | 34,729 |
| | $ | 33,704 |
| | $ | 100,432 |
| | $ | 102,652 |
|
International | 10,432 |
| | 13,133 |
| | 29,720 |
| | 33,673 |
|
Products and Systems | 2,753 |
| | 3,686 |
| | 7,313 |
| | 9,475 |
|
Corporate and eliminations | (17 | ) | | 128 |
| | (73 | ) | | 356 |
|
| $ | 47,897 |
| | $ | 50,651 |
| | $ | 137,392 |
| | $ | 146,156 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Income (loss) from operations | |
| | |
| | | | |
Services | $ | 11,699 |
| | $ | 12,221 |
| | $ | 31,211 |
| | $ | 30,932 |
|
International | 1,023 |
| | 5,751 |
| | 3,866 |
| | 8,925 |
|
Products and Systems | (15,573 | ) | | 806 |
| | (16,913 | ) | | 560 |
|
Corporate and eliminations | (7,524 | ) | | (6,662 | ) | | (20,287 | ) | | (17,816 | ) |
| $ | (10,375 | ) | | $ | 12,116 |
| | $ | (2,123 | ) | | $ | 22,601 |
|
Income (loss) from operations by operating segment includes intercompany transactions, which are eliminated in Corporate and eliminations. | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
| 2022 | | 2021 | 2022 | | 2021 |
Income (loss) from operations | | | | | | |
Services | $ | 14,855 | | | $ | 18,358 | | $ | 18,615 | | | $ | 22,906 | |
International | 1,580 | | | 1,809 | | 1,864 | | | 989 | |
Products and Systems | (420) | | | 209 | | (1,002) | | | (372) | |
Corporate and eliminations | (6,439) | | | (9,002) | | (14,600) | | | (16,895) | |
| $ | 9,576 | | | $ | 11,374 | | $ | 4,877 | | | $ | 6,628 | |
| | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
| 2022 | | 2021 | 2022 | | 2021 |
Depreciation and amortization | | | | | | |
Services | $ | 6,166 | | | $ | 6,211 | | $ | 12,759 | | | $ | 12,325 | |
International | 1,919 | | | 2,175 | | 3,977 | | | 4,385 | |
Products and Systems | 120 | | | 215 | | 337 | | | 443 | |
Corporate and eliminations | (77) | | | 31 | | (138) | | | 44 | |
| $ | 8,128 | | | $ | 8,632 | | $ | 16,935 | | | $ | 17,197 | |
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
Depreciation and amortization | |
| | |
| | |
| | |
|
Services | $ | 5,543 |
| | $ | 5,516 |
| | $ | 16,330 |
| | $ | 17,224 |
|
International | 2,004 |
| | 1,958 |
| | 5,736 |
| | 5,881 |
|
Products and Systems | 594 |
| | 552 |
| | 1,746 |
| | 1,718 |
|
Corporate and eliminations | (46 | ) | | (107 | ) | | (168 | ) | | (260 | ) |
| $ | 8,095 |
| | $ | 7,919 |
| | $ | 23,644 |
| | $ | 24,563 |
|
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Intangible assets, net | |
| | |
|
Services | $ | 24,951 |
| | $ | 19,550 |
|
International | 14,228 |
| | 14,139 |
|
Products and Systems | 2,309 |
| | 5,482 |
|
Corporate and eliminations | 754 |
| | 836 |
|
| $ | 42,242 |
| | $ | 40,007 |
|
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Intangible assets, net | | | |
Services | $ | 47,900 | | | $ | 51,862 | |
International | 5,071 | | | 6,344 | |
Products and Systems | 1,182 | | | 1,042 | |
Corporate and eliminations | 125 | | | 133 | |
| $ | 54,278 | | | $ | 59,381 | |
| | | September 30, 2017 | | December 31, 2016 | | June 30, 2022 | | December 31, 2021 |
Total assets | |
| | |
| Total assets | | | |
Services | $ | 306,323 |
| | $ | 291,539 |
| Services | $ | 428,218 | | | $ | 424,058 | |
International | 150,555 |
| | 130,427 |
| International | 101,086 | | | 111,619 | |
Products and Systems | 13,944 |
| | 28,964 |
| Products and Systems | 11,476 | | | 10,532 | |
Corporate and eliminations | 13,600 |
| | 18,497 |
| Corporate and eliminations | 14,762 | | | 15,986 | |
| $ | 484,422 |
| | $ | 469,427 |
| | $ | 555,542 | | | $ | 562,195 | |
RevenuesRefer to Note 2–Revenue, for revenue by geographic area for the three and ninesix months ended SeptemberJune 30, 20172022 and 2016, respectively, were as follows:2021.
16. Subsequent Events
On August 1, 2022 Mistras Group, Inc. entered into a credit agreement (the "Credit Agreement") with JPMorgan Chase Bank N.A., as administrative agent for the lenders and a lender, BofA Securities as Syndication Agent and a lender, and the other lenders set forth in the Credit Agreement.
The Credit Agreement was filed as Exhibit 10.1 to the Company's Form 8-K filed with the SEC on August 2, 2022.
The Credit Agreement, among other things, provides the Company with a $190 million 5-year committed revolving credit facility and a $125 million term loan. The Credit Agreement has a maturity date of July 30, 2027 and permits the Company to borrow up to $100 million in non-US dollar currencies and to use up to $20 million of the credit limit for the issuance of letters of credit. Borrowings bear interest at Secured Overnight Financing Rate ("SOFR") plus a credit spread adjustment and applicable SOFR margin ranging from 1.25% to 2.75%, based upon our Total Consolidated Debt Leverage Ratio. We have the benefit of the lowest SOFR margin if our Total Consolidated Debt Leverage Ratio is equal to or less than 1.25 to 1, and the margin increases as the ratio increases, to the maximum margin if the ratio is greater than 3.75 to 1. The Credit Agreement is secured by liens on substantially all the assets of the Company and certain of its U.S subsidiaries and is guaranteed by those U.S. subsidiaries.
|
| | | | | | | | | | | | | | | |
| 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 |
|
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed ConsolidatedManagement's Discussion and Analysis of Financial StatementsCondition and Results of Operations
(tabular dollars and sharesare 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.
ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (“MD&A”) includesprovides a narrative explanation and analysisdiscussion of our results of operations and financial conditionposition for the three and ninesix months ended SeptemberJune 30, 20172022 and September 30, 2016.2021. The MD&A should be read together with our condensed consolidated financial statementsUnaudited Condensed Consolidated Financial Statements and related notes included in Item 1 in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our TransitionAnnual Report on Form 10-K for the transition periodyear ended December 31, 2016,2021, filed with the Securities and Exchange Commission on March 20, 201714, 2022 (“2016 Transition2021 Annual Report”). Unless otherwise specified or the context otherwise requires, “Mistras,” “the Company,” “we,” “us” and “our” refer to Mistras Group, Inc. and its consolidated subsidiaries. The MD&A includes disclosure in the following areas:sections:
•Forward-Looking Statements
•Overview
•Note about Non-GAAP Measures
•Consolidated Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Policies and Estimates
Forward-Looking Statements
This report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”). Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.
In some cases, you can identify forward-looking statements by terminology, such as “goals,” or “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “could,” “should,” “would,” “predicts,” “appears,” “projects,” or the negative of such terms or other similar expressions. You are urged not to place undue reliance on any such forward-looking statements, any of which may turn out to be wrong due to inaccurate assumptions, various risks, uncertainties or other factors known and unknown. Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those discussed in the “Business—Forward-Looking Statements,” and “Risk Factors” sections of our 2016 Transition2021 Annual Report as well as those discussed in this Quarterly Report on Form 10-Q and in our other filings with the SecuritiesSEC.
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 significant 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.
The Company is currently unable to predict with certainty the overall impact that the factors discussed above and the effect of the Russian-Ukrainian conflict may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine. To date, the Company’s European operations have begun to see increased costs associated with higher energy costs, among others, due in part to the on-going conflict. The Company will continue to monitor market conditions and respond accordingly.
Overview
We offer our customers “one source for asset protection solutions”® and areThe Company is a leading global“one source” multinational provider of integrated technology-enabled asset protection solutions usedhelping to evaluatemaximize the structural integritysafety and reliability ofoperational uptime for civilization’s most critical energy, industrial and public infrastructure. We combine industry-leading productscivil assets.
Backed by an innovative, data-driven asset protection portfolio, proprietary technologies, strong commitment to Environmental, Social, and Governance (ESG) initiatives and decades-long legacy of industry leadership, the Company helps clients with asset-intensive infrastructure in the oil and gas, aerospace and defense, industrials, power generation and transmission (including alternative and renewable energy), other process industries and infrastructure, research and engineering and other industries
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
towards achieving and maintaining operational excellence. By supporting these organizations that help fuel our vehicles and power our society; inspecting components that are trusted for commercial, defense, and space craft; and building real-time monitoring systems to help avoid catastrophic incidents, the Company helps the world at large.
The Company enhances value for its clients by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial Internet of Things ("IoT")-connected digital software and monitoring solutions, including OneSuite™, which serves as an ecosystem platform, pulling together all of the Company’s software and data services capabilities, for the benefit of its customers.
The Company’s core capabilities also include non-destructive testing (“NDT”) field inspections enhanced by advanced robotics, laboratory quality control and assurance testing, sensing technologies expertise inand NDT equipment, asset and mechanical integrity (MI), Non-Destructive Testing (NDT), Destructive Testing (DT),engineering services, and light mechanical maintenance and predictive maintenance (PdM) services, process and fixed asset engineering and consulting services, proprietary data analysis and our world class enterprise inspection databaseaccess services.
management and analysis software, PCMS, to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity management and assessments. These mission critical solutions enhance our customers’ ability to comply with governmental safety and environmental regulations, extend the useful life of their assets, increase productivity, minimize repair costs, manage risk and avoid catastrophic disasters. Our operations consist of three reportable segments: Services, International, and Products and Systems.
•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.
•International offers services, products and systems similar to those of the other segments to globalselect markets principally inwithin Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.
•Products and Systems designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States.
Given the role our solutions play in ensuringenhancing the safe and efficient operation of infrastructure, we providehave historically provided a majority of our servicessolutions to our customers on a regular, recurring basis. We serveperform these services largely at our customers’ facilities, while primarily servicing our aerospace customers at our network of state-of-the-art, in-house laboratories. These solutions typically include NDT and inspection services, and can also include a global customer basewide range of companies with asset-intensive infrastructure,mechanical services, including companies in the oilheat tracing, pre-inspection insulation stripping, coating applications, re-insulation, engineering assessments and gas (downstream, midstream, upstreamlong-term condition-monitoring. Under this business model, many customers outsource their inspection to us on a “run and petrochemical), power generation (natural gas, fossil, nuclear, alternative, renewable, and transmission and distribution), public infrastructure, chemicals, commercial aerospace and defense, transportation, primary metals and metalworking, pharmaceutical/biotechnology and food processing industries and research and engineering institutions.maintain” basis. We have established long-term relationships as a critical solutions provider to many of the leading companies with asset-intensive infrastructure in our target markets. These markets include companies in the oil and gas, aerospace and defense, industrials, power generation and transmission (including alternative and renewable energy), other process industries and infrastructure, research and engineering and other industries.
We have focused on introducingproviding our advanced asset protection solutions to our customers using proprietary, technology-enabled software and testing instruments, including those developed by our Products and Systems segment. We have made a number ofnumerous acquisitions in an effort to grow our base of experienced, certified personnel, expand our service lines and technical capabilities, increase our geographical reach, complement our existing offerings, and leverage our fixed costs. We have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the integration of acquired companies. These acquisitions have provided us with additional service lines, technologies, resources and customers thatwhich we believe will enhance our advantages over our competition.
Demand for outsourced asset protection solutions has generally increased over the last ten years, creating demand from which our entire industry has benefited. We believe continuedlong-term growth can be realized in all of our target markets. For mostOur level of 2017, current marketbusiness and financial results are impacted by world-wide macro- and micro-economic conditions generally, as well as those within our target markets. Among other things, we expect the timing of our oil and gas customers inspection spend to be impacted by oil price fluctuations.
We have continued providing our customers with an innovative asset protection software ecosystem through our MISTRAS OneSuite platform. The software platform offers functions of MISTRAS' 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 85 plus applications being offered on one centralized platform.
We have continued to develop new technologies to provide monitoring of 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
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
maximize uptime, performance and safety of wind turbine blades. This tool provides additional growth and expansion of our capabilities to serve both new and existing wind turbines and greatly enhances our product offerings within the renewable energy industry.
Recent Developments
The COVID-19 coronavirus (COVID-19) pandemic has continued to cause disruption and volatility in domestic and international markets although conditions continue to improve during 2022 as compared to 2021. The Company’s businesses have been soft, drivenclassified as non-healthcare critical infrastructure as defined by lower oil prices which have caused many ofthe U.S. Centers for Disease Control and Prevention (CDC). Our facilities, and the Company’s customers facilities as well, have remained open with staffing modifications and precautionary procedures taken as necessary.
Overall, we have taken actions to curtail spendinghelp ensure the health and safety of our employees and those of our customers and suppliers; maintain business continuity and financial strength and stability; and serve our customers as they provide essential products and services to the world.
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.
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 June 30, 2022, the cash balance was approximately $18.6 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 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 servicesbusiness and products. However, duringoperational results.
We are currently unable to predict the falloverall impact that the COVID-19 pandemic uncertainty, volatility in oil prices and climate change initiatives to reduce the use of 2017, market conditions turned modestly positive and we believe this will continue for the remainder of 2017 and through the spring of 2018.
Results of Operations
Condensed consolidatedfossil fuels may have on our business, results of operations, forliquidity or in other ways which we cannot yet determine.
The Company is currently unable to predict with certainty the threeoverall impact that the factors discussed above and nine months ended September 30, 2017the effect of the Russian-Ukrainian conflict may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine. To date, the Company’s European operations have begun to see increased costs associated with higher energy costs, among others, due in part to the Russian-Ukrainian conflict. The Company will continue to monitor market conditions and September 30, 2016 were as follows:respond accordingly. Refer to Item 1A. Risk Factors in Part I of our 2021 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
The Company prepares its consolidated financial statements in accordance with U.S. GAAP. In this MD&A under the heading "Income (loss) from Operations", the non-GAAP financial performance measure "Income (Loss)(loss) before special items” is used for each of our three operating segments, the Corporate segment and the "Total Company", with tables reconciling the measure to a financial measure under GAAP. This non-GAAP measurepresentation excludes from the GAAP measure "Income (Loss)(loss) from Operations" (a) transaction expenses related to acquisitions, such as professional fees and due diligence costs, (b) the net changes in the fair value of acquisition-related contingent consideration liabilities, (c) impairment charges, (d) reorganization and (c)other costs, which includes items such as severance, labor relations matters and asset and lease termination costs and (e) other special items. These itemsadjustments have been excluded from the GAAP measure because these expenses and credits are not related to the Company’sour or Segment’sany individual segment's core business operations. The acquisition related costs and special items can be a net expense or credit in any given period. Our management uses this non-GAAP measure as a measure of operating performance and liquidity to assist in comparing performance from period to period on a consistent basis, as a measure for planning and forecasting overall
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
expectations and for evaluating actual results against such expectations. We believe investors and other users of our financial statements benefit from the presentation of "Income (loss) before special items"this non-GAAP measure in evaluating our performance. Income (loss) before special items excludes the identified adjustments, which provides an additional tooltools to compare our core business operating performance on a consistent basis and measure underlying trends and results in our business. Income (loss) before special items is not used to determine incentive compensation for executives or employees.employees, nor is it a replacement for the reported GAAP financial performance and/or necessarily comparable to the non-GAAP financial measures of other companies.
Results of Operations
Condensed consolidated results of operations for the three and six months ended June 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
| 2022 | | 2021 | 2022 | | 2021 |
Revenues | $ | 179,031 | | | $ | 177,677 | | $ | 340,693 | | | $ | 331,412 | |
Gross profit | 53,558 | | | 55,336 | | 93,450 | | | 95,337 | |
Gross profit as a % of Revenue | 29.9 | % | | 31.1 | % | 27.4 | % | | 28.8 | % |
| | | | | | |
| | | | | | |
Income from operations | 9,576 | | | 11,374 | | 4,877 | | | 6,628 | |
Income from Operations as a % of Revenue | 5.3 | % | | 6.4 | % | 1.4 | % | | 2.0 | % |
| | | | | | |
Income before provision (benefit) for income taxes | 7,459 | | | 8,219 | | 822 | | | 260 | |
| | | | | | |
Net Income (loss) | 4,666 | | | 5,945 | | (687) | | | 586 | |
| | | | | | |
Net Income (loss) attributable to Mistras Group, Inc. | $ | 4,643 | | | $ | 5,937 | | $ | (720) | | | $ | 575 | |
Revenue
RevenuesRevenue was $179.0 million for the three months ended SeptemberJune 30, 2017 were $179.6 million,2022, an increase of $10.8$1.4 million, or 6%0.8%, compared with the three months ended SeptemberJune 30, 2016. Revenues2021. Revenue for the ninesix months ended SeptemberJune 30, 2017 were $513.32022 was $340.7 million, a decreasean increase of $1.3$9.3 million, or less than 1%2.8%, compared with the ninesix months ended SeptemberJune 30, 2016.2021.
RevenuesRevenue by segment for the three and ninesix months ended SeptemberJune 30, 20172022 and September 30, 2016 were2021 was as follows:
| | | | | | | | | | | | Three months ended June 30, | Six months ended June 30, |
| Three months ended | | Nine months ended | | 2022 | | 2021 | 2022 | | 2021 |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 | |
| ($ in thousands) | | ($ in thousands) | |
Revenues | |
| | |
| | | | | |
Revenue | | Revenue | | | | | | |
Services | $ | 137,194 |
| | $ | 127,153 |
| | $ | 397,565 |
| | $ | 395,089 |
| Services | $ | 149,528 | | | $ | 144,977 | | $ | 282,474 | | | $ | 269,275 | |
International | 38,200 |
| | 37,922 |
| | 106,360 |
| | 105,275 |
| International | 29,610 | | | 31,951 | | 57,748 | | | 59,599 | |
Products and Systems | 6,268 |
| | 6,807 |
| | 16,925 |
| | 19,955 |
| Products and Systems | 2,652 | | | 3,203 | | 5,588 | | | 6,191 | |
Corporate and eliminations | (2,092 | ) | | (3,071 | ) | | (7,524 | ) | | (5,713 | ) | Corporate and eliminations | (2,759) | | | (2,454) | | (5,117) | | | (3,653) | |
| $ | 179,570 |
| | $ | 168,811 |
| | $ | 513,326 |
| | $ | 514,606 |
| | $ | 179,031 | | | $ | 177,677 | | $ | 340,693 | | | $ | 331,412 | |
Three Months
In the three months ended SeptemberJune 30, 2017,2022, total revenue increased 0.8% versus the prior year comparable period due predominantly to a low single-digit organic increase. Services segment revenuesrevenue increased 8%3.1% due to a combination of acquisitionsingle-digit organic growth and International segment revenue decreased (7.3)%, due predominantly to low single digit favorable impactsdouble-digit unfavorable impact of foreign exchange rates andwhich was offset by low single-digit 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 revenuesrevenue decreased by 8% driven by lower$0.6 million, due to decreased sales volume.volume as compared to the prior period.
Oil and gas customer revenuesrevenue comprised approximately 54%57% and 56%54% of total Company revenuesrevenue for the three months ended SeptemberJune 30, 20172022 and 2016,2021, respectively. Aerospace and defense customer revenue comprised approximately 13% and 10% of total revenue for the three months ended June 30, 2022 and 2021, respectively. The Company’s top ten customers comprised approximately 36%33% of total revenuesrevenue for the three months ended SeptemberJune 30, 2017,2022, as compared to 38%35% for the three months ended SeptemberJune 30, 2016. One2021, with no customer BP plc., accountedaccounting for approximately 10% and 14%or more of total revenues, respectively, for the threerevenue in either three-month period.
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Six months ended September 30, 2017 and three months ended September 30, 2016.
Nine Months
In the ninesix months ended SeptemberJune 30, 2017, Services segment revenues2022, total revenue increased 1%,2.8% versus the comparable prior period. The increase was due to organic growth in our core business as acquisition growth slightly offsetour end markets recover from the effects of COVID-19. In addition, the Company realized a low single digit organic decline. International segment revenues increased 1%, as low single digit organic growth slightly offset a low single digitsingle-digit unfavorable revenue impact offrom foreign exchange rates. ProductsOur Services segment revenuesrevenue increased 4.9% due predominantly to organic growth in end-markets. International segment revenue decreased 15%(3.1)% due to lower sales volume.a high single-digit unfavorable revenue impact from foreign exchange rates which was partially offset by mid single-digit favorable organic growth.
Oil and gas revenuescustomer revenue comprised approximately 58%57% and 57%55% of total Company revenuesrevenue for the nine month periodssix months ended SeptemberJune 30, 20172022 and September2021, respectively. Aerospace and defense customer revenue comprised approximately 12% and 10% of total revenue for the six months ended June 30, 2016,2022 and 2021, respectively. The Company’s top ten customers comprised approximately 38%33% of total revenues for both the nine month periods ended September 30, 2017 and September 30, 2016. One customer, BP plc., accounted for approximately 11% of our total revenuesrevenue for the ninesix months ended SeptemberJune 30, 2017 and 12%2022, as compared to 35% for the ninesix months ended SeptemberJune 30, 2016.2021, with no customer accounting for 10% or more of total revenue in either six-month period.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | |
Oil and Gas Revenue by sub-category | | | | | | | |
Upstream | $ | 39,443 | | | $ | 36,205 | | | $ | 81,108 | | | $ | 70,131 | |
Midstream | 32,949 | | | 29,797 | | | 57,856 | | | 52,235 | |
Downstream | 28,873 | | | 29,574 | | | 56,524 | | | 60,422 | |
Total | $ | 101,265 | | | $ | 95,576 | | | $ | 195,488 | | | $ | 182,788 | |
Oil and gas upstream customer revenue increased approximately $11.0 million, or 16%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, and $3.2 million, or 9% for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 due to continued market share gains and expanded exploration operations compared to the prior period.
Midstream customer revenues increased approximately $5.6 million, or 11%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, and $3.2 million, or 11% for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 due to increased pipe inspection services performed as compared to the prior year.
Downstream customer revenue decreased $(3.9) million, or (6)%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, and $(0.7) million, or (2)% for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 primarily due to delays in timing associated with customer turnarounds.
Gross Profit
Gross profit decreased by $2.8$(1.8) million, or 5%3.2%, in the three months ended SeptemberJune 30, 2017, despite a sales2022 versus the prior year comparable period, on an increase in revenue of 6%0.8%. During the nine month period ended September 30, 2017, gross
Gross profit had a year-on-year decrease of $8.8decreased by $(1.9) million, or 6%2.0%, in the six months ended June 30, 2022 on a sales declinean increase in revenue of less than 1%2.8%.
Gross profit by segment for the three and ninesix months ended SeptemberJune 30, 20172022 and September 30, 20162021 was as follows:
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
| | | Three months ended | | Nine months ended | | Three months ended June 30, | Six months ended June 30, |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 | | 2022 | | 2021 | 2022 | | 2021 |
| ($ in thousands) | | ($ in thousands) | |
Gross profit | |
| | |
| | | | | Gross profit | | | | | | |
Services | $ | 34,729 |
| | $ | 33,704 |
| | $ | 100,432 |
| | $ | 102,652 |
| Services | $ | 42,954 | | | $ | 43,761 | | $ | 73,479 | | | $ | 74,837 | |
% of segment revenue | 25.3 | % | | 26.5 | % | | 25.3 | % | | 26.0 | % | % of segment revenue | 28.7 | % | | 30.2 | % | 26.0 | % | | 27.8 | % |
International | 10,432 |
| | 13,133 |
| | 29,720 |
| | 33,673 |
| International | 9,440 | | | 9,615 | | 17,630 | | | 17,240 | |
% of segment revenue | 27.3 | % | | 34.6 | % | | 27.9 | % | | 32.0 | % | % of segment revenue | 31.9 | % | | 30.1 | % | 30.5 | % | | 28.9 | % |
Products and Systems | 2,753 |
| | 3,686 |
| | 7,313 |
| | 9,475 |
| Products and Systems | 1,157 | | | 1,952 | | 2,325 | | | 3,233 | |
% of segment revenue | 43.9 | % | | 54.2 | % | | 43.2 | % | | 47.5 | % | % of segment revenue | 43.6 | % | | 60.9 | % | 41.6 | % | | 52.2 | % |
Corporate and eliminations | (17 | ) | | 128 |
| | (73 | ) | | 356 |
| Corporate and eliminations | 7 | | | 8 | | 16 | | | 27 | |
| $ | 47,897 |
| | $ | 50,651 |
| | $ | 137,392 |
| | $ | 146,156 |
| | $ | 53,558 | | | $ | 55,336 | | $ | 93,450 | | | $ | 95,337 | |
% of total revenue | 26.7 | % | | 30.0 | % | | 26.8 | % | | 28.4 | % | % of total revenue | 29.9 | % | | 31.1 | % | 27.4 | % | | 28.8 | % |
Three monthsMonths
Gross profit margin was 26.7%29.9% and 30.0%31.1% for the three monththree-month periods ended SeptemberJune 30, 20172022 and 2016,2021, respectively. Services segment realized a 1.5% reduction in gross profit margins had a year-on-year decline of 120 basis pointsmargin to 25.3% in28.7% during the three months ended SeptemberJune 30, 2017, driven2022. This was primarily by an adverse impact from the 2017 summer hurricanes, which reduced revenues by
more than $1 million while labor costs were largely unchanged, as the Company chose to pay its technicians who were unable to work due to these events.higher benefit costs in the US and the end of government wage subsidies received in Canada, both as compared to the prior year period. International segment realized a 1.8% increase in gross margins had a year-on-year decline of 730 basis pointsprofit margin to 27.3% in31.9% during the three months ended SeptemberJune 30, 2017. This decline was2022 due primarily driven by lower revenues into continued recovery and sales within the Company's German subsidiary, as well as poor margins on a large contract and lower utilization of technical labor in the UK. Products and Systems segment gross margin declined by 1030 basis points for the three months ended September 30, 2017 to 43.9%, driven by lower sales volumes.
Nine months
Gross profit margin was 26.8% and 28.4% for the nine months ended September 30, 2017 and 2016, respectively. Services segment gross profit margins declined by 70 basis points to 25.3% in the nine months ended September 30, 2017, driven primarily by the aforementioned 2017 hurricane impact 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 the nine months ended September 30, 2017, driven primarily by lower revenues in the Company’s German subsidiary, as well poor margins on a large contract and lower utilization of technical labor in the UK.aerospace end market. Products and Systems segment gross margin decreased by 430 basis points17.3% to 43.2%43.6% during the three months ended June, 2022 due to unfavorable sales mix.
Six months
Gross profit margin was 27.4%and 28.8% for the ninesix months ended SeptemberJune 30, 2017, driven2022 and 2021, respectively. Gross profit margin decreased primarily due to higher benefit costs and the end of government wage subsidies received in Canada within the Services segment, partially offset by lowercontinued recovery and sales volumes.within the aerospace end market within the International segment.
Operating Expenses
Operating expenses for the three and six months ended June 30, 2022 and 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
| 2022 | | 2021 | 2022 | | 2021 |
| | |
Operating Expenses | | | | | | |
Selling, general and administrative expenses | $ | 40,676 | | | $ | 39,719 | | $ | 82,712 | | | $ | 79,358 | |
Bad debt provision for troubled customers, net of recoveries | 289 | | | — | | 289 | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
Research and engineering | 522 | | | 620 | | 1,073 | | | 1,347 | |
Depreciation and amortization | 2,635 | | | 3,078 | | 5,430 | | | 6,152 | |
| | | | | | |
Legal settlement and insurance recoveries, net | (153) | | | — | | (994) | | | 1,030 | |
Acquisition-related expense, net | 13 | | | 545 | | 63 | | | 822 | |
| | | | | | |
| | | | | | |
Three Months
Total operating expenses were flat for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Selling, general and administrative expenses increased $1.0 million during the three months ended June 30, 2022 compared to the three months ended June 30, 2021, due to the reversal of remaining COVID-19 temporary cost reductions in August 2021, which had been initially implemented in 2020. Depreciation and amortization decreased $(0.4) million during the
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 June 30, 2022 compared to the three months ended June 30, 2021. During the three months ended June 30, 2022 a $0.2 million insurance recovery was recorded.
Six months
Operating expenses decreased $(0.1) million, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. Selling, general, and administrative expenses increased $3.4 million during the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to the reversal of remaining COVID-19 temporary cost reductions in August 2021, which had been initially implemented in 2020, and wage subsidies received in 2021. Legal settlements, net of insurance recoveries for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 decreased $2.6 million due primarily to insurance recoveries received in the first quarter of 2022. Depreciation and amortization decreased $(0.7) million during the six months ended June 30, 2022 compared to the six months ended June 30, 2021. Acquisition-related expense decreased $(0.8) million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 due to remeasurement of acquisition related contingent consideration which occurred in 2021.
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Income (Loss)(loss) from Operations
The following table shows a reconciliation of the income (loss) from operations to income (loss) before special items for each of the Company'sour three segments, Corporate and forEliminations and the Company in total: | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
| 2022 | | 2021 | 2022 | | 2021 |
| | |
Services: | | | | | | |
Income from operations (GAAP) | $ | 14,855 | | | $ | 18,358 | | $ | 18,615 | | | $ | 22,906 | |
Bad debt provision for troubled customers, net of recoveries | 289 | | | — | | 289 | | | — | |
| | | | | | |
| | | | | | |
Reorganization and other costs | 1 | | | 26 | | 28 | | | 97 | |
Legal settlement and insurance recoveries, net | — | | | — | | (841) | | | 1,650 | |
Acquisition-related expense, net | — | | | 545 | | 45 | | | 788 | |
Income from operations before special items (non-GAAP) | $ | 15,145 | | | $ | 18,929 | | $ | 18,136 | | | $ | 25,441 | |
International: | | | | | | |
Income from operations (GAAP) | $ | 1,580 | | | $ | 1,809 | | $ | 1,864 | | | $ | 989 | |
| | | | | | |
| | | | | | |
Reorganization and other costs | (187) | | | 30 | | (99) | | | 126 | |
| | | | | | |
Income from operations before special items (non-GAAP) | $ | 1,393 | | | $ | 1,839 | | $ | 1,765 | | | $ | 1,115 | |
Products and Systems: | | | | | | |
Income (loss) from operations (GAAP) | $ | (420) | | | $ | 209 | | $ | (1,002) | | | $ | (372) | |
| | | | | | |
Reorganization and other costs | — | | | — | | — | | | 27 | |
Income (loss) from operations (GAAP) | $ | (420) | | | $ | 209 | | $ | (1,002) | | | $ | (345) | |
Corporate and Eliminations: | | | | | | |
Loss from operations (GAAP) | $ | (6,439) | | | $ | (9,002) | | $ | (14,600) | | | $ | (16,895) | |
Loss on debt modification | — | | | 277 | | — | | | 277 | |
Reorganization and other costs | 6 | | | — | | 6 | | | — | |
Acquisition-related expense, net | 13 | | | — | | 18 | | | 34 | |
Legal settlement and insurance recoveries, net | (153) | | | — | | (153) | | | (620) | |
Loss from operations before special items (non-GAAP) | $ | (6,573) | | | $ | (8,725) | | $ | (14,729) | | | $ | (17,204) | |
Total Company: | | | | | | |
Income from operations (GAAP) | $ | 9,576 | | | $ | 11,374 | | $ | 4,877 | | | $ | 6,628 | |
Bad debt provision for troubled customers, net of recoveries | 289 | | | — | | 289 | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
Reorganization and other costs | (180) | | | 56 | | (65) | | | 250 | |
Loss on debt modification | — | | | 277 | | — | | | 277 | |
Legal settlement and insurance recoveries, net | (153) | | | — | | (994) | | | 1,030 | |
Acquisition-related expense, net | 13 | | | 545 | | 63 | | | 822 | |
Income from operations before special items (non-GAAP) | $ | 9,545 | | | $ | 12,252 | | $ | 4,170 | | | $ | 9,007 | |
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| ($ in thousands) | | ($ in thousands) |
Services: | |
| | |
| | | | |
Income from operations | $ | 11,699 |
| | $ | 12,221 |
| | $ | 31,211 |
| | $ | 30,932 |
|
Litigation charges | — |
| | — |
| | — |
| | 6,320 |
|
Bad debt provision for a customer bankruptcy | — |
| | — |
| | 1,200 |
| | — |
|
Severance costs | 163 |
| | 43 |
| | 493 |
| | 43 |
|
Asset write-offs and lease terminations | — |
| | — |
| | 123 |
| | — |
|
Acquisition-related expense (benefit), net | (126 | ) | | 345 |
| | (48 | ) | | (123 | ) |
Income before special items | 11,736 |
| | 12,609 |
| | 32,979 |
| | 37,172 |
|
International: | |
| | |
| | |
| | |
|
Income from operations | 1,023 |
| | 5,751 |
| | 3,866 |
| | 8,925 |
|
Severance costs | 379 |
| | 89 |
| | 455 |
| | 799 |
|
Acquisition-related expense (benefit), net | — |
| | 11 |
| | (501 | ) | | (53 | ) |
Income before special items | 1,402 |
| | 5,851 |
| | 3,820 |
| | 9,671 |
|
Products and Systems: | |
| | |
| | |
| | |
|
Income (loss) from operations | (15,573 | ) | | 806 |
| | (16,913 | ) | | 560 |
|
Impairment charges | 15,810 |
| | — |
| | 15,810 |
| | — |
|
Severance costs | — |
| | — |
| | — |
| | 17 |
|
Acquisition-related expense (benefit), net | — |
| | — |
| | — |
| | — |
|
Income (loss) before special items | 237 |
| | 806 |
| | (1,103 | ) | | 577 |
|
Corporate and Eliminations: | |
| | |
| | |
| | |
|
Loss from operations | (7,524 | ) | | (6,662 | ) | | (20,287 | ) | | (17,816 | ) |
Litigation charges | 1,200 |
| | — |
| | 1,200 |
| | — |
|
Severance costs | — |
| | 133 |
| | — |
| | 133 |
|
Acquisition-related expense (benefit), net | (122 | ) | | 28 |
| | (40 | ) | | 77 |
|
Loss before special items | (6,446 | ) | | (6,501 | ) | | (19,127 | ) | | (17,606 | ) |
Total Company | |
| | |
| | |
| | |
|
Income (loss) from operations | $ | (10,375 | ) | | $ | 12,116 |
| | $ | (2,123 | ) | | $ | 22,601 |
|
Litigation charges | 1,200 |
| | — |
| | 1,200 |
| | 6,320 |
|
Impairment charges | 15,810 |
| | — |
| | 15,810 |
| | — |
|
Bad debt provision for a customer bankruptcy | — |
| | — |
| | 1,200 |
| | — |
|
Severance costs | 542 |
| | 265 |
| | 948 |
| | 992 |
|
Asset write-offs and lease terminations | — |
| | — |
| | 123 |
| | — |
|
Acquisition-related expense (benefit), net | (248 | ) | | 384 |
| | (589 | ) | | (99 | ) |
Income before special items | $ | 6,929 |
| | $ | 12,765 |
| | $ | 16,569 |
| | $ | 29,814 |
|
See section Note About Non-GAAP Measures in this report for an explanation of the use of non-GAAP measurements.
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Three monthsMonths
For the three months ended SeptemberJune 30, 2017,2022, income from operations (GAAP) decreased $22.5$(1.8) million, or 186%, compared with the three months ended SeptemberJune 30, 2016,2021, while income before special items (non-GAAP) decreased $5.8 million, or
46%.$(2.7) million. As a percentage of revenues, income before special items declined by 370 basis points to 3.9% in the three months ended September 30, 2017 from 7.6% in the three months ended September 30, 2016.
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.
Nine months
For the nine months ended September 30, 2017, income from operations (GAAP) decreased $24.7 million, or 109% compared with the prior year, and income before special items (non-GAAP) decreased $13.2 million, or 44%. As a percentage of revenues,revenue, income before special items decreased by 260160 basis points to 3.2%5.3% in the ninethree months ended SeptemberJune 30, 2017, as compared to 5.8%2022 from 6.9% in the ninethree months ended SeptemberJune 30, 2016.2021.
Operating expenses increased $16.0 million duringSix months
For the ninesix months ended SeptemberJune 30, 2017, driven primarily2022, income (loss) from operations (GAAP) decreased $(1.8) million, compared with the six months ended June 30, 2021, while income (loss) from operations before special items (non-GAAP) decreased $(4.8) million. As a percentage of revenue, income (loss) from operations before special items decreased by the $15.8 million impairment charges150 basis points to 1.2% in the Products and Systems segment. In addition, there was a $2.0 million increasesix months ended June 30, 2022 from 2.7% in the six months ended June 30, 2021. During the six months ended June 30, 2022, the Company experienced overall organic growth offset by foreign currency transaction expenses for the Company, $2.3 million of additional operating expenses pertaining to Services segment acquisitions and $0.8 million of Corporate segment expenses, primarily professional fees. These increases were primarily offset by a $5.1 million decrease in litigation expenses for the respective periods.headwinds.
Interest Expense
Interest expense was approximately $1.1$2.1 million and $0.8$3.2 million for the three months ended SeptemberJune 30, 20172022 and 2016, respectively, and $3.12021, respectively. Interest expense was approximately $4.1 million and $2.2$6.4 million for the ninesix months ended SeptemberJune 30, 20172022 and 2016.2021, respectively. The increases weredecrease for both periods was a result of a change in the effective interest rate, due to increased borrowings ona lower leverage ratio and the Company's revolving lineelimination of credit.the minimum LIBOR floor in the May 2021 amendment to our credit agreement.
An amendment in May 2021 to our Credit Agreement 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%. This will reduce our interest rate, when LIBOR is below 1.0%.
Income Taxes
The Company’sOur effective income tax rate was approximately 39%37.4% and 36%27.7% for the three months ended SeptemberJune 30, 20172022 and 2016,2021, respectively. The Company'sOur effective income tax rate was approximately 42%183.6% and 34%(125.4)% for the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, respectively.
The increase in theeffective income tax rate for these respective periodsthe three months ended June 30, 2022 was higher than the statutory rate primarily due to a discrete item related to the impairment of goodwill and intangible assets in the Products and Systems reporting unit. Excluding this item, the$0.7 million valuation allowance recorded on a foreign jurisdiction. The effective income tax rate would have been 35% and 36%, respectively, for the three and nine months ended SeptemberJune 30, 2017.2021 was higher than the statutory rate due to earnings in jurisdictions with higher income tax rates than the United States.
The valuation allowance of $0.7 million has been recorded to recognize only the portion of the deferred tax assets that are more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.
The effective income tax rate for the six months ended June 30, 2022 was higher than the statutory rate due primarily to a $0.7 million valuation allowance recorded during the period which was related to a foreign jurisdiction. The effective income tax rate for the six months ended June 30, 2021 was lower than the statutory rate due to capitalization of certain non-US intercompany balances which resulted in a deductible foreign exchange loss in the US.
On December 27, 2020, the United States enacted the Consolidated Appropriations Act, 2021, (the "Appropriations Act") an additional stimulus package providing financial relief for individuals and small business. The Appropriations Act contains a variety of tax provisions, including full expensing of business meals in 2021 and 2022, and expansion of the employee retention tax credit. We evaluated the impact of this guidance on our consolidated financial position, results of operations, and cash flows, and it will not have a material impact.
Income tax expense varies as a function of pre-tax income and the level of non-deductible expenses, such as certain amounts of meals and entertainment expense, valuation allowances, and other permanent differences. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. Our effective income tax rate may fluctuate over the
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
next few years due to many variables including the amount and future geographic distribution of our pre-tax income, changes resulting from our acquisition strategy, and increases or decreases in our permanent differences.
Liquidity and Capital Resources
Cash flows are summarized in the table below:
|
| | | | | | | |
| Nine months ended |
| September 30, 2017 | | September 30, 2016 |
| ($ in thousands) |
Net cash provided by (used in): | |
| | |
|
Operating activities | $ | 35,226 |
| | $ | 52,109 |
|
Investing activities | (22,516 | ) | | (12,487 | ) |
Financing activities | (7,114 | ) | | (32,491 | ) |
Effect of exchange rate changes on cash | 2,113 |
| | (221 | ) |
Net change in cash and cash equivalents | $ | 7,709 |
| | $ | 6,910 |
|
| | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 |
| |
Net cash provided by (used in): | | | |
Operating activities | $ | 7,809 | | | $ | 18,126 | |
Investing activities | (6,499) | | | (10,318) | |
Financing activities | (5,056) | | | (12,970) | |
Effect of exchange rate changes on cash | (1,755) | | | (656) | |
Net change in cash and cash equivalents | $ | (5,501) | | | $ | (5,818) | |
Cash Flows from Operating Activities
During the ninesix months ended SeptemberJune 30, 2017,2022, cash provided by operating activities was $35.2$7.8 million, representing a year-on-year decrease of $16.9$(10.3) million, or 32%57%. The decrease was primarily attributable to a lower level of net income, as well as movements in working capital includingincrease in the 2017 paymentcourse of a $6.3 million legal settlement and thetiming of collections.normal operations.
Cash Flows from Investing Activities
During the ninesix months ended SeptemberJune 30, 2017,2022, cash used in investing activities was $22.5$6.5 million primarily attributable to a reduction in capital expenditures during the current period as compared with a use of cash of $12.5 million in the comparable period ofto the prior year. The first nine months of 2017 included increased outflows of $7.2 million related to acquisitions and an increase of $3.0 million for capital expenditures, as the Company was in the midst of its build-out in France to service an important new customer contract.period.
Cash Flows from Financing Activities
Net cash used in financing activities was $7.1$5.1 million for the ninesix months ended SeptemberJune 30, 2017. The Company borrowed $11.5 million, net, on its Credit Agreement,2022, compared to help fund the purchase of $15.9 million of treasury stock and towards the funding of $8.4 million for acquisitions. For the comparable period in 2016, net cash used in financing activities was $32.5of $13.0 million for the six months ended June 30, 2021. During the six months ended June 30, 2022, net repayments of which $28.9debt were approximately $6.6 million waslower as compared to reduce the Company's debt and capital lease obligations.2021 as cash flows were used to support operating activities.
Effect of Exchange Rate Changes on Cash and Cash Equivalents
The effect of exchange rate changes on our cash and cash equivalents was a net increasedecrease of $2.1$(1.8) million in the first ninesix months of 2017,ended June 30, 2022, compared to a $0.2decrease of $(0.7) million decrease for the first ninesix months ended June 30, 2021. The primary driver of 2016.the change was foreign currency fluctuations during the quarter related to the Euro and the US Dollar.
Cash Balance and Credit Facility Borrowings
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.”
As of SeptemberJune 30, 2017,2022, we had cash and cash equivalents totaling $26.9$18.6 million and available borrowing capacity$11.7 million of $74.9 millionunused commitments under our Credit Agreement with borrowings of $95.1$195.3 million and $5.0$3.0 million of letters of credit outstanding. We finance operations primarily through our existing cash balances, cash collected from operations, bank borrowings and capital lease financing. We believe these sources are sufficient to fund our operations for the foreseeable future.
As of SeptemberJune 30, 2017,2022, we were in compliance with the terms of the Credit Agreement and we will continuously monitor our compliance with the covenants contained in ourthe Credit Agreement.
Quarterly payments on the term loan increased to $5.0 million for each quarterly payment after March 31, 2022, with a final balloon payment at maturity.
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" and in Note 16 Subsequent Events of the Notes.
Contractual Obligations
There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2016 Transition Report.2021 Annual Report except as noted in Note 16 Subsequent Events.
Off-balance Sheet Arrangements
During the ninesix months ended SeptemberJune 30, 2017,2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the 2016 Transition2021 Annual Report.
ITEM 3.Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes to the Company’sour quantitative and qualitative disclosures about market risk as discussed in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” included in the 2016 Transition2021 Annual Report.
ITEM 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2017,Pursuant to Rule 13a-15(b) under the CompanyExchange Act, our management carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’sour President and Chief Executive Officer and the Company’sour Executive Vice President, Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures, as such term is(as defined in Rule 13a-15(e) of the Exchange Act.Act) and procedures. Based on theupon that evaluation, the Company’sour President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer haveand Treasurer concluded that, the Company’sas of June 30, 2022, our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.were effective.
Changes in Internal Control Overover Financial Reporting
There hashave been no changechanges in the Company’sour internal control over financial reporting that occurred during the Company’s quarter ended SeptemberJune 30, 20172022 that has materially affected, or isare reasonably likely to materially affect, suchour internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. ��Legal Proceedings
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 Transition2021 Annual Report, except as disclosed in such Note 12 (see below).
See Note 12 - 14-Commitments and Contingencies to the condensed consolidated financial statements included in this Quarterly Report for a description of our legal proceedings..
ITEM 1.A.Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors discussed under the “Risk Factors” section included in our 2016 Transition2021 Annual Report. ThereExcept as described below, there have been no material changes to the risk factors previously disclosed in the 2016 Transition2021 Annual Report.
ITEM 2.Unregistered Sale of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
None.
(b) Use of Proceeds from Public Offering of Common Stock
None.
(c) Repurchases of Our Equity Securities
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 |
April 30, 2022 | 31,508 | | | $ | 6.66 | | | — | | | $ | — | |
May 31, 2022 | 528 | | | $ | 5.42 | | | — | | | $ | — | |
June 30, 2022 | — | | | $ | — | | | — | | | $ | — | |
|
| | | | | | | | | | | | | |
Month Ending | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
July 31, 2017 | 94,877 |
| | $ | 21.08 |
| | 94,877 |
| | $ | 27,004,569 |
|
August 31, 2017 | 139,276 |
| | $ | 20.20 |
| | 90,490 |
| | $ | 25,081,657 |
|
September 30, 2017 | — |
| | $ | — |
| | — |
| | $ | 25,081,657 |
|
(1) On August 17, 2016, the Company entered into an agreement with its founder, Chairman and Chief Executive Officer, Dr. Sotirios Vahaviolos, which provides for the Company to repurchase up to 1 million shares of its common stock from Dr. Vahaviolos. The plan with Dr. Vahaviolos is included in the $50.0 million of purchases authorized by our Board of Directors described in footnote 2 below. All of the amounts in this column represent the purchases from Dr. Vahaviolos during the third quarter of 2017.
(2) - On October 7, 2015, the Company announced that its Board of Directors approved a share repurchase plan, which authorizes the expenditure of up to $50.0 million for the purchase of the Company's common stock.
ITEM 3.Defaults Upon Senior Securities
None.
ITEM 4.Mine Safety Disclosures
Not applicable.
ITEM 5.Other Information
None.
ITEM 6.Exhibits
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Exhibit No. | | Description | |
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Exhibit No. | | Description |
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101.INS | | XBRL Instance Document | |
| | | |
101.SCH | | XBRL Schema Document | |
| | | |
101.CAL | | XBRL Calculation Linkbase Document | |
| | | |
101.LAB | | XBRL Labels Linkbase Document | |
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101.PRE | | XBRL Presentation Linkbase Document | |
| | | |
101.DEF | | XBRL Definition Linkbase Document | |
_________________
Signatures
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.
|
| | | | | | | |
| MISTRAS GROUP, INC. |
| | |
| By: | /s/ Jonathan H. WolkEdward J. Prajzner |
| | Jonathan H. WolkEdward J. Prajzner |
| | Senior Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer |
| | (Principal Financial and Accounting Officer and duly authorized officer) |
Date: November 9, 2017August 5, 2022