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, 20192020
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- 34481001-34481
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:
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| | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $0.01 par value | MG | 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 every Interactive Data File required to be submitted 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 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.
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| | | | | | | | | | | | | |
Large accelerated filero | o |
| Accelerated filer | x |
Non-accelerated filero | o |
| Smaller reporting companyo | ☐ |
| |
| 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 OctoberJuly 31, 2019,2020, the registrant had 28,915,08829,110,362 shares of common 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)
| | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
ASSETS | (unaudited) | | |
| ASSETS | (unaudited) | | |
Current Assets | |
| | |
| Current Assets | | | |
Cash and cash equivalents | $ | 14,372 |
| | $ | 25,544 |
| Cash and cash equivalents | $ | 22,588 | | | $ | 15,016 | |
Accounts receivable, net | 148,024 |
| | 148,324 |
| Accounts receivable, net | 103,698 | | | 135,997 | |
Inventories | 13,419 |
| | 13,053 |
| Inventories | 14,267 | | | 13,413 | |
Prepaid expenses and other current assets | 17,135 |
| | 15,870 |
| Prepaid expenses and other current assets | 13,045 | | | 14,729 | |
Total current assets | 192,950 |
| | 202,791 |
| Total current assets | 153,598 | | | 179,155 | |
Property, plant and equipment, net | 95,502 |
| | 93,895 |
| Property, plant and equipment, net | 93,238 | | | 98,607 | |
Intangible assets, net | 106,893 |
| | 111,395 |
| Intangible assets, net | 70,848 | | | 109,537 | |
Goodwill | 283,121 |
| | 279,259 |
| Goodwill | 199,277 | | | 282,410 | |
Deferred income taxes | 2,780 |
| | 1,930 |
| Deferred income taxes | 1,781 | | | 1,786 | |
Other assets | 46,781 |
| | 4,767 |
| Other assets | 48,936 | | | 48,383 | |
Total assets | $ | 728,027 |
| | $ | 694,037 |
| Total assets | $ | 567,678 | | | $ | 719,878 | |
LIABILITIES AND EQUITY | |
| | |
| LIABILITIES AND EQUITY | | | |
Current Liabilities | |
| | |
| Current Liabilities | | | |
Accounts payable | $ | 13,428 |
| | $ | 13,863 |
| Accounts payable | $ | 8,239 | | | $ | 15,033 | |
Accrued expenses and other current liabilities | 86,452 |
| | 73,895 |
| Accrued expenses and other current liabilities | 77,308 | | | 81,389 | |
Current portion of long-term debt | 6,563 |
| | 6,833 |
| Current portion of long-term debt | 8,735 | | | 6,593 | |
Current portion of finance lease obligations | 3,751 |
| | 3,922 |
| Current portion of finance lease obligations | 3,642 | | | 4,131 | |
Income taxes payable | 1,049 |
| | 1,958 |
| Income taxes payable | 2,569 | | | 2,094 | |
Total current liabilities | 111,243 |
| | 100,471 |
| Total current liabilities | 100,493 | | | 109,240 | |
Long-term debt, net of current portion | 260,753 |
| | 283,787 |
| Long-term debt, net of current portion | 230,661 | | | 248,120 | |
Obligations under finance leases, net of current portion | 10,799 |
| | 9,075 |
| Obligations under finance leases, net of current portion | 11,964 | | | 13,043 | |
Deferred income taxes | 27,458 |
| | 23,148 |
| Deferred income taxes | 6,574 | | | 21,290 | |
Other long-term liabilities | 39,428 |
| | 6,482 |
| Other long-term liabilities | 41,523 | | | 42,163 | |
Total liabilities | 449,681 |
| | 422,963 |
| Total liabilities | 391,215 | | | 433,856 | |
Commitments and contingencies |
|
| |
|
| Commitments and contingencies | |
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, 28,915,088 and 28,562,608 shares issued | 289 |
| | 285 |
| |
Common stock, $0.01 par value, 200,000,000 shares authorized, 29,110,362 and 28,945,472 shares issued | | Common stock, $0.01 par value, 200,000,000 shares authorized, 29,110,362 and 28,945,472 shares issued | 291 | | | 289 | |
Additional paid-in capital | 228,287 |
| | 226,616 |
| Additional paid-in capital | 231,724 | | | 229,205 | |
Retained earnings | 76,784 |
| | 71,553 |
| |
Retained earnings (deficit) | | Retained earnings (deficit) | (23,552) | | | 77,613 | |
Accumulated other comprehensive loss | (27,202 | ) | | (27,557 | ) | Accumulated other comprehensive loss | (32,172) | | | (21,285) | |
Total Mistras Group, Inc. stockholders’ equity | 278,158 |
| | 270,897 |
| Total Mistras Group, Inc. stockholders’ equity | 176,291 | | | 285,822 | |
Non-controlling interests | 188 |
| | 177 |
| Non-controlling interests | 172 | | | 200 | |
Total equity | 278,346 |
| | 271,074 |
| Total equity | 176,463 | | | 286,022 | |
Total liabilities and equity | $ | 728,027 |
| | $ | 694,037 |
| Total liabilities and equity | $ | 567,678 | | | $ | 719,878 | |
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, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
| |
| | |
| | | | | | | | | | | | |
Revenue | $ | 192,192 |
| | $ | 182,169 |
| | $ | 569,595 |
| | $ | 561,592 |
| Revenue | $ | 124,435 | | | $ | 200,616 | | | $ | 283,900 | | | $ | 377,403 | |
Cost of revenue | 129,241 |
| | 124,260 |
| | 386,721 |
| | 389,131 |
| Cost of revenue | 77,954 | | | 135,063 | | | 191,278 | | | 257,480 | |
Depreciation | 5,182 |
| | 5,577 |
| | 16,160 |
| | 16,902 |
| Depreciation | 5,323 | | | 5,482 | | | 10,820 | | | 10,978 | |
Gross profit | 57,769 |
| | 52,332 |
| | 166,714 |
| | 155,559 |
| Gross profit | 41,158 | | | 60,071 | | | 81,802 | | | 108,945 | |
Selling, general and administrative expenses | 42,328 |
| | 41,931 |
| | 126,014 |
| | 122,232 |
| Selling, general and administrative expenses | 37,607 | | | 41,923 | | | 79,165 | | | 83,686 | |
Bad debt provision for troubled customers, net of recoveries | — |
| | — |
| | 2,798 |
| | — |
| |
Pension withdrawal expense (benefit) | (45 | ) | | 5,886 |
| | 489 |
| | 5,886 |
| |
Gain on sale of subsidiary | — |
| | (2,384 | ) | | — |
| | (2,384 | ) | |
Bad debt provision (benefit) for troubled customers, net of recoveries | | Bad debt provision (benefit) for troubled customers, net of recoveries | — | | | (2,693) | | | — | | | 2,798 | |
Impairment charges | | Impairment charges | — | | | — | | | 106,062 | | | — | |
Pension withdrawal expense | | Pension withdrawal expense | — | | | — | | | — | | | 534 | |
| Research and engineering | 650 |
| | 745 |
| | 2,261 |
| | 2,414 |
| Research and engineering | 708 | | | 754 | | | 1,532 | | | 1,611 | |
Depreciation and amortization | 4,089 |
| | 2,920 |
| | 12,380 |
| | 8,834 |
| Depreciation and amortization | 3,207 | | | 4,119 | | | 7,177 | | | 8,291 | |
Acquisition-related expense (benefit), net | (32 | ) | | 217 |
| | 970 |
| | (1,143 | ) | Acquisition-related expense (benefit), net | 19 | | | 549 | | | (523) | | | 1,002 | |
Income from operations | 10,779 |
| | 3,017 |
| | 21,802 |
| | 19,720 |
| |
Income (loss) from operations | | Income (loss) from operations | (383) | | | 15,419 | | | (111,611) | | | 11,023 | |
Interest expense | 2,959 |
| | 1,894 |
| | 10,065 |
| | 5,581 |
| Interest expense | 2,976 | | | 3,579 | | | 5,765 | | | 7,106 | |
Income before provision for income taxes | 7,820 |
| | 1,123 |
| | 11,737 |
| | 14,139 |
| |
Provision for income taxes | 4,733 |
| | 2,133 |
| | 6,493 |
| | 6,229 |
| |
Income (loss) before provision (benefit) for income taxes | | Income (loss) before provision (benefit) for income taxes | (3,359) | | | 11,840 | | | (117,376) | | | 3,917 | |
Provision (benefit) for income taxes | | Provision (benefit) for income taxes | (694) | | | 4,397 | | | (16,189) | | | 1,760 | |
Net income (loss) | 3,087 |
| | (1,010 | ) | | 5,244 |
| | 7,910 |
| Net income (loss) | (2,665) | | | 7,443 | | | (101,187) | | | 2,157 | |
Less: Net income (loss) attributable to non-controlling interests, net of taxes | (6 | ) | | 1 |
| | 13 |
| | 13 |
| Less: Net income (loss) attributable to non-controlling interests, net of taxes | (9) | | | 12 | | | (22) | | | 19 | |
Net income (loss) attributable to Mistras Group, Inc. | $ | 3,093 |
| | $ | (1,011 | ) | | $ | 5,231 |
| | $ | 7,897 |
| Net income (loss) attributable to Mistras Group, Inc. | $ | (2,656) | | | $ | 7,431 | | | $ | (101,165) | | | $ | 2,138 | |
| | | | | | | | | | | | | | | |
Earnings (loss) per common share: | |
| | |
| | | | | Earnings (loss) per common share: | | | | |
Basic | $ | 0.11 |
| | $ | (0.04 | ) | | $ | 0.18 |
| | $ | 0.28 |
| Basic | $ | (0.09) | | | $ | 0.26 | | | $ | (3.49) | | | $ | 0.07 | |
Diluted | $ | 0.11 |
| | $ | (0.04 | ) | | $ | 0.18 |
| | $ | 0.27 |
| Diluted | $ | (0.09) | | | $ | 0.26 | | | $ | (3.49) | | | $ | 0.07 | |
Weighted-average common shares outstanding: | |
| | |
| | | | | Weighted-average common shares outstanding: | | | | |
Basic | 28,800 |
| | 28,429 |
| | 28,678 |
| | 28,360 |
| Basic | 29,085 | | | 28,657 | | | 29,024 | | | 28,616 | |
Diluted | 29,156 |
| | 28,429 |
| | 29,022 |
| | 29,447 |
| Diluted | 29,085 | | | 28,862 | | | 29,024 | | | 28,918 | |
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 | | Three months ended June 30, | | | Six months ended June 30, | |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | | | | | | | | |
Net income (loss) | $ | 3,087 |
| | $ | (1,010 | ) | | $ | 5,244 |
| | $ | 7,910 |
| Net income (loss) | $ | (2,665) | | | $ | 7,443 | | | $ | (101,187) | | | $ | 2,157 | |
Other comprehensive income: | |
| | |
| | | | | |
Other comprehensive income (loss): | | Other comprehensive income (loss): | | | | |
Foreign currency translation adjustments | (5,425 | ) | | 14 |
| | 355 |
| | (4,051 | ) | Foreign currency translation adjustments | 6,122 | | | 3,649 | | | (10,887) | | | 5,780 | |
Comprehensive income (loss) | (2,338 | ) | | (996 | ) | | 5,599 |
| | 3,859 |
| Comprehensive income (loss) | 3,457 | | | 11,092 | | | (112,074) | | | 7,937 | |
Less: comprehensive income (loss) attributable to non-controlling interest | (8 | ) | | — |
| | 11 |
| | 10 |
| Less: comprehensive income (loss) attributable to non-controlling interest | (9) | | | 10 | | | (28) | | | 19 | |
Comprehensive income (loss) attributable to Mistras Group, Inc. | $ | (2,330 | ) | | $ | (996 | ) | | $ | 5,588 |
| | $ | 3,849 |
| Comprehensive income (loss) attributable to Mistras Group, Inc. | $ | 3,466 | | | $ | 11,082 | | | $ | (112,046) | | | $ | 7,918 | |
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)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, 2020 | 29,042 | | | $ | 290 | | | $ | 230,472 | | | $ | (20,896) | | | $ | (38,294) | | | $ | 171,572 | | | $ | 181 | | | $ | 171,753 | |
Net loss | — | | | — | | | — | | | (2,656) | | | — | | | (2,656) | | | (9) | | | (2,665) | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 6,122 | | | 6,122 | | | — | | | 6,122 | |
Share-based payments | — | | | — | | | 1,373 | | | — | | | — | | | 1,373 | | | — | | | 1,373 | |
Net settlement of restricted stock units | 68 | | | 1 | | | (121) | | | — | | | — | | | (120) | | | — | | | (120) | |
| | | | | | | | | | | | | | | |
Balance at June 30, 2020 | 29,110 | | | $ | 291 | | | $ | 231,724 | | | $ | (23,552) | | | $ | (32,172) | | | $ | 176,291 | | | $ | 172 | | | $ | 176,463 | |
| | | | | | | | | | | | | | | |
Balance at March 31, 2019 | 28,627 | | | $ | 286 | | | $ | 227,790 | | | $ | 66,260 | | | $ | (25,426) | | | $ | 268,910 | | | $ | 186 | | | $ | 269,096 | |
Net income | — | | | — | | | — | | | 7,431 | | | — | | | 7,431 | | | 12 | | | 7,443 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 3,649 | | | 3,649 | | | (2) | | | 3,647 | |
Share-based payments | 58 | | | — | | | 1,490 | | | — | | | — | | | 1,490 | | | — | | | 1,490 | |
Net settlement of restricted stock units | — | | | — | | | (397) | | | — | | | — | | | (397) | | | — | | | (397) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at June 30, 2019 | 28,685 | | | $ | 286 | | | $ | 228,883 | | | $ | 73,691 | | | $ | (21,777) | | | $ | 281,083 | | | $ | 196 | | | $ | 281,279 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended |
| Common Stock | | Additional paid-in capital | | Retained earnings
| | Accumulated other comprehensive income (loss) | | Total Mistras Group, Inc. Stockholders’ Equity | | Noncontrolling Interest | | |
| Shares | | Amount | | | | | | | Total Equity |
| | | | | | | | | | | | | | | |
Balance at June 30, 2019 | 28,685 |
| | $ | 286 |
| | $ | 228,883 |
| | $ | 73,691 |
| | $ | (21,777 | ) | | $ | 281,083 |
| | $ | 196 |
| | $ | 281,279 |
|
Net income | — |
| | — |
| | — |
| | 3,093 |
| | — |
| | 3,093 |
| | (6 | ) | | 3,087 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | (5,425 | ) | | (5,425 | ) | | (2 | ) | | (5,427 | ) |
Share-based payments | — |
| | — |
| | 1,682 |
| | — |
| | — |
| | 1,682 |
| | — |
| | 1,682 |
|
Net settlement of options and restricted stock units | 230 |
| | 3 |
| | (2,278 | ) | | — |
| | — |
| | (2,275 | ) | | — |
| | (2,275 | ) |
Balance at September 30, 2019 | 28,915 |
| | $ | 289 |
| | $ | 228,287 |
| | $ | 76,784 |
| | $ | (27,202 | ) | | $ | 278,158 |
| | $ | 188 |
| | $ | 278,346 |
|
| | | | | | | | | | | | | | | |
Balance at June 30, 2018 | 28,374 |
| | $ | 283 |
| | $ | 224,634 |
| | $ | 73,624 |
| | $ | (20,870 | ) | | $ | 277,671 |
| | $ | 183 |
| | $ | 277,854 |
|
Net loss | — |
| | — |
| | — |
| | (1,011 | ) | | — |
| | (1,011 | ) | | 1 |
| | (1,010 | ) |
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | 14 |
| | 14 |
| | (1 | ) | | 13 |
|
Share-based payments | — |
| | — |
| | 1,899 |
| | — |
| | — |
| | 1,899 |
| | — |
| | 1,899 |
|
Net settlement of restricted stock units | 97 |
| | 1 |
| | (752 | ) | | — |
| | — |
| | (751 | ) | | — |
| | (751 | ) |
Exercise of stock options | 25 |
| | — |
| | 273 |
| | — |
| | — |
| | 273 |
| | — |
| | — |
|
Balance at September 30, 2018 | 28,496 |
| | $ | 284 |
| | $ | 226,054 |
| | $ | 72,613 |
| | $ | (20,856 | ) | | $ | 278,095 |
| | $ | 183 |
| | $ | 278,278 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2019 | 28,945 | | | $ | 289 | | | $ | 229,205 | | | $ | 77,613 | | | $ | (21,285) | | | $ | 285,822 | | | $ | 200 | | | $ | 286,022 | |
Net loss | — | | | — | | | — | | | (101,165) | | | — | | | (101,165) | | | (22) | | | (101,187) | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | (10,887) | | | (10,887) | | | (6) | | | (10,893) | |
Share-based payments | — | | | — | | | 2,798 | | | — | | | — | | | 2,798 | | | — | | | 2,798 | |
Net settlement of restricted stock units | 165 | | | 2 | | | (279) | | | — | | | — | | | (277) | | | — | | | (277) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at June 30, 2020 | 29,110 | | | $ | 291 | | | $ | 231,724 | | | $ | (23,552) | | | $ | (32,172) | | | $ | 176,291 | | | $ | 172 | | | $ | 176,463 | |
| | | | | | | | | | | | | | | |
Balance at December 31, 2018 | 28,563 | | | $ | 285 | | | $ | 226,616 | | | $ | 71,553 | | | $ | (27,557) | | | $ | 270,897 | | | $ | 177 | | | $ | 271,074 | |
Net income | — | | | — | | | — | | | 2,138 | | | — | | | 2,138 | | | 19 | | | 2,157 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 5,780 | | | 5,780 | | | — | | | 5,780 | |
Share-based payments | 119 | | | 1 | | | 2,916 | | | — | | | — | | | 2,917 | | | — | | | 2,917 | |
Net settlement of restricted stock units | — | | | — | | | (681) | | | — | | | — | | | (681) | | | — | | | (681) | |
| | | | | | | | | | | | | | | |
Exercise of stock options | 3 | | | — | | | 32 | | | — | | | — | | | 32 | | | — | | | 32 | |
Balance at June 30, 2019 | 28,685 | | | $ | 286 | | | $ | 228,883 | | | $ | 73,691 | | | $ | (21,777) | | | $ | 281,083 | | | $ | 196 | | | $ | 281,279 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended |
| Common Stock | | Additional paid-in capital | | Retained earnings
| | Accumulated other comprehensive income (loss) | | Total Mistras Group, Inc. Stockholders’ Equity | | Noncontrolling Interest | | |
| Shares | | Amount | | | | | | | Total Equity |
| | | | | | | | | | | | | | | |
Balance at December 31, 2018 | 28,563 |
| | $ | 285 |
| | $ | 226,616 |
| | $ | 71,553 |
| | $ | (27,557 | ) | | $ | 270,897 |
| | $ | 177 |
| | $ | 271,074 |
|
Net income | — |
| | — |
| | — |
| | 5,231 |
| | — |
| | 5,231 |
| | 13 |
| | 5,244 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 355 |
| | 355 |
| | (2 | ) | | 353 |
|
Share-based payments | — |
| | — |
| | 4,598 |
| | — |
| | — |
| | 4,598 |
| | — |
| | 4,598 |
|
Net settlement of options and restricted stock units | 349 |
| | 4 |
| | (2,959 | ) | | — |
| | — |
| | (2,955 | ) | | — |
| | (2,955 | ) |
Exercise of stock options | 3 |
| | — |
| | 32 |
| | — |
| | — |
| | 32 |
| | — |
| | 32 |
|
Balance at September 30, 2019 | 28,915 |
| | $ | 289 |
| | $ | 228,287 |
| | $ | 76,784 |
| | $ | (27,202 | ) | | $ | 278,158 |
| | $ | 188 |
| | $ | 278,346 |
|
| | | | | | | | | | | | | | | |
Balance at December 31, 2017 | 28,295 |
| | $ | 282 |
| | $ | 222,425 |
| | $ | 64,716 |
| | $ | (16,805 | ) | | $ | 270,618 |
| | $ | 173 |
| | $ | 270,791 |
|
Net income | — |
| | — |
| | — |
| | 7,897 |
| | — |
| | 7,897 |
| | 13 |
| | 7,910 |
|
Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (4,051 | ) | | (4,051 | ) | | (3 | ) | | (4,054 | ) |
Share-based payments | — |
| | — |
| | 4,763 |
| | — |
| | — |
| | 4,763 |
| | — |
| | 4,763 |
|
Net settlement on vesting of restricted stock units | 176 |
| | 2 |
| | (1,407 | ) | | — |
| | — |
| | (1,405 | ) | | — |
| | (1,405 | ) |
Exercise of stock options | 25 |
| | — |
| | 273 |
| | — |
| | — |
| | 273 |
| | — |
| | 273 |
|
Balance at September 30, 2018 | 28,496 |
| | $ | 284 |
| | $ | 226,054 |
| | $ | 72,613 |
| | $ | (20,856 | ) | | $ | 278,095 |
| | $ | 183 |
| | $ | 278,278 |
|
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 Cash Flows
(in thousands) thousands)
| | | | | | | | | | | |
| Six months ended June 30, | | |
| 2020 | | 2019 |
| | | |
Cash flows from operating activities | | | |
Net income (loss) | $ | (101,187) | | | $ | 2,157 | |
Adjustments to reconcile net loss to net cash provided by operating activities | | | |
Depreciation and amortization | 17,997 | | | 19,269 | |
Impairment charges | 106,062 | | | — | |
Deferred income taxes | (14,327) | | | 420 | |
Share-based compensation expense | 2,740 | | | 2,867 | |
Bad debt provision for troubled customers, net of recoveries | — | | | 2,798 | |
Fair value adjustments to contingent consideration | (523) | | | 672 | |
Foreign currency (gain) loss | 1,067 | | | (1,218) | |
| | | |
Other | 1,179 | | | (395) | |
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions | | | |
Accounts receivable | 30,228 | | | (8,792) | |
Inventories | (1,300) | | | (594) | |
Prepaid expenses and other assets | (1,426) | | | (625) | |
Accounts payable | (6,536) | | | 4,945 | |
Accrued expenses and other liabilities | 347 | | | (988) | |
Income taxes payable | 541 | | | 589 | |
Net cash provided by operating activities | 34,862 | | | 21,105 | |
Cash flows from investing activities | | | |
Purchase of property, plant and equipment | (7,443) | | | (11,562) | |
| | | |
Purchase of intangible assets | (195) | | | (441) | |
| | | |
Proceeds from sale of equipment | 390 | | | 955 | |
| | | |
Net cash used in investing activities | (7,248) | | | (11,048) | |
Cash flows from financing activities | | | |
Repayment of finance lease obligations | (2,132) | | | (2,411) | |
Proceeds from borrowings of long-term debt | 1,605 | | | 566 | |
Repayment of long-term debt | (2,983) | | | (3,445) | |
Proceeds from revolver | 16,500 | | | 10,000 | |
Repayment of revolver | (30,250) | | | (27,200) | |
Payment of financing costs | (1,497) | | | — | |
Payment of contingent consideration for business acquisitions | (1,303) | | | — | |
Taxes paid related to net share settlement of share-based awards | (277) | | | (681) | |
Proceeds from exercise of stock options | — | | | 32 | |
Net cash used in financing activities | (20,337) | | | (23,139) | |
Effect of exchange rate changes on cash and cash equivalents | 295 | | | 39 | |
Net change in cash and cash equivalents | 7,572 | | | (13,043) | |
Cash and cash equivalents at beginning of period | 15,016 | | | 25,544 | |
Cash and cash equivalents at end of period | $ | 22,588 | | | $ | 12,501 | |
Supplemental disclosure of cash paid | | | |
Interest | $ | 5,554 | | | $ | 7,016 | |
Income taxes, net of refunds | $ | (70) | | | $ | 2,565 | |
Noncash investing and financing | | | |
Equipment acquired through finance lease obligations | $ | 1,266 | | | $ | 2,887 | |
|
| | | | | | | |
| Nine months ended |
| September 30, 2019 | | September 30, 2018 |
| | | |
Cash flows from operating activities | |
| | |
|
Net income | $ | 5,244 |
| | $ | 7,910 |
|
Adjustments to reconcile net income to net cash provided by operating activities | |
| | |
|
Depreciation and amortization | 28,540 |
| | 25,736 |
|
Deferred income taxes | 3,151 |
| | 3,188 |
|
Share-based compensation expense | 4,598 |
| | 4,760 |
|
Bad debt provision for troubled customers, net of recoveries | 2,798 |
| | — |
|
Fair value adjustments to contingent consideration | 537 |
| | (808 | ) |
Foreign currency (gain) loss | (1,010 | ) | | 618 |
|
Gain on sale of subsidiary | — |
| | (2,384 | ) |
Other | (143 | ) | | 207 |
|
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions | |
| | |
Accounts receivable | (3,098 | ) | | (20,258 | ) |
Inventories | (391 | ) | | (1,746 | ) |
Prepaid expenses and other assets | 439 |
| | 918 |
|
Accounts payable | (261 | ) | | 3,019 |
|
Accrued expenses and other liabilities | (2,465 | ) | | 7,456 |
|
Income taxes payable | 2,537 |
| | (4,432 | ) |
Net cash provided by operating activities | 40,476 |
| | 24,184 |
|
Cash flows from investing activities | |
| | |
|
Purchase of property, plant and equipment | (17,275 | ) | | (15,386 | ) |
Disposition of business, net of cash sold | — |
| | 4,800 |
|
Purchase of intangible assets | (704 | ) | | (385 | ) |
Acquisition of business, net of cash acquired | (4,822 | ) | | — |
|
Proceeds from sale of equipment | 1,173 |
| | 1,140 |
|
Net cash used in investing activities | (21,628 | ) | | (9,831 | ) |
Cash flows from financing activities | |
| | |
|
Repayment of finance lease obligations | (3,338 | ) | | (4,464 | ) |
Proceeds from borrowings of long-term debt | 684 |
| | 1,743 |
|
Repayment of long-term debt | (5,189 | ) | | (1,857 | ) |
Proceeds from revolver | 20,500 |
| | 28,076 |
|
Repayment of revolver | (38,500 | ) | | (43,990 | ) |
Payment of contingent consideration for business acquisitions | (755 | ) | | (2,282 | ) |
Taxes paid related to net share settlement of share-based awards | (2,955 | ) | | (1,404 | ) |
Proceeds from exercise of stock options | 32 |
| | 273 |
|
Net cash used in financing activities | (29,521 | ) | | (23,905 | ) |
Effect of exchange rate changes on cash and cash equivalents | (499 | ) | | (916 | ) |
Net change in cash and cash equivalents | (11,172 | ) | | (10,468 | ) |
Cash and cash equivalents at beginning of period | 25,544 |
| | 27,541 |
|
Cash and cash equivalents at end of period | $ | 14,372 |
| | $ | 17,073 |
|
Supplemental disclosure of cash paid | |
| | |
|
Interest | $ | 9,944 |
| | $ | 5,418 |
|
Income taxes | $ | 4,011 |
| | $ | 9,658 |
|
Noncash investing and financing | |
| | |
|
Equipment acquired through finance lease obligations | $ | 5,536 |
| | $ | 3,850 |
|
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") is a leading “one source” global provider of technology-enabled asset protection solutions used to evaluate the structural integrity and reliability of critical energy, industrial, public infrastructure and commercial aerospace components. 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 companies with asset-intensive infrastructure, including companies in the oil and gas, commercial aerospace and defense, fossil and nuclear power, alternative and renewable energy, public infrastructure, chemicals, transportation, primary metals and metalworking, pharmaceutical/biotechnology and food processing industries and research and engineering institutions.
Recent Developments
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread throughout the United States. The COVID-19 pandemic has caused significant volatility in domestic and international markets. There is on-going uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies. In addition, oil prices have dropped significantly, and airline traffic has experienced a significant decline. In response to the COVID-19 pandemic, companies within the oil and gas and aerospace industries (including our customers) have announced spending cuts and/or slowdowns (or temporary cessation) in production which, in turn, may result in decreases in awards of new contracts or adjustments, reductions, suspensions or cancellations of existing contracts. These declines were driven in large measure by various factors surrounding the COVID-19 pandemic and, in the case of the oil and gas market, other macroeconomic events such as the geopolitical tensions between OPEC and Russia.
The COVID-19 pandemic, significant volatility in oil prices and decreased traffic in the aerospace industry have adversely affected the Company's workforce and operations, as well as the operations of its customers, suppliers and contractors. These negative factors have also resulted in significant volatility and uncertainty in the markets in which the Company operates. To successfully navigate through this unprecedented period, the Company continues to focus on the following key priorities:
•Ensuring the health and safety of its employees and those of its customers and suppliers;
•Maintaining business continuity and financial strength and stability; and
•Serving its customers as they provide essential products and services to the world.
While the Company cannot fully assess the impact that the factors discussed above will have on its operations at this time, there are certain impacts that the Company has identified:
•The financial market volatility that resulted from COVID-19 and the volatility in oil prices required the Company to reassess the goodwill it had recorded related to various prior acquisitions under the guidance of ASC 350 during the first quarter of 2020. The Company determined that the fair values of various reporting units were less than their carrying values (including goodwill). As a result, the Company recorded an impairment charge related to goodwill of approximately $77.1 million during the three months ended March 31, 2020. See Note 8–Goodwill.
•These same events required the Company to reassess the tangible and intangible assets recorded under the guidance of ASC 360 during the first quarter of 2020. The Company determined that the fair values of certain asset groups were less than their carrying values (excluding goodwill). As a result, the Company recorded impairment charges related to intangible assets of approximately $28.8 million and a right-of-use asset of approximately $0.2 million during the three months ended March 31, 2020. See Note 9–Intangible Assets and Note13–Leases.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
To respond to the economic downturn resulting from the factors discussed above, in March 2020 the Company initiated a cost reduction and efficiency program. As part of this program, named executive officers of the Company have voluntarily taken temporary salary reductions ranging from 25% to 45% of their base salary. In addition, the Company instituted a reduction for certain other salaried employees, at lower percentages, and suspended the Company's voluntary match under the Company sponsored savings plans for its U.S. and Canadian employees. These reductions became effective at the beginning of the second quarter of 2020 and, except for the salary reductions for certain lower salaried employees, will continue through the third quarter. At the end of the third quarter, management will assess whether to change these cost saving measures. In addition, the Company’s non-employee directors voluntarily agreed to a $3,750 reduction in their second and third quarter 2020 payments.
The Company is currently unable to predict with certainty the overall impact that the factors discussed above may have on its business, results of operations, liquidity or in other ways which the Company cannot yet determine. 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"). 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 years ending December 31, 20192020 and 2018.December 31, 2019. 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’sCompany's 2019 Annual Report on Form 10-K (“2018("2019 Annual Report”Report") for the year ended December 31, 2018, dated March 15, 2019..
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statementsUnaudited Condensed Consolidated Financial Statements include the accounts of Mistras Group, Inc. and its wholly and majority-owned subsidiaries. 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. The non-controlling interests in net results, net of tax, is classified separately in the accompanying Unaudited Condensed Consolidated Statements of Income (Loss). All significant intercompany accounts and transactions have been eliminated in consolidation.
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's financial condition or results of operations as previously reported.
Customers
For each of the ninethree and six months ended SeptemberJune 30, 20192020 and 2018,2019, 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 Policies and Practices in the 20182019 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 20182019 Annual Report, there have been no material changes to the Company's significant accounting policies, other than its adoption of the new leasing standard on January 1, 2019.policies.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Income Taxes
On December 22, 2017,Income taxes are accounted for under the United Statesasset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted fundamental changestax rates expected to federalapply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax law followingassets and liabilities of a change in tax rates is recognized in income in the passageperiod that includes the enactment date. A valuation allowance is provided if it is more likely than not that some or all of a deferred income tax asset will not be realized. Financial accounting standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. These standards also provide guidance on de-recognition, measurement, and classification of amounts relating to uncertain tax positions, accounting for and disclosure of interest and penalties, accounting in interim periods and disclosures required. Interest and penalties related to unrecognized tax positions are recognized as incurred within “provision for income taxes” in the consolidated statements of income. ASC 740-270, Income Taxes-Interim Reporting, requires the Company to use an estimated annual effective tax rate (EAETR) for calculating its tax provision for interim periods. At each interim period, the Company is required, with certain exceptions and limitations, to estimate its forecasted worldwide EAETR, which is applied to the Company's year-to-date consolidated ordinary income or loss resulting in the year-to-date income tax provision before considering items not included in ordinary income or loss. The tax effects of events or transactions not considered to represent ordinary income or loss are accounted for discretely in the interim period and are not included in the determination of the Tax CutsEAETR.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and JobsEconomic Security Act (the “Tax(“CARES Act”) was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to deferment of employer’s social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property (QIP). The Company’s financial statements forultimate impact of the periods ended September 30, 2019CARES Act may differ from the estimated impact the Company recorded during this interim period due to changes in interpretations and September 30, 2018 reflectedguidance that may be issued and actions the Company may take in response to the CARES Act. The Company will continue to assess the impact that various provisions of the TaxCARES Act, effective forand how they are interpreted and effected, will have on its business.
The Company continues to evaluate its deferred tax assets each period to determine if a valuation allowance is required based on whether it is more likely than not that some portion of these deferred tax assets will not be realized. As of June 30, 2020, management concluded that it is more likely than not that a substantial portion of the Company's deferred tax assets will be realized. As part of the Company's analysis, it considered both positive and negative factors that impact profitability and whether those factors would lead to a change in the estimate of the Company's deferred tax assets that may be realized in the future. In the current period, the impact of the COVID-19 pandemic on the Company's business was more pronounced given the pandemic spanned the full quarter. The Company will continue to monitor the impacts of the COVID-19 pandemic on its business, and any sustained or prolonged reductions in future earnings periods beginning after December 31, 2017, which includesmay change the reduced federal corporateCompany's conclusions on whether it is more likely than not to realize portions of the Company's deferred tax rate of from 35% to 21%, adjustments made to executive compensation and meals and entertainment rules, and the inclusion of new categories of income, global intangible low-taxes income (“GILTI”) and foreign derived intangible income (“FDII”). assets.
The Company’s effective income tax rate was approximately 61%21% and 190%37% for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The Company'sCompany’s effective income tax rate was approximately 55%14% and 44%45% for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The effective income tax rate for the thirdsecond quarter of 2020 approximated the statutory rate, as the favorable impact of the CARES Act was offset by the unfavorable impact of taxes in other jurisdictions and other permanent book to tax differences. The effective income tax rate for the first nine-monthssix-months of 20192020 was lower than the statutory rate primarily due to impairments for which the Company will not realize income tax benefits, partially offset by income tax benefits of the CARES Act. The CARES Act provides a five-year carryback of net operating losses generated in years 2018 through 2020. As the statutory federal income tax rate applicable to certain years within the carryback period is 35%, carryback to those years of the Company's estimated 2020 annual federal tax loss provides a tax benefit in excess of the current federal statutory rate of 21%, resulting in an increased income tax benefit. The Company projects that the income tax effects of the CARES Act will result in additional income tax benefit recognized throughout the 2020 tax year and 2018a cash refund in 2021 of taxes paid in prior years. The effective income tax rate for the three and six months ended June 30, 2019 was higher than the statutory rate due to the impact of discrete items, GILTI,the global intangible low-taxed income (GILTI), and executive compensation, and other provisions resulting from the December 22, 2017 passage of the Tax Cuts and Jobs Act and foreign tax rates different than statutory rates in the U.S..U.S.
The Company has completed the accounting for the adoption of the Tax Act. The amounts recorded in 2019 for the Tax Act related to the calculations of the GILTI, FDII, executive compensation and meals and entertainment are the Company’s best estimates based on the current data and guidance available. The Company is continuing to evaluate the state tax conformity to the Tax Act, including the GILTI provisions. Given the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). In 2018, the Company made an accounting policy election to account for these effects under the period cost method.
Mistras and its subsidiaries file tax returns in the U.S., including various state and local returns, and in other foreign jurisdictions. The Company believes adequate provision has been made for all income tax uncertainties.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which the Company adopted as of January 1, 2019. Topic 842 requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. The Company elected the modified retrospective method permitted by the standard, upon which prior-period information has not been restated.
The standard provided for several practical expedient options for use in transition. The Company elected to utilize the “package of practical expedients,” which permits the Company not to reassess previous conclusions reached on lease identification, lease classification and initial direct costs. The Company also elected to utilize the practical expedient available to not separate lease and non-lease components within the lease and has therefore accounted for all lease components as a single lease component.
Adoption of the new standard resulted in the recording of a right-of-use (ROU) asset and liability related to the Company’s operating leases of approximately $38 million as of January 1, 2019. The new standard did not have a material impact to our statements of income or cash flows.
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 their reporting units to their fair value. An entity should record an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Tax deductibility of goodwill should be considered in evaluating any reporting unit's impairment loss to be taken. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company early adopted ASU 2017-04 in the third quarter of 2017 for its condensed consolidated financial statements and related disclosures.
2. Revenue
The majority of the Company's revenues are derived from 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, which was adopted on January 1, 2018.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities related to outside basis differences. The standard is effective for interim and annual periods beginning January 1, 2021, with certain amendments applied prospectively and others requiring retrospective application. Early adoption is permitted, with any adjustments reflected as of the beginning of the fiscal year of adoption. If early adoption is elected, all changes as a result of the standard must be adopted in the same period. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations, and cash flows.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of 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 the impact of this guidance on its consolidated financial position, results of operations, and cash flows.
2. Revenue
The Company derives the majority of its revenue by providing services on a time and material basis, which are generally short-term in nature. The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of ourthe Company's contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. The Company provides highly integrated and bundled inspection services to its customers. Some of ourthe Company's contracts have multiple performance obligations, most commonly due to the contract providing both goods and services. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using ourits best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is a relative selling price based on price lists.
Contract modifications are not routine in the performance of ourthe Company 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.
OurThe Company's performance obligations are satisfied over time as work progresses or at a point in time. The majority of ourthe Company's revenue recognized over time as work progresses is related to ourits service deliverables, which includes providing testing, inspection and mechanical services to ourthe Company's customers. Revenue is recognized over time based on time and material incurred to date which best portrays the transfer of control to the customer. The Company also utilizes an available practical expedient that provides for revenue to be recognized in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. Fixed fee arrangements are determined based on expected labor, material, and overhead to be consumed on fulfillment of such services. Revenue is recognized on a cost-to-cost method tracked on an input basis.
The majority of ourthe Company's revenue recognized at a point in time is related to product sales when the customer obtains control of the asset, which is generally upon shipment to the customer. Contract costs include labor, material and overhead.
The Company expects any significant remaining performance obligations to be satisfied within one year.
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 our revenuesthe Company's revenue are short-term in nature. The Company has many Master Service Agreementsmaster service agreements (MSAs) that specify an overall framework and contract terms when the Company and customers agree upon services or products to be provided. The actual contracting to provide services or furnish products is 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 long-term contracts, which can range from several months to several years. Revenue on such long-term 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 ourthe 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 ourthe 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,revenue, 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, 2020 | Services | | International | | Products | | Corp/Elim | | Total |
Oil & Gas | $ | 59,279 | | | $ | 7,339 | | | $ | 68 | | | $ | — | | | $ | 66,686 | |
Aerospace & Defense | 14,248 | | | 3,595 | | | 151 | | | — | | | 17,994 | |
Industrials | 10,298 | | | 3,817 | | | 419 | | | — | | | 14,534 | |
Power generation & Transmission | 7,652 | | | 1,207 | | | 644 | | | — | | | 9,503 | |
Other Process Industries | 4,999 | | | 2,610 | | | 74 | | | — | | | 7,683 | |
Infrastructure, Research & Engineering | 2,994 | | | 2,020 | | | 1,900 | | | — | | | 6,914 | |
Other | 1,207 | | | 755 | | | 746 | | | (1,587) | | | 1,121 | |
Total | $ | 100,677 | | | $ | 21,343 | | | $ | 4,002 | | | $ | (1,587) | | | $ | 124,435 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 | Services | | International | | Products | | Corp/Elim | | Total |
Oil & Gas | $ | 109,103 | | | $ | 11,767 | | | $ | 465 | | | $ | — | | | $ | 121,335 | |
Aerospace & Defense | 13,511 | | | 10,504 | | | 315 | | | — | | | 24,330 | |
Industrials | 19,638 | | | 5,459 | | | 647 | | | — | | | 25,744 | |
Power generation & Transmission | 8,352 | | | 2,499 | | | 619 | | | — | | | 11,470 | |
Other Process Industries | 6,384 | | | 2,504 | | | 68 | | | — | | | 8,956 | |
Infrastructure, Research & Engineering | 2,806 | | | 2,517 | | | 1,059 | | | — | | | 6,382 | |
Other | 1,416 | | | 1,840 | | | 1,096 | | | (1,953) | | | 2,399 | |
Total | $ | 161,210 | | | $ | 37,090 | | | $ | 4,269 | | | $ | (1,953) | | | $ | 200,616 | |
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, 2020 | Services | | International | | Products | | Corp/Elim | | Total |
Oil & Gas | $ | 142,578 | | | $ | 16,443 | | | $ | 163 | | | $ | — | | | $ | 159,184 | |
Aerospace & Defense | 28,900 | | | 11,010 | | | 298 | | | — | | | 40,208 | |
Industrials | 23,165 | | | 8,736 | | | 907 | | | — | | | 32,808 | |
Power generation & Transmission | 12,747 | | | 2,904 | | | 1,498 | | | — | | | 17,149 | |
Other Process Industries | 11,003 | | | 4,730 | | | 77 | | | — | | | 15,810 | |
Infrastructure, Research & Engineering | 7,511 | | | 4,481 | | | 2,460 | | | — | | | 14,452 | |
Other | 3,646 | | | 2,106 | | | 1,411 | | | (2,874) | | | 4,289 | |
Total | $ | 229,550 | | | $ | 50,410 | | | $ | 6,814 | | | $ | (2,874) | | | $ | 283,900 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2019 | Services | | International | | Products | | Corp/Elim | | Total |
Oil & Gas | $ | 200,769 | | | $ | 21,472 | | | $ | 480 | | | $ | — | | | $ | 222,721 | |
Aerospace & Defense | 26,305 | | | 22,158 | | | 622 | | | — | | | 49,085 | |
Industrials | 35,762 | | | 10,534 | | | 1,079 | | | — | | | 47,375 | |
Power generation & Transmission | 14,614 | | | 3,921 | | | 2,000 | | | — | | | 20,535 | |
Other Process Industries | 12,702 | | | 4,746 | | | 73 | | | — | | | 17,521 | |
Infrastructure, Research & Engineering | 5,396 | | | 5,250 | | | 1,905 | | | — | | | 12,551 | |
Other | 5,959 | | | 4,171 | | | 1,542 | | | (4,057) | | | 7,615 | |
Total | $ | 301,507 | | | $ | 72,252 | | | $ | 7,701 | | | $ | (4,057) | | | $ | 377,403 | |
Revenue by Category
The following series of tables present our disaggregated revenues:
Revenue by industryper key geographic location was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2020 | Services | | International | | Products | | Corp/Elim | | Total |
United States | $ | 88,205 | | | $ | 160 | | | $ | 2,053 | | | $ | (810) | | | $ | 89,608 | |
Other Americas | 12,046 | | | 959 | | | 72 | | | (93) | | | 12,984 | |
Europe | 263 | | | 20,031 | | | 588 | | | (662) | | | 20,220 | |
Asia-Pacific | 163 | | | 193 | | | 1,289 | | | (22) | | | 1,623 | |
Total | $ | 100,677 | | | $ | 21,343 | | | $ | 4,002 | | | $ | (1,587) | | | $ | 124,435 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 | Services | | International | | Products | | Corp/Elim | | Total |
United States | $ | 131,880 | | | $ | 57 | | | $ | 2,977 | | | $ | (1,274) | | | $ | 133,640 | |
Other Americas | 28,804 | | | 1,686 | | | 71 | | | (207) | | | 30,354 | |
Europe | 271 | | | 33,740 | | | 436 | | | (472) | | | 33,975 | |
Asia-Pacific | 255 | | | 1,607 | | | 785 | | | — | | | 2,647 | |
Total | $ | 161,210 | | | $ | 37,090 | | | $ | 4,269 | | | $ | (1,953) | | | $ | 200,616 | |
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2019 | Services | | International | | Products | | Corp/Elim | | Total |
Oil & Gas | $ | 100,927 |
| | $ | 11,561 |
| | $ | 71 |
| | $ | — |
| | $ | 112,559 |
|
Aerospace & Defense | 12,420 |
| | 9,626 |
| | 438 |
| | — |
| | 22,484 |
|
Industrials | 15,612 |
| | 5,453 |
| | 506 |
| | — |
| | 21,571 |
|
Power generation & Transmission | 7,215 |
| | 3,462 |
| | 461 |
| | — |
| | 11,138 |
|
Other Process Industries | 6,942 |
| | 2,674 |
| | 304 |
| | — |
| | 9,920 |
|
Infrastructure, Research & Engineering | 4,205 |
| | 1,964 |
| | 2,964 |
| | — |
| | 9,133 |
|
Other | 5,251 |
| | 2,310 |
| | 777 |
| | (2,951 | ) | | 5,387 |
|
Total | $ | 152,572 |
| | $ | 37,050 |
| | $ | 5,521 |
| | $ | (2,951 | ) | | $ | 192,192 |
|
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2018 | Services | | International | | Products | | Corp/Elim | | Total |
Oil & Gas | $ | 90,584 |
| | $ | 8,843 |
| | $ | 115 |
| | $ | — |
| | $ | 99,542 |
|
Aerospace & Defense | 12,287 |
| | 13,117 |
| | 400 |
| | — |
| | 25,804 |
|
Industrials | 17,523 |
| | 6,080 |
| | 1,191 |
| | — |
| | 24,794 |
|
Power generation & Transmission | 6,341 |
| | 3,202 |
| | 1,334 |
| | — |
| | 10,877 |
|
Other Process Industries | 6,677 |
| | 1,650 |
| | 11 |
| | — |
| | 8,338 |
|
Infrastructure, Research & Engineering | 2,629 |
| | 1,777 |
| | 1,576 |
| | — |
| | 5,982 |
|
Other | 5,299 |
| | 2,002 |
| | 1,089 |
| | (1,558 | ) | | 6,832 |
|
Total | $ | 141,340 |
| | $ | 36,671 |
| | $ | 5,716 |
| | $ | (1,558 | ) | | $ | 182,169 |
|
|
| | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2019 | Services | | International | | Products | | Corp/Elim | | Total |
Oil & Gas | $ | 301,696 |
| | $ | 33,033 |
| | $ | 551 |
| | $ | — |
| | $ | 335,280 |
|
Aerospace & Defense | 38,725 |
| | 31,783 |
| | 1,060 |
| | — |
| | 71,568 |
|
Industrials | 51,373 |
| | 15,987 |
| | 1,585 |
| | — |
| | 68,945 |
|
Power generation & Transmission | 21,829 |
| | 7,383 |
| | 2,328 |
| | — |
| | 31,540 |
|
Other Process Industries | 19,644 |
| | 7,420 |
| | 376 |
| | — |
| | 27,440 |
|
Infrastructure, Research & Engineering | 9,601 |
| | 7,214 |
| | 4,869 |
| | — |
| | 21,684 |
|
Other | 11,211 |
| | 6,482 |
| | 2,453 |
| | (7,008 | ) | | 13,138 |
|
Total | $ | 454,079 |
| | $ | 109,302 |
| | $ | 13,222 |
| | $ | (7,008 | ) | | $ | 569,595 |
|
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, 2020 | Services | | International | | Products | | Corp/Elim | | Total |
United States | $ | 197,786 | | | $ | 314 | | | $ | 3,612 | | | $ | (1,521) | | | $ | 200,191 | |
Other Americas | 30,781 | | | 2,464 | | | 350 | | | (246) | | | 33,349 | |
Europe | 371 | | | 46,266 | | | 928 | | | (1,041) | | | 46,524 | |
Asia-Pacific | 612 | | | 1,366 | | | 1,924 | | | (66) | | | 3,836 | |
Total | $ | 229,550 | | | $ | 50,410 | | | $ | 6,814 | | | $ | (2,874) | | | $ | 283,900 | |
|
| | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2018 | Services | | International | | Products | | Corp/Elim | | Total |
Oil & Gas | $ | 287,620 |
| | $ | 27,512 |
| | $ | 1,052 |
| | $ | — |
| | $ | 316,184 |
|
Aerospace & Defense | 38,115 |
| | 42,468 |
| | 1,836 |
| | — |
| | 82,419 |
|
Industrials | 45,847 |
| | 20,298 |
| | 2,656 |
| | — |
| | 68,801 |
|
Power generation & Transmission | 23,378 |
| | 6,728 |
| | 3,444 |
| | — |
| | 33,550 |
|
Other Process Industries | 18,222 |
| | 6,349 |
| | 49 |
| | — |
| | 24,620 |
|
Infrastructure, Research & Engineering | 8,723 |
| | 6,848 |
| | 3,337 |
| | — |
| | 18,908 |
|
Other | 12,748 |
| | 6,035 |
| | 4,912 |
| | (6,585 | ) | | 17,110 |
|
Total | $ | 434,653 |
| | $ | 116,238 |
| | $ | 17,286 |
| | $ | (6,585 | ) | | $ | 561,592 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2019 | Services | | International | | Products | | Corp/Elim | | Total |
United States | $ | 245,015 | | | $ | 334 | | | $ | 4,947 | | | $ | (2,554) | | | $ | 247,742 | |
Other Americas | 55,513 | | | 3,915 | | | 137 | | | (264) | | | 59,301 | |
Europe | 698 | | | 65,280 | | | 857 | | | (1,235) | | | 65,600 | |
Asia-Pacific | 281 | | | 2,723 | | | 1,760 | | | (4) | | | 4,760 | |
Total | $ | 301,507 | | | $ | 72,252 | | | $ | 7,701 | | | $ | (4,057) | | | $ | 377,403 | |
Revenue per key geographic location was as follows:
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2019 | Services | | International | | Products | | Corp/Elim | | Total |
United States | $ | 123,585 |
| | $ | 128 |
| | $ | 3,780 |
| | $ | (1,084 | ) | | $ | 126,409 |
|
Other Americas | 26,981 |
| | 1,842 |
| | 72 |
| | 32 |
| | 28,927 |
|
Europe | 1,157 |
| | 31,817 |
| | 513 |
| | (1,844 | ) | | 31,643 |
|
Asia-Pacific | 849 |
| | 3,263 |
| | 1,156 |
| | (55 | ) | | 5,213 |
|
Total | $ | 152,572 |
| | $ | 37,050 |
| | $ | 5,521 |
| | $ | (2,951 | ) | | $ | 192,192 |
|
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2018 | Services | | International | | Products | | Corp/Elim | | Total |
United States | $ | 118,415 |
| | $ | 82 |
| | $ | 2,806 |
| | $ | (849 | ) | | $ | 120,454 |
|
Other Americas | 21,712 |
| | 1,894 |
| | 192 |
| | (141 | ) | | 23,657 |
|
Europe | 748 |
| | 33,654 |
| | 1,184 |
| | (557 | ) | | 35,029 |
|
Asia-Pacific | 465 |
| | 1,041 |
| | 1,534 |
| | (11 | ) | | 3,029 |
|
Total | $ | 141,340 |
| | $ | 36,671 |
| | $ | 5,716 |
| | $ | (1,558 | ) | | $ | 182,169 |
|
|
| | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2019 | Services | | International | | Products | | Corp/Elim | | Total |
United States | $ | 368,600 |
| | $ | 461 |
| | $ | 8,727 |
| | $ | (3,638 | ) | | $ | 374,150 |
|
Other Americas | 82,494 |
| | 5,757 |
| | 209 |
| | (232 | ) | | 88,228 |
|
Europe | 1,855 |
| | 97,098 |
| | 1,370 |
| | (3,079 | ) | | 97,244 |
|
Asia-Pacific | 1,130 |
| | 5,986 |
| | 2,916 |
| | (59 | ) | | 9,973 |
|
Total | $ | 454,079 |
| | $ | 109,302 |
| | $ | 13,222 |
| | $ | (7,008 | ) | | $ | 569,595 |
|
|
| | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2018 | Services | | International | | Products | | Corp/Elim | | Total |
United States | $ | 364,813 |
| | $ | 506 |
| | $ | 8,846 |
| | $ | (2,595 | ) | | $ | 371,570 |
|
Other Americas | 66,170 |
| | 5,751 |
| | 552 |
| | (1,138 | ) | | 71,335 |
|
Europe | 3,037 |
| | 105,499 |
| | 3,118 |
| | (2,752 | ) | | 108,902 |
|
Asia-Pacific | 633 |
| | 4,482 |
| | 4,770 |
| | (100 | ) | | 9,785 |
|
Total | $ | 434,653 |
| | $ | 116,238 |
| | $ | 17,286 |
| | $ | (6,585 | ) | | $ | 561,592 |
|
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
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 Condensed Consolidated Balance Sheets. Amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, generally at periodic intervals (e.g., weekly, bi-weekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from ourits customers before revenue is recognized, resulting in contract liabilities. These assets and liabilities are aggregated on an individual contract basis and reported on the Condensed Consolidated Balance Sheets at the end of each reporting period within accounts receivables or accrued expenses and other current liabilities.
Revenue recognized induring the six months ended June 30, 2020 and 2019 that was included in the contract liability balance at the beginning of thesuch year was $3.4 million.$3.2 million and $2.7 million, respectively. Changes in the contract asset and liability balances during the quarter ended September 30, 2019,these periods were not materially impacted by any other factors. The Company has elected to utilize a practical expedient to expense incremental costs incurred related to obtaining a contract. The Company’s expenses are expected to be amortized over a period less than one year.
3.Share-Based Compensation
The Company has share-based incentive awards outstanding to its eligible employees and non-employee directors under two2 equity incentive plans: (i) the 2009 Long-Term Incentive Plan (the "2009 Plan") and (ii) the 2016 Long-Term Incentive Plan (the "2016 Plan"). NoNaN further awards may be granted under the 2009 Plan, although awards granted under the 2009 Plan remain outstanding in accordance with their terms. Awards granted under the 2016 Plan may be in the form of stock options, restricted stock units and other forms of share-based incentives, including performance restricted stock units, stock appreciation rights and deferred stock rights. At the annual shareholders meeting on May 19, 2020, the Company’s shareholders approved an amendment to increase the total number of shares that may be issued under the 2016 Plan by 2 million, for a total of 3.7 million shares that may be issued under the 2016 Plan.
Stock Options
For the ninethree and six months ended SeptemberJune 30, 20192020 and 2018,2019, the Company did not0t recognize any share-based compensation expense related to stock option awards, as all outstanding stock options awards arewere then already fully vested. NoNaN unrecognized compensation costs remained related to stock option awards as of SeptemberJune 30, 2019.2020.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
The following table sets forth a summary of the stock option activity, weighted-average exercise prices and options outstanding as of SeptemberJune 30, 20192020 and SeptemberJune 30, 2018:2019:
| | | Nine months ended September 30, | | Six months ended June 30, | |
| 2019 | | 2018 | | 2020 | | | 2019 | |
| Common Stock Options | | Weighted Average Exercise Price | | Common Stock Options | | Weighted Average Exercise Price | | Common Stock Options | | Weighted Average Exercise Price | | Common Stock Options | | Weighted Average Exercise Price | |
Outstanding at beginning of period: | 2,105 |
| | $ | 13.47 |
| | 2,130 |
| | $ | 13.43 |
| Outstanding at beginning of period: | 5 | | | $ | 22.35 | | | 2,105 | | | $ | 13.47 | | |
Granted | — |
| | $ | — |
| | — |
| | $ | — |
| Granted | — | | | $ | — | | | — | | | $ | — | | |
Exercised | (2,093 | ) | | $ | 13.45 |
| | (25 | ) | | $ | 10.75 |
| Exercised | — | | | $ | — | | | (4) | | | $ | 10.00 | | |
Expired or forfeited | (7 | ) | | $ | 10.00 |
| | — |
| | $ | — |
| Expired or forfeited | — | | | $ | — | | | (7) | | | $ | 10.00 | | |
Outstanding at end of period: | 5 |
| | $ | 22.35 |
| | 2,105 |
| | $ | 13.47 |
| Outstanding at end of period: | 5 | | | $ | 22.35 | | | 2,094 | | | $ | 13.48 | | |
Restricted Stock Unit Awards
For the three months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019, the Company recognized share-based compensation expense related to restricted stock unit awards of $1.0$1.4 million and $1.3$1.1 million, respectively. For the ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018,2019, the Company recognized share-based compensation expense related to restricted stock unit awards of $3.0$2.1 million and $3.3$2.0 million, respectively. As of SeptemberJune 30, 2019,2020, there was $7.8$6.6 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which is expected to be recognized over a remaining weighted-average period of 2.62.3 years. 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 vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows:
| | | | | | | | | | | |
| Six months ended June 30, | | |
| 2020 | | 2019 |
Restricted stock awards vested | 143 | | | 77 | |
Fair value of awards vested | $ | 542 | | | $ | 1,052 | |
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, | | |
| 2020 | | 2019 |
Awards issued | 15 | | | 15 | |
Grant date fair value of awards issued | $ | 57 | | | $ | 210 | |
A summary of the Company's outstanding, non-vested restricted share units is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, | | | | | | |
| 2020 | | | | 2019 | | |
| Units | | Weighted Average Grant-Date Fair Value | | Units | | Weighted Average Grant-Date Fair Value |
Outstanding at beginning of period: | 559 | | | $ | 16.92 | | | 443 | | | $ | 20.55 | |
Granted | 557 | | | $ | 3.77 | | | 334 | | | $ | 14.04 | |
Released | (143) | | | $ | 16.74 | | | (77) | | | $ | 19.88 | |
Forfeited | (14) | | | $ | 13.74 | | | (23) | | | $ | 19.35 | |
Outstanding at end of period: | 959 | | | $ | 9.35 | | | 677 | | | $ | 17.46 | |
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows:
|
| | | | | | | |
| Nine months ended September 30, |
| 2019 | | 2018 |
Restricted stock awards vested | 148 |
| | 158 |
|
Fair value of awards vested | $ | 2,168 |
| | $ | 3,406 |
|
A summary of the fully-vested common stock the Company issued to its six non-employee directors, in connection with its non-employee director compensation plan, is as follows:
|
| | | | | | | |
| Nine months ended September 30, |
| 2019 | | 2018 |
Awards issued | 30 |
| | 19 |
|
Grant date fair value of awards issued | $ | 450 |
| | $ | 400 |
|
A summary of the Company's outstanding, non-vested restricted share units is as follows:
|
| | | | | | | | | | | | | |
| Nine months ended September 30, |
| 2019 | | 2018 |
| Units | | Weighted Average Grant-Date Fair Value | | Units | | Weighted Average Grant-Date Fair Value |
Outstanding at beginning of period: | 443 |
| | $ | 20.55 |
| | 532 |
| | $ | 21.05 |
|
Granted | 334 |
| | $ | 14.04 |
| | 211 |
| | $ | 19.20 |
|
Released | (148 | ) | | $ | 20.17 |
| | (158 | ) | | $ | 20.66 |
|
Forfeited | (36 | ) | | $ | 18.38 |
| | (34 | ) | | $ | 20.36 |
|
Outstanding at end of period: | 593 |
| | $ | 17.08 |
| | 551 |
| | $ | 20.37 |
|
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 approved by the Compensation Committee of the Board of Directors of the Company. For 2019, 3 metrics, as defined: (1) Operating Income, (2) Adjusted EBITDAS (defined as net income attributable to MISTRAS Group, Inc. 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) and (3) Revenue. There also is a discretionary portion of the PRSUs based on individual performance, granted at the discretion of the Compensation Committee (Discretionary PRSUs). PRSUs and Discretionary 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.
For 2020, the Compensation Committee changed the criteria for the PRSUs to 4 metrics, with no discretionary portion. Revenue and Adjusted EBITDAS are being retained, and 2 additional metrics, free cash flow as a percentage of revenue and return on average book equity, will replace Operating Income. These 2 newly-added metrics are relative metrics, the performance of which are based upon how the Company performs relative to a peer group.
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 equity-classified.
A summary of the Company's PRSU activity is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, | | | | | | |
| 2020 | | | | 2019 | | |
| Units | | Weighted Average Grant-Date Fair Value | | Units | | Weighted Average Grant-Date Fair Value |
Outstanding at beginning of period: | 260 | | | $ | 16.77 | | | 277 | | | $ | 17.80 | |
Granted | 292 | | | $ | 3.68 | | | 190 | | | $ | 13.63 | |
Performance condition adjustments | 1 | | | $ | 13.63 | | | (3) | | | $ | 18.46 | |
Released | (79) | | | $ | 15.43 | | | (77) | | | $ | 15.86 | |
Forfeited | — | | | $ | — | | | — | | | $ | — | |
Outstanding at end of period: | 474 | | | $ | 8.17 | | | 387 | | | $ | 15.94 | |
During the six months ended June 30, 2020 and June 30, 2019, the Compensation Committee approved the final calculation of the award metrics for calendar year 2019 and calendar year 2018, respectively. As a result, the calendar year 2019 PRSUs increased by approximately 1,000 units and the calendar year 2018 PRSUs decreased by approximately 3,000 units. As of June 30, 2020, the final revenue and adjusted EBITDA metrics were not finalized related to the 2020 grant, therefore, approximately 146 thousand shares were liability classified at June 30, 2020. The liability at June 30, 2020 was less than $0.1 million. The revenue and adjusted EBITDA metrics were finalized in August 2020.
For the three months ended June 30, 2020 and June 30, 2019, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.3 million and $0.4 million, respectively. For the six months ended June 30, 2020 and June 30, 2019, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.6 million and $0.7 million, respectively. At June 30, 2020, there was $2.0 million of total unrecognized compensation costs related to approximately 474,000 non-vested PRSUs, which is expected to be recognized over a remaining weighted-average period of 2.5 years.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
A summary of the Company's PRSU activity is as follows:
|
| | | | | | | | | | | | | |
| Nine months ended September 30, |
| 2019 | | 2018 |
| Units | | Weighted Average Grant-Date Fair Value | | Units | | Weighted Average Grant-Date Fair Value |
Outstanding at beginning of period: | 277 |
| | $ | 17.80 |
| | 278 |
| | $ | 17.00 |
|
Granted | 190 |
| | $ | 13.63 |
| | 123 |
| | $ | 19.46 |
|
Performance condition adjustments | (36 | ) | | $ | 14.06 |
| | (28 | ) | | $ | 19.49 |
|
Released | (77 | ) | | $ | 15.86 |
| | (61 | ) | | $ | 15.04 |
|
Forfeited | — |
| | $ | — |
| | (12 | ) | | $ | 16.16 |
|
Outstanding at end of period: | 354 |
| | $ | 16.45 |
| | 300 |
| | $ | 18.05 |
|
During the nine months ended September 30, 2019 and September 30, 2018, the Compensation Committee approved the final calculation of the award metrics for calendar year 2018 and calendar year 2017, respectively. As a result, the calendar year 2018 PRSUs decreased by approximately 3,000 units and the calendar year 2017 PRSUs increased by approximately 4,000 units. Calendar year 2019 PRSUs decreased approximately 33,000 units during the nine months ended September 30, 2019 based on forecasted results for calendar year 2019. Calendar year 2018 PRSUs decreased approximately 32,000 units during the nine months ended September 30, 2018 based on forecasted results for calendar year 2018.
As of September 30, 2019, 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 Sheets.
For the three months ended September 30, 2019 and September 30, 2018, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.5 million and $0.4 million, respectively. For the nine months ended September 30, 2019 and September 30, 2018, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $1.2 million and $1.0 million, respectively. At September 30, 2019, there was $3.1 million of total unrecognized compensation costs related to approximately 354,000 non-vested PRSUs, which is expected to be recognized over a remaining weighted-average period of 2.3 years.
4.Earnings (loss) per Share
Basic earnings (loss) per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, and (2) the dilutive effect of assumed conversion of equity awards using the treasury stock method. With respect to the number of weighted-average shares outstanding (denominator), diluted shares reflects: (i) the exercise of options to acquire common stock to the extent that the options’ exercise prices are less than the average market price of common shares during the period and (ii) the pro forma vesting of restricted stock units.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
The following table sets forth the computations of basic and diluted earnings per share:
| | | | | | | | | | | | Three months ended June 30, | | | Six months ended June 30, | |
| Three months ended | | Nine months ended | | 2020 | | 2019 | | 2020 | | 2019 |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 | | | | | | | | |
| | | | | | | | |
Basic earnings per share: | |
| | |
| | | | | |
Basic earnings (loss) per share: | | Basic earnings (loss) per share: | | | | |
Numerator: | |
| | |
| | | | | Numerator: | | | | |
Net income (loss) attributable to Mistras Group, Inc. | $ | 3,093 |
| | $ | (1,011 | ) | | $ | 5,231 |
| | $ | 7,897 |
| Net income (loss) attributable to Mistras Group, Inc. | $ | (2,656) | | | $ | 7,431 | | | $ | (101,165) | | | $ | 2,138 | |
Denominator: | |
| | |
| | |
| | |
| Denominator: | | | | | | | |
Weighted-average common shares outstanding | 28,800 |
| | 28,429 |
| | 28,678 |
| | 28,360 |
| Weighted-average common shares outstanding | 29,085 | | | 28,657 | | | 29,024 | | | 28,616 | |
Basic earnings per share | $ | 0.11 |
| | $ | (0.04 | ) | | $ | 0.18 |
| | $ | 0.28 |
| |
Basic earnings (loss) per share | | Basic earnings (loss) per share | $ | (0.09) | | | $ | 0.26 | | | $ | (3.49) | | | $ | 0.07 | |
| | | | | | | | |
Diluted earnings per share: | |
| | |
| | | | | |
Diluted earnings (loss) per share: | | Diluted earnings (loss) per share: | | | | |
Numerator: | |
| | |
| | | | | Numerator: | | | | |
Net income (loss) attributable to Mistras Group, Inc. | $ | 3,093 |
| | $ | (1,011 | ) | | $ | 5,231 |
| | $ | 7,897 |
| Net income (loss) attributable to Mistras Group, Inc. | $ | (2,656) | | | $ | 7,431 | | | $ | (101,165) | | | $ | 2,138 | |
Denominator: | |
| | |
| | |
| | |
| Denominator: | | | | | | | |
Weighted-average common shares outstanding | 28,800 |
| | 28,429 |
| | 28,678 |
| | 28,360 |
| Weighted-average common shares outstanding | 29,085 | | | 28,657 | | | 29,024 | | | 28,616 | |
Dilutive effect of stock options outstanding(1) | 129 |
| | — |
| | 147 |
| | 739 |
| Dilutive effect of stock options outstanding(1) | — | | | 46 | | | — | | | 131 | |
Dilutive effect of restricted stock units outstanding(1) | 227 |
| | — |
| | 197 |
| | 348 |
| Dilutive effect of restricted stock units outstanding(1) | — | | | 159 | | | — | | | 171 | |
| 29,156 |
| | 28,429 |
| | 29,022 |
| | 29,447 |
| | 29,085 | | | 28,862 | | | 29,024 | | | 28,918 | |
Diluted earnings per share | $ | 0.11 |
| | $ | (0.04 | ) | | $ | 0.18 |
| | $ | 0.27 |
| |
Diluted earnings (loss) per share | | Diluted earnings (loss) per share | $ | (0.09) | | | $ | 0.26 | | | $ | (3.49) | | | $ | 0.07 | |
_______________
(1) For the three and six months ended SeptemberJune 30, 2018, 8052020, 118 thousand shares and 364223 thousand shares related to stock options and restricted stock respectively, were excluded from the calculation of diluted EPS due to the net loss for the period.
5.Acquisitions and Dispositions
Acquisitions
DuringThe Company did 0t complete any acquisitions during the ninesix months ended June 30, 2020 or 2019. During September 30, 2019, the Company completed one1 acquisition that provides pipeline integrity management software and services to energy transportation companies. The Company acquired all the equity interest of the acquiree in exchange for aggregate consideration of $4.8$4.4 million in cash, contingent consideration of up to $4.3 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 working capital adjustments, which have not been finalized.adjustments. The goodwill recorded is primarily attributable to expected synergies and is generally fully deductible for tax purposes. The Company is still in the process of completing its valuation of the assets acquired and liabilities assumed. The Company accounted for this transaction in accordance with the acquisition method of accounting for business combinations.
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 summarizes the allocation of the preliminary purchase price to the estimated fair valuesvalue of the assets acquired and liabilities assumed, at the dateCompany's allocation of acquisition, with the excess recorded as goodwill:
|
| | | |
Cash paid | $ | 4,843 |
|
Contingent consideration | 1,081 |
|
Total consideration | $ | 5,924 |
|
| |
Current assets | $ | 1,282 |
|
Property, plant and equipment | 65 |
|
Intangible assets | 3,467 |
|
Goodwill | 1,753 |
|
Current liabilities | (643 | ) |
Net assets acquired | $ | 5,924 |
|
The assets and liabilities of the business acquired in 2019 are included in the Condensed Consolidated Balance Sheets 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 valuation of the assets acquired and liabilities assumed. Goodwill primarily relates to expected synergies and is generally fully deductible for tax purposes. Intangible assets primarily relate to technology and customer relationships.
The results of operations of the business acquired in 2019 have been included in the Services segment within the Unaudited Condensed Consolidated Statements of Income (Loss) from the closing date of this transaction and approximates $0.6 million for revenues and $0.1 million operating lossany subsequent adjustments made for the three and nine months ended September 30, 2019.2019 acquisition:
During the nine months ended September 30, 2018, the Company did not complete any acquisitions. | | | | | | | |
| | | |
| | | |
| | | |
| | | |
Cash paid | $ | 4,380 | | | |
Working capital adjustments | (152) | | | |
Fair value of contingent consideration | 1,142 | | | |
Total consideration | $ | 5,370 | | | |
| | | |
Current net assets | $ | 142 | | | |
Other assets | 34 | | | |
Property, plant and equipment | 65 | | | |
Intangibles | 3,594 | | | |
Goodwill | 1,535 | | | |
Net assets acquired | $ | 5,370 | | | |
The Company completed one acquisition during the fourth quarter of 2018. The acquired company primarily provides services to the midstream area within the oil and gas industry, with headquarters in Canada and a location in the U.S. The Company acquired 100% of the equity interests of the acquiree's Canadian and U.S. entities in exchange for aggregate consideration of $143.1 million in cash. The Company accounted for this transaction in accordance with the acquisition method of accounting for business combinations.
During the three months ended September 30, 2019, the Company adjusted provisional amounts recorded and related effects as follows:
The Company decreased the $8.5 million provisional fair value of property, plant and equipment by $0.6 million with a corresponding increase to goodwill.
The Company increased the $5.0 million provisional fair value of debt and other liabilities by $0.4 million with a corresponding increase to goodwill.
The Company is still in the process of completing the remaining valuation of the assets acquired.
The Company has filed a claim with the seller and the Company's insurance carrier through which the Company has representations and warranty insurance with respect to certain matters that may impact the purchase price. This matter is currently being investigated and discussed with the seller and the Company's insurance carrier.
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, 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, (benefit), net on the Unaudited Condensed Consolidated Statements of Income (Loss) and were as follows for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Due diligence, professional fees and other transaction costs | $ | — | | | $ | 182 | | | $ | — | | | $ | 330 | |
Adjustments to fair value of contingent consideration liabilities | 19 | | | 367 | | | (523) | | | 672 | |
Acquisition-related expense, net | $ | 19 | | | $ | 549 | | | $ | (523) | | | $ | 1,002 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Due diligence, professional fees and other transaction costs | $ | 93 |
| | $ | 35 |
| | $ | 433 |
| | $ | (334 | ) |
Adjustments to fair value of contingent consideration liabilities | (125 | ) | | 182 |
| | 537 |
| | (809 | ) |
Acquisition-related expense (benefit), net | $ | (32 | ) | | $ | 217 |
| | $ | 970 |
| | $ | (1,143 | ) |
The Company's contingent consideration liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheets.
Dispositions
During the third quarter of 2018, substantially all of the assets and liabilities of a subsidiary in the Products and Systems segment were sold for approximately $4.3 million, inclusive of a $0.5 million post-closing adjustment. For the nine months ended September 30, 2018, the Company recognized a gain of approximately $2.4 million related to the sale, which is reported as a Gain on sale of subsidiary on the Unaudited Condensed Consolidated Statement of Income (Loss). The sale also included a three-year agreement to purchase products from the buyer, with a cumulative commitment of $2.3 million (see Note 14–Commitments and Contingencies).
6.Accounts Receivable, net
Accounts receivable consisted of the following:
| | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
| | | | | | | |
Trade accounts receivable | $ | 154,250 |
| | $ | 152,511 |
| Trade accounts receivable | $ | 111,658 | | | $ | 144,282 | |
Allowance for doubtful accounts | (6,226 | ) | | (4,187 | ) | Allowance for doubtful accounts | (7,960) | | | (8,285) | |
Accounts receivable, net | $ | 148,024 |
| | $ | 148,324 |
| Accounts receivable, net | $ | 103,698 | | | $ | 135,997 | |
The Company had $32.3$16.6 million and $16.1$22.2 million of unbilled revenuesrevenue accrued as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. These amounts are included in the trade accounts receivable balances above. Unbilled revenues arerevenue is generally billed in the subsequent quarter to their revenue recognition.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of June 30, 2020, approximately $1.4 million of past due receivables were outstanding from this customer. The Company received notice from the customer in December 2019, alleging that the work performed was not in compliance with the contract. The Company filed a lawsuit to recover the $1.4 million and other amounts due to the Company and the customer filed a counterclaim, alleging breach of contract and seeking its damages. Accordingly, the Company recorded a full reserve in the amount of $1.4 million during the second half of 2019 for these past due receivables. The status of the dispute has not changed during 2020. See Note 14–Commitments and Contingencies for additional details.
In the fourth quarter of 2018, the Company recorded a reserve of $0.7 million for a renewable energy industry customer, based in part on the available information about the financial difficulties of the customer. This customer filed for a voluntary insolvency proceeding on April 9, 2019 at which time payments under the previously agreed upon payment plan ceased. As a result, duringDuring the first quarter of 2019, the Company recorded an additional charge of $5.7 million to fully reserve for the amount of the exposure related to this customer. This customer filed for a voluntary insolvency proceeding on April 9, 2019. During the second quarter of 2019, the Company reversed $1.0 million of this reserve based on additional information obtained during the quarter. There were no changes duringThe status of the thirddispute has not changed since the second quarter of 2019.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
During 2019, the Company sold to an unaffiliated third party, without recourse, its remaining outstanding receivables owed from a customer which filed for bankruptcy, and for which the Company had initially recorded a charge during the second quarter of 2017. During the first quarter of 2019, the Company recorded a recovery of $0.2 million and during the second quarter of 2019, the Company recorded a recovery $1.7 million, related to a bad debt provision for the receivables due from this customer. This matter is considered fully resolved.
7.Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
| | | Useful Life (Years) | | September 30, 2019 | | December 31, 2018 | | Useful Life (Years) | | June 30, 2020 | | December 31, 2019 |
| | | | | | | | | | |
Land | | | $ | 2,657 |
| | $ | 2,680 |
| Land | | | $ | 2,669 | | | $ | 2,672 | |
Buildings and improvements | 30-40 | | 24,031 |
| | 24,338 |
| Buildings and improvements | 30-40 | | 24,543 | | | 24,537 | |
Office furniture and equipment | 5-8 | | 18,037 |
| | 16,170 |
| Office furniture and equipment | 5-8 | | 19,465 | | | 17,227 | |
Machinery and equipment | 5-7 | | 221,555 |
| | 208,245 |
| Machinery and equipment | 5-7 | | 227,671 | | | 225,974 | |
| | | 266,280 |
| | 251,433 |
| | | | 274,348 | | | 270,410 | |
Accumulated depreciation and amortization | | | (170,778 | ) | | (157,538 | ) | Accumulated depreciation and amortization | | | (181,110) | | | (171,803) | |
Property, plant and equipment, net | | | $ | 95,502 |
| | $ | 93,895 |
| Property, plant and equipment, net | | | $ | 93,238 | | | $ | 98,607 | |
Depreciation and amortization expense for the three months ended June 30, 2020 and 2019 was approximately $6.0 million and $6.1 million, respectively.
Depreciation expense for each of the threesix months ended SeptemberJune 30, 2020 and June 30, 2019 and September 30, 2018 was approximately $5.8$12.1 million and $6.0$12.2 million, respectively.
Depreciation expense for each
Mistras Group, Inc. and September 30, 2018 was approximately $18.0 millionSubsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and $18.2 million, respectively.shares in thousands, except per share data)
8. Goodwill
Changes in the carrying amount of goodwill by segment is shown below:
| | | | | | | | | | | | Services | | International | | Products and Systems | | Total |
| Services | | International | | Products and Systems | | Total | |
Balance at December 31, 2018 | $ | 243,476 |
| | $ | 35,783 |
| | $ | — |
| | $ | 279,259 |
| |
Balance at December 31, 2019 | | Balance at December 31, 2019 | $ | 247,215 | | | $ | 35,195 | | | $ | — | | | $ | 282,410 | |
Goodwill acquired during the period | 1,753 |
| | — |
| | — |
| | 1,753 |
| Goodwill acquired during the period | — | | | — | | | — | | | — | |
Impairment charges | | Impairment charges | (57,227) | | | (19,862) | | | — | | | (77,089) | |
Adjustments to preliminary purchase price allocations | 923 |
| | — |
| | — |
| | 923 |
| Adjustments to preliminary purchase price allocations | — | | | — | | | — | | | — | |
Foreign currency translation | 2,830 |
| | (1,644 | ) | | — |
| | 1,186 |
| Foreign currency translation | (5,263) | | | (781) | | | — | | | (6,044) | |
Balance at September 30, 2019 | $ | 248,982 |
| | $ | 34,139 |
| | $ | — |
| | $ | 283,121 |
| |
Balance at June 30, 2020 | | Balance at June 30, 2020 | $ | 184,725 | | | $ | 14,552 | | | $ | — | | | $ | 199,277 | |
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. As
During the first quarter of September2020, the Company’s market capitalization declined significantly compared to the fourth quarter of 2019. Over the same period, the equity value of the Company’s peer group, and the overall U.S. stock market also declined significantly amid market volatility. In addition, oil prices had dropped significantly. These declines were driven in large part by the uncertainty surrounding the COVID-19 pandemic and other macroeconomic events such as the geopolitical tensions between OPEC and Russia. Based on these factors, the Company concluded that multiple triggering events occurred and, accordingly, an interim quantitative goodwill impairment test was performed as of the testing date for each reporting unit as of March 31, 2020 (“testing date”). During the first quarter of 2020, the Company also performed an analysis to determine any impairment of long-lived assets (see Note 9–Intangible assets) as well based on the triggering events noted above.
In performing the interim quantitative goodwill impairment test and consistent with prior practice, the Company determined the fair value of each of the reporting units using a combination of the income approach and the market approach by assessing each of these valuation methodologies based upon availability and relevance of comparable company data and determining the appropriate weighting.
Under the income approach, the fair value for each of the reporting units was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company used internal forecasts, updated for recent events, to estimate future cash flows with cash flows beyond the specific operating plans estimated using a terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on the Company’s most recent views of the long-term outlook for each reporting unit. The internal forecasts include assumptions about future market recovery, including the expected demand for the Company’s goods and services. Due to the inherent uncertainties involved in making estimates and assumptions, actual results may differ from those assumed in the forecasts. The Company derived the discount rates using a capital asset pricing model and analyzing published rates for industries relevant to the reporting units to estimate the cost of equity financing. The Company used discount rates that are commensurate with the risks and uncertainties inherent in the respective businesses and in the internally developed forecasts, updated for recent events.
The market approach valuations were derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses was based on the markets in which the reporting units operate considering risk profiles, size, geography, and diversity of products and services.
Based upon the results of the interim quantitative goodwill impairment test during the first quarter of 2020, the Company recorded an aggregate impairment charge of $77.1 million, which included $57.2 million in the services reporting unit within the Services segment, and $19.3 million in the European reporting unit and $0.6 million in the Brazilian reporting unit, both within the International segment. The impairment was calculated based on the difference between the estimated fair value and the carrying value of the reporting units and are included in Impairment charges on the Unaudited Condensed Consolidated Statements of Income (Loss) for the six months ended June 30, 2019,2020. Subsequent to March 31, 2020 through June 30, 2020, the Company did not identify any changes in circumstances that would indicate the carrying value of goodwill may not be recoverable.
The Significant adverse changes in future periods could negatively affect the Company's cumulativekey assumptions and may result in future goodwill impairment as of September 30, 2019 and December 31, 2018 was $23.1 million, ofcharges which $13.2 million related to the Products and Systems segment and $9.9 million related to the International segment.could be material.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
The Company's cumulative goodwill impairment as of June 30, 2020 was $100.2 million, of which $57.2 million related to the Services segment, $29.8 million related to the International segment and $13.2 million related to the Products and Systems segment. The Company's cumulative goodwill impairment as of December 31, 2019 was $23.1 million, of which $13.2 million related to the Products and Systems segment and $9.9 million related to the International segment.
9.Intangible Assets
The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows:
| | | | | September 30, 2019 | | December 31, 2018 | | | | June 30, 2020 | | | December 31, 2019 | |
| Useful Life (Years) | | Gross Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Amount | | Accumulated Amortization | | Net Carrying Amount | | Useful Life (Years) | | Gross Amount | | Accumulated Amortization | | Impairment | | Net Carrying Amount | | Gross Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | 5-14 | | $ | 112,592 |
| | $ | (65,615 | ) | | $ | 46,977 |
| | $ | 112,624 |
| | $ | (60,993 | ) | | $ | 51,631 |
| Customer relationships | 5-18 | | $ | 112,813 | | | $ | (70,370) | | | $ | (2,206) | | | $ | 40,237 | | | $ | 113,861 | | | $ | (67,853) | | | $ | 46,008 | |
Software/Technology | 3-15 | | 72,198 |
| | (17,071 | ) | | 55,127 |
| | 67,240 |
| | (13,319 | ) | | 53,921 |
| Software/Technology | 3-15 | | 74,899 | | | (21,365) | | | (25,874) | | | 27,660 | | | 77,914 | | | (18,756) | | | 59,158 | |
Covenants not to compete | 2-5 | | 12,735 |
| | (11,416 | ) | | 1,319 |
| | 12,593 |
| | (10,825 | ) | | 1,768 |
| Covenants not to compete | 2-5 | | 12,688 | | | (11,846) | | | (212) | | | 630 | | | 12,795 | | | (11,630) | | | 1,165 | |
Other | 2-12 | | 10,726 |
| | (7,256 | ) | | 3,470 |
| | 10,317 |
| | (6,242 | ) | | 4,075 |
| Other | 2-12 | | 10,864 | | | (8,041) | | | (502) | | | 2,321 | | | 10,813 | | | (7,607) | | | 3,206 | |
Total | | | $ | 208,251 |
| | $ | (101,358 | ) | | $ | 106,893 |
| | $ | 202,774 |
| | $ | (91,379 | ) | | $ | 111,395 |
| Total | | | $ | 211,264 | | | $ | (111,622) | | | $ | (28,794) | | | $ | 70,848 | | | $ | 215,383 | | | $ | (105,846) | | | $ | 109,537 | |
As described in Note 8–Goodwill, during the first quarter of 2020, there were negative market indicators that were determined to be triggering events indicating a potential impairment of certain long-lived assets within asset groups in the Services, International, Products and Corporate segments. The asset groups are groupings of assets and liabilities determined at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability testing indicated that certain intangible assets and right of use assets (See Note 13–Leases) were potentially impaired. For asset groups that required an impairment measurement, similar to the valuations performed to determine the goodwill impairment, the Company used income and market approaches to estimate the fair value of the long-lived assets, which requires significant judgment in evaluation of the useful lives of the assets, economic and industry trends, estimated future cash flows, discount rates, and other factors. The result of the analysis was an aggregate impairment charge of $28.8 million, which included $25.9 million to software/technology, $2.2 million to customer relationships, $0.5 million to other intangibles and $0.2 million to covenants not to compete, all of which are in the Services reporting unit within the Services segment and are included in Impairment charges on the Unaudited Condensed Consolidated Statements of Income (Loss) for the six months ended June 30, 2020.
Amortization expense for the three months ended SeptemberJune 30, 2020 and June 30, 2019 and September 30, 2018 was approximately $3.4$2.6 million and $2.5$3.5 million, respectively.
Amortization expense for the ninesix months ended SeptemberJune 30, 2020 and June 30, 2019 and September 30, 2018 was approximately $10.5$5.9 million and $7.5$7.1 million, respectively.
10.Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| | | |
Accrued salaries, wages and related employee benefits | $ | 34,020 |
| | $ | 29,959 |
|
Contingent consideration, current portion | 2,732 |
| | 1,687 |
|
Accrued workers’ compensation and health benefits | 4,882 |
| | 5,086 |
|
Deferred revenue | 5,153 |
| | 5,046 |
|
Pension accrual | 3,064 |
| | 5,585 |
|
Right-of-use liability - operating | 9,636 |
| | — |
|
Other accrued expenses | 26,965 |
| | 26,532 |
|
Total | $ | 86,452 |
| | $ | 73,895 |
|
11.Long-Term Debt
Long-term debt consisted of the following:
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| | | |
Senior credit facility | $ | 163,233 |
| | $ | 181,656 |
|
Senior secured term loan, net of debt issuance costs of $0.1 million | 96,163 |
| | 99,897 |
|
Notes payable | — |
| | 68 |
|
Other | 7,920 |
| | 8,999 |
|
Total debt | 267,316 |
| | 290,620 |
|
Less: Current portion | (6,563 | ) | | (6,833 | ) |
Long-term debt, net of current portion | $ | 260,753 |
| | $ | 283,787 |
|
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| | | |
Accrued salaries, wages and related employee benefits | $ | 27,014 | | | $ | 30,072 | |
Contingent consideration, current portion | 1,023 | | | 2,614 | |
Accrued workers’ compensation and health benefits | 4,434 | | | 4,467 | |
Deferred revenue | 6,861 | | | 5,860 | |
Pension accrual | 2,519 | | | 2,519 | |
Right-of-use liability - operating | 9,857 | | | 10,133 | |
Other accrued expenses | 25,600 | | | 25,724 | |
Total | $ | 77,308 | | | $ | 81,389 | |
11. Long-Term Debt
Long-term debt consisted of the following:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| | | |
Senior credit facility | $ | 138,033 | | | $ | 151,773 | |
Senior secured term loan, net of debt issuance costs of $0.3 million | 92,202 | | | 94,919 | |
| | | |
Other | 9,161 | | | 8,021 | |
Total debt | 239,396 | | | 254,713 | |
Less: Current portion | (8,735) | | | (6,593) | |
Long-term debt, net of current portion | $ | 230,661 | | | $ | 248,120 | |
Senior Credit Facility
The Company's revolvingCompany has a credit agreement with its banking group ("Credit Agreement") which provides the Company with a $300 million revolving line of credit which, under certain circumstances, can be increased to $450 million with the approval of the banks. In addition, the Credit Agreement provides the Company withand a $100 million senior secured term loan A facility. Pursuant to the Amendment described below, the revolving line of credit was reduced from $300 million to $175 million. Both the revolving line of credit and the term loan A facility under the Credit Agreement have a maturity date of December 12, 2023. The Company may borrow up to $100 million in non-U.S. Dollar currencies and use up to $20 million of the credit limit for the issuance of letters of credit. As of September 30, 2019,
On May 15, 2020, the Company had borrowings of $259.4 million and a total of $5.4 million of letters of credit outstanding underentered into the Third Amendment (the “Amendment”) to the Credit Agreement. The amendment was needed because the Company has capitalized costs associated with debt modificationsdetermined that as a result of $0.9 million asthe uncertain impact of September 30, 2019, which is includedthe COVID-19 pandemic and the significant drop in Other assets onoil prices, it would not meet the Condensed Consolidated Balance Sheets.
Loans underthen existing financial covenants in the Credit Agreement bear interest atfor upcoming quarters. Accordingly, the London Interbank Offered Rate ("LIBOR") plus an applicable LIBOR margin ranging from 1%Amendment modified the financial covenants to 2%, or a base rate less a marginprovide for: i) elimination 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 generally 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 (h) certain amounts of EBITDA of acquired business for the prior twelve months, plus (i) certain expenses related to the closing of the Credit Agreement, plus (j) non-cash expenses which do not (in the current or any future period) represent a cash item (excluding non-cash gains which increase net income), plus (k) non-recurring charges (not to exceed $10.0 million in the four consecutive quarters immediately preceding the date of determination) for items such as severance, lease termination charges, asset write-offs and litigation settlements paid, and multi-employer pension plan withdrawal liabilities, all determined for the period of four consecutive fiscal quarters immediately preceding the date of determination of EBITDA. The Company has the benefit of the lowest margin if its Funded Debt Leverage Ratio is equal to or less than 1.0 to 1, and the margin increases as the ratio increases, to the maximum margin if the ratio is greater than 3.25 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 amounts not paid when due. Amounts borrowed under the Credit Agreement are secured by liens on substantially all of the assets of the Company and is guaranteed by certain of our subsidiaries.
The Credit Agreement contains financial covenants requiring that the Company maintain a Funded Debt Leverage Ratio of no greater than 4.25 to 1 through December 31, 2018, reducing to a maximum permitted ratio of 4.0 to 1 as of March 31, June 30, and September 30, 2019, a maximum permitted ratio of 3.75 to 1 as of December 31, 2019 and a maximum permitted ratio of 3.50 to 1 as of March 31, 2020 and all quarterly periods thereafter, and a Fixed Charge Coverage Ratio of at least 1.25 to 1. Fixed Charge Coverage Ratio means the ratio, as of any date of determination, of (a) (i) EBITDA for the 12 month period immediately preceding the date of determination, taken together as one accounting period, less (ii) the aggregate amount of all capital expenditures made during the period, less (iii) taxes paid in cash during the period, less (iv) Restricted Payments (as defined in the Credit Agreement) paidfor the quarters ended June 30 and September 30, 2020 and increased the Funded Debt Leverage ratio to no greater than 5.25 to 1 beginning for the quarter ending December 31, 2020 and decreasing each successive quarter to no greater than 3.50 to 1 for the quarter ended September 30, 2021, and all quarterly periods thereafter; ii) an elimination of the minimum Fixed Charge Coverage Ratio (as defined in cash during the period, -to- (b)Credit Agreement for the quarters ended June 30, September 30 and December 31, 2020), a decrease to 1.0 to 1 for the quarter ending March 31, 2021 and returning to 1.25 to 1 for the quarter ending June 30, 2021 and thereafter; iii) the addition of a minimum EBITDA covenant requiring $3.44 million for the three months ending June 30, 2020, $24.25 million for the six months ending September 30, 2020, and $38.55 million for the nine months ending December 31, 2020, with no requirement thereafter; and iv) the addition of a minimum Liquidity (as defined in the Amendment) covenant of not less than $20.0 million at all times through September 30, 2020 and ceasing thereafter. In addition, the Amendment set a LIBOR floor of 1.0% applicable to all LIBOR loans, and increased the LIBOR margin range to 1.50% to 4.15%, in addition to certain other modifications of the Credit Agreement. The Amendment also requires that the Company promptly prepay the outstanding amount under the revolving credit facility in an amount equal to the difference between (a) the aggregate sum of (i) all interest, premium payments, debt discount, fees, chargescash and related expensescash equivalents of the Company and its subsidiaries held in connection with borrowed money (including capitalized interest) orthe United States minus (b) $10.0 million if, for a period of two (2) consecutive business days, (i) the outstanding
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in connection withthousands, except per share data)
amount under the deferred purchase price of assets, in each case, to the extent treated as interest in accordance with U.S. generally accepted accounting principles ("GAAP")revolving credit facility exceeds $75.0 million and to the extent paid in cash during the period, (ii) the aggregate principal amount of all redemptions or similar acquisitions for value of outstanding debt for borrowed money or regularly scheduled principal payments made during the period, but excluding any such payments to the extent refinanced through the incurrence of additional Indebtedness otherwise expressly permitted under thecash and cash equivalents exceeds $10.0 million.
The Credit Agreement, and (iii) payments made during the period under all leasesAmendment, as amended, provides that have been or should be, in accordance with GAAP as in effect for the Company's 2017 audited financial statement, recorded as capitalized leases. Beginning in 2020, the Company can electmay not make any acquisitions prior to increaseJune 30, 2021, and thereafter only if the maximumCompany's Funded Debt Leverage Ratio to 4.0is less than 2.50 to 1, for four fiscal quarters immediately following the fiscal quarter in which the Company acquires another business, with the maximum permitted ratio reducing backand after giving effect to 3.5such acquisition, its pro forma Funded Debt Leverage Ratio will not be greater than 3.25 to 1 in the fifth fiscal quarter following such acquisition. The Company can make this election twice during the term of the Credit Agreement.
1. The Credit Agreement also limits the Company’s ability to, among other things, create liens, make investments, incur more indebtedness, merge or consolidate, make dispositions of property, pay dividends and make distributions to stockholders or repurchase ourits stock, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements.
The Company may borrow up to $100 million in non-U.S. Dollar currencies and use up to $20 million of the credit limit for the issuance of letters of credit. As of June 30, 2020, the Company had borrowings of $230.2 million and a total of $3.9 million of letters of credit outstanding under the Credit Agreement does not limitAgreement. The Company has capitalized costs associated with debt modifications of $1.3 million as of June 30, 2020, which is included in Other assets on the Company’s ability to acquire other businesses or companies except that the acquired business or company must be inCondensed Consolidated Balance Sheets. The Amendment reduced the Company's line of business,total available loan capacity, amongst other things, and as a result, the Company must beexpensed approximately $0.6 million in compliance withcapitalized debt issuance costs during the
Mistras Group, Inc.2020, which was included in Selling, general and Subsidiaries
Notes toadministrative expenses on the Unaudited Condensed Consolidated Financial Statements of Income (Loss).
(tabular dollars and shares in thousands, except per share data)
financial covenants on a pro forma basis after taking into account the acquisition, and, if the acquired business is a separate subsidiary, in certain circumstances the lenders will receive the benefit of a guaranty of the subsidiary and liens on its assets and a pledge of its stock.
As of SeptemberJune 30, 2019,2020, the Company was in compliance with the terms of the Credit Agreement and will continuously monitor its compliance with the covenants contained in its Credit Agreement. The Company believes that it is probable, based on the amended covenants, that the Company will be able to comply with the financial covenants in the Credit Agreement as modified by the Amendment and that sufficient credit remains available under the Credit Agreement to meet the Company's liquidity needs. However, due to the uncertainties being caused by the COVID-19 pandemic, the significant volatility in oil prices, and volatility in the aerospace production, such matters cannot be predicted with certainty.
Notes Payable and Other debt
The Company's other debt includes local bank financing provided at the local subsidiary level used to support working capital requirements and fund capital expenditures. At SeptemberJune 30, 2019,2020, there was an aggregate of approximately $7.9$9.2 million outstanding, payable at various times from 2019 to 2029.through 2030. Monthly payments range from $1 thousand to $17 thousand and interest rates range from 0.4% to 6.2%3.5%.
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.
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, | | | Six months ended June 30, | |
| | 2019 | | 2018 | | 2020 | | 2019 |
Beginning balance | | $ | 2,365 |
| | $ | 5,508 |
| Beginning balance | | $ | 3,216 | | | $ | 2,365 | |
Acquisitions | | 1,081 |
| | — |
| |
| Payments | | (755 | ) | | (2,282 | ) | Payments | | (1,303) | | | — | |
Accretion of liability | | 85 |
| | 149 |
| Accretion of liability | | 30 | | | 75 | |
Revaluation | | 452 |
| | (957 | ) | Revaluation | | (553) | | | 597 | |
Foreign currency translation | | 50 |
| | (65 | ) | Foreign currency translation | | (34) | | | 58 | |
Ending balance | | $ | 3,278 |
| | $ | 2,353 |
| Ending balance | | $ | 1,356 | | | $ | 3,095 | |
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 capital lease obligations approximates their carrying amounts based on anticipated interest rates which management believes would currently be available to the Company for similar issuances of debt.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
13. Leases
The Company leases certain office and operating facilities, machinery, equipment, and vehicles. Concurrent with the adoption of ASC 842, the Company recognized a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term for each lease agreement. The Company has elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less and will continue to recognize lease expense for these leases on a straight-line basis over the lease term. The Company has leases with both lease components and non-lease components, such as common area maintenance, utilities, or other repairs and maintenance. For all asset classes, the Company decided to utilize the practical expedient to include both fixed lease components and fixed non-lease components in calculating the ROU asset and lease liability. The Company identified variable lease payments, such as maintenance payments based on actual activities performed or costs incurred, at lease commencement by assessing the nature of the payment provisions, including whether the payments are subject to a minimum charge. Many of ourthe Company's leases include one or more options to renew. When it is reasonably certain that wethe Company will exercise the option, wethe Company will include the impact of the option in the lease term for purposes of determining future lease payments. As the Company is unable to determine the discount rate implicit in its lease agreements, the Company uses its incremental borrowing rate on the commencement date to calculate the present value of future payments.
The Company’s Condensed Consolidated Balance Sheets includes the following related to operating leases:
| | | | | | | | | | | | | | | | | | | | |
Leases | | Classification | | June 30, 2020 | | December 31, 2019 |
Assets | | | | | | |
ROU assets | | Other Assets | | $ | 43,458 | | | $ | 45,817 | |
| | | | | | |
Liabilities | | | | | | |
ROU - current | | Accrued and other current liabilities | | $ | 9,857 | | | $ | 10,133 | |
ROU liability - long-term | | Other liabilities | | 34,843 | | | 36,750 | |
Total ROU liabilities | | | | $ | 44,700 | | | $ | 46,883 | |
|
| | | | | | |
Leases | | Classification | | Nine months ended September 30, 2019 |
Assets | | | | |
Right-of-use assets | | Other Assets | | $ | 42,433 |
|
| | | | |
Liabilities | | | | |
Right-of-use liability - current | | Accrued and other current liabilities | | $ | 9,636 |
|
Right-of-use liability - long-term | | Other liabilities | | 33,531 |
|
Total right-of-use liabilities | | | | $ | 43,167 |
|
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 iswas approximately $4.7$4.2 million and $4.5 million as of SeptemberJune 30, 2020 and December 31, 2019, and totalrespectively. Total rent payments made during the three and nine months ended September 30, 2019for this facility were approximately $0.2 million and $0.7 million, respectively.
Asfor each of Septemberthe three months ended June 30, 2019, the total ROU assets attributable to finance leases are approximately $16.5 million, which is included in Property, plant, and equipment, net on the Condensed Consolidated Balance Sheets.
The components of lease costs were as follows:
|
| | | | | | | | | | |
| | Classification | | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 |
Finance lease expense | | | | | | |
Amortization of ROU assets | | Depreciation and amortization | | $ | 1,205 |
| | $ | 3,605 |
|
Interest on lease liabilities | | Interest expense | | 194 |
| | 578 |
|
Operating lease expense | | Selling, General & Administrative expenses | | 3,230 |
| | 9,453 |
|
Short-term lease expense | | Selling, General & Administrative expenses | | 12 |
| | 18 |
|
Variable lease expense | | Selling, General & Administrative expenses | | 282 |
| | 828 |
|
Total | | | | $ | 4,923 |
| | $ | 14,482 |
|
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
2020 and June 30, 2019. Total rent payments for this facility were approximately $0.4 million and $0.5 million for the six months ended June 30, 2020 and June 30, 2019, respectively. As part of the COVID-19 related vendor concessions, an agreement was reached during the second quarter of 2020 with the related party to reduce rental payments by 20% and defer payments for 90 days for the lease of the Company’s headquarters, starting in June 2020 through December 2020.
Additional information
As part of other COVID-19 related vendor discussions, the Company has modified the terms of several North America operating lease contracts to provide temporary reductions in monthly rental payments and/or temporary deferrals of monthly rental payments.Temporary rent reductions and deferred rental payments have been accounted for on a cash basis and is reflected as a reduction of variable lease expense in the chart below.
The total ROU assets attributable to finance leases were approximately $17.3 million and $19.2 million as of June 30, 2020 and December 31, 2019, respectively, which is included in Property, plant, and equipment, net on the Condensed Consolidated Balance Sheets.
As described in Note 9–Intangible Assets, during the first quarter of 2020 the Company performed an analysis to determine whether there was any impairment of long-lived assets, which included the ROU assets, within the Services, International, and Products and Systems operating segments as follows:well as Corporate. The result of the analysis was a $0.2 million impairment of a ROU asset in an asset group within the Services segment which was included in Impairment charges on the Unaudited Condensed Consolidated Statements of Income (Loss) for the six months ended June 30, 2020.
|
| | | |
| September 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities for finance leases | |
Finance - financing cash flows | $ | 3,338 |
|
Finance - operating cash flows | $ | 578 |
|
Operating - operating cash flows | $ | 9,361 |
|
ROU assets obtained in the exchange for lease liabilities | |
Finance leases | $ | 5,536 |
|
Operating leases | $ | 12,766 |
|
Weighted-average remaining lease term (in years) | |
Finance leases | 6.0 |
|
Operating leases | 6.1 |
|
Weighted-average discount rate | |
Finance leases | 6.2 | % |
Operating leases | 6.0 | % |
MaturitiesThe components of lease liabilities as of September 30, 2019costs were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three months ended June 30, | | | | Six months ended June 30, | | |
| | Classification | | 2020 | | 2019 | | 2020 | | 2019 |
Finance lease expense | | | | | | | | | | |
Amortization of ROU assets | | Depreciation and amortization | | $ | 1,133 | | | $ | 1,226 | | | $ | 2,375 | | | $ | 2,403 | |
Interest on lease liabilities | | Interest expense | | 216 | | | 189 | | | 437 | | | 380 | |
Operating lease expense | | Cost of revenue; Selling, general & administrative expenses | | 3,317 | | | 3,139 | | | 6,664 | | | 6,259 | |
Short-term lease expense | | Cost of revenue; Selling, general & administrative expenses | | 1 | | | 2 | | | 2 | | | 6 | |
Variable lease expense | | Cost of revenue; Selling, general & administrative expenses | | 114 | | | 273 | | | 437 | | | 518 | |
Total | | | | $ | 4,781 | | | $ | 4,829 | | | $ | 9,915 | | | $ | 9,566 | |
|
| | | | | | | |
| Finance | | Operating |
Remainder of 2019 | $ | 1,761 |
| | $ | 3,130 |
|
2020 | 5,119 |
| | 11,431 |
|
2021 | 3,420 |
| | 8,955 |
|
2022 | 2,550 |
| | 6,877 |
|
2023 | 1,661 |
| | 5,976 |
|
Thereafter | 1,465 |
| | 15,677 |
|
Total | 15,976 |
| | 52,046 |
|
Less: Present value discount | (1,426 | ) | | (8,879 | ) |
Lease liability | $ | 14,550 |
| | $ | 43,167 |
|
Pursuant to the Company’s adoption of the new lease accounting guidance using a modified retrospective transition approach, as permitted, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. As previously disclosed in its 2018 Annual Report, the following table presents the Company’s future minimum operating lease commitments as of December 31, 2018:
|
| | | |
2019 | $ | 10,939 |
|
2020 | 8,764 |
|
2021 | 6,327 |
|
2022 | 4,826 |
|
2023 | 4,239 |
|
Thereafter | 10,667 |
|
Total | $ | 45,762 |
|
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, | | |
| | | | | 2020 | | 2019 |
Cash paid for amounts included in the measurement of lease liabilities for finance leases | | | | | | | |
Finance - financing cash flows | | | | | $ | 2,132 | | | $ | 2,411 | |
Finance - operating cash flows | | | | | $ | 437 | | | $ | 380 | |
Operating - operating cash flows | | | | | $ | 6,562 | | | $ | 6,196 | |
ROU assets obtained in the exchange for lease liabilities | | | | | | | |
Finance leases | | | | | $ | 1,266 | | | $ | 2,887 | |
Operating leases | | | | | $ | 2,451 | | | $ | 8,962 | |
Weighted-average remaining lease term (in years) | | | | | | | |
Finance leases | | | | | 5.9 | | 5.8 |
Operating leases | | | | | 6.0 | | 6.0 |
Weighted-average discount rate | | | | | | | |
Finance leases | | | | | 5.9 | % | | 6.3 | % |
Operating leases | | | | | 5.8 | % | | 6.0 | % |
Maturities of lease liabilities as of June 30, 2020 were as follows:
| | | | | | | | | | | |
| Finance | | Operating |
Remainder of 2020 | $ | 3,280 | | | $ | 6,367 | |
2021 | 4,518 | | | 10,933 | |
2022 | 3,678 | | | 8,853 | |
2023 | 2,806 | | | 7,367 | |
2024 | 1,893 | | | 5,755 | |
Thereafter | 1,096 | | | 14,094 | |
Total | 17,271 | | | 53,369 | |
Less: Present value discount | (1,665) | | | (8,669) | |
Lease liability | $ | 15,606 | | | $ | 44,700 | |
14.Commitments and Contingencies
Legal Proceedings and Government Investigations
The Company is subject to periodic 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 possiblypossible liabilities that could arise for certain of the matters described below, the Company does not believe that any currently pending legal proceeding to which the Company is a party will have a material adverse effect on its business, results of operations, cash flows or financial condition. The costs of defense and amounts that may be recovered against the Company may be covered by insurance for certain matters.
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’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 former owner received a judgment in his favor in the amount of $0.4 million for payment of the contingent consideration portion of the purchase price for the business. The Company recorded an accrualwas contracted to perform inspections of welds on various pipeline projects in Texas for this judgment during 2016. The Company's subsidiary appealed the judgment and the entire judgment was overturned on appeal. The appeal process was completed in July 2018 in the Company's favor, and accordingly, the Company reversed the accrual asa customer. As of June 30, 2018.
2020, 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 over 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 was a defendant inhas filed a lawsuit Triumph Aerostructures, LLC d/b/a Triumph Aerostructures-Vought Aircraft Division v. Mistras Group, Inc., pending in the District Court of Bexar County, Texas, State district court, 193rd37th Judicial District, Dallas County, Texas, filed September 2016. The plaintiff alleged that in 2014, Mistras delivered a defective Ultrasonic inspection system and alleged damages of approximately $2.3 million, the amount it paid for the system. In January 2018, the Company agreed to settle this matter for a payment of $1.6 million and Mistras subsequently obtained ownership of the underlying ultrasonic inspection components. A charge for $1.6 million was recorded in 2017 and payment was made in February 2018.
A Company vehicle was involved in an accident in which individuals were injured, property was damaged, and businesses allegedly impacted by the accident have claimed economic losses. One lawsuit has been filed by one of the injured individuals in the U.S. District Court for the District of Colorado, McAllister v.action captioned Mistras Group, Inc. v. Epic Y-Grade Pipeline LP, to recover the $1.4 million and other amounts due to the Company. The customer filed a counterclaim, alleging breach of contract and seeking recovery of its alleged damages. The Company has insurance for these types of matters. Most ofbelieves that any successful claim by the claims have been settled, includingcustomer regarding the claimsCompany’s workmanship will be covered by the McAllister case, and the two remaining unresolved claims are for economic loss and property damage only, and allinsurance, subject to payment of the claims, including the two that have not yet been resolved, have been or will be fully covered by the Company's insurance.
Government Investigations
In May 2015, the Company received a notice from the U.S. Environmental Protection Agency (“EPA”) that it performed a preliminary assessment at a leased facility the Company operates in Cudahy, California and would be investigating the site. The purpose of the investigation was 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. The Company has not received any further notices from EPA regarding this matter. In addition, in 2018, the California Department of Toxic Substances Control notified the owner of the property that it will be performing an additional investigation at the property.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. The Company recorded a full reserve in the amount of $1.4 million during the second half of 2019 for these past due receivables. See Note 6–Accounts Receivable, net.
Pension Related Contingencies
The workforce of certain of the Company’s subsidiaries are unionized and the terms of employment for these workers are governed by collective bargaining agreements, or CBAs. Under these CBAs, the Company’s subsidiaries are required to contribute to the national pension funds for the unions representing these employees, which are multi-employer pension plans. The Company was notified that a significant project was awarded to another contractor in January 2018, and as a result, one of the Company’s subsidiaries experienced a significant reduction in the number of its employees covered by one of the CBAs.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Under certain circumstances, such a reduction in the number of employees participating in multi-employer pension plans pursuant to this CBA could result in a complete or partial withdrawal liability to these multi-employer pension plans under the Employee Retirement Income Security Act of 1974 ("ERISA"). Management explored options to retain a level of union work that would avoid withdrawal liability to the pension plans but concluded during the third quarter of 2018 that the Company's subsidiaries probably would not obtain sufficient union work to avoid withdrawal liability. Therefore, the Company determined that it is probable that its subsidiary willwould incur a withdrawal liability related to these multi-employer pension plans. Accordingly, the Company recorded a charge of $5.9 million during the third quarter of 2018 and $0.5$0.8 million during the nine months ended September 30, 2019 for this potential withdrawal liability. The Company’s subsidiary reached an agreement with one of the pension funds in September 2019 forand made a final payment of $0.9 million in complete satisfaction of the withdrawal liability of the subsidiary. ThisExcluding the settlement payment, was subsequently paid in October 2019.the Company made monthly payments totaling $3.3 million through the time of the final settlement payment, for total payments of $4.2 million. The balance of the estimated total amount of this potential liability as of SeptemberJune 30, 20192020 is approximately $3.1 million, which includes the $0.9 million paid in October 2019.$2.5 million.
Severance and labor disputes
During the third quarter of 2018, the Company recorded approximately $1.2 million in charges related to labor claims for its Brazilian subsidiary, which are included within Selling, general and administrative expenses. These claims related to employees in a company acquired by the Brazilian subsidiary in a prior period. The Company believes it is entitled to indemnification from the sellers of the acquired company for most of these charges, but has not recorded the expected recovery of indemnification for these labor claims as the amount and timing of collection is uncertain as of September 30, 2019.
The Company’s German subsidiary provides employees to customers under temporary staff leasing arrangements. In April 2017, the German Labor Lease Act was passed in Germany limiting the duration of temporary workers to eighteen months, or longer as subsequently agreed with by a customer appropriate authority. Since the passing of the German Labor Lease Act, the Company explored selling its staff leasing services and concluded during the third quarter of 2018 that a sale would not be probable. As a result, the Company decided that it would not renew several of these leasing services contracts when they expireexpired beginning in 2019. Due to the limit on the length of service allowed under the German Labor Lease Act, employees will have to beare being transitioned off the customer contracts. It is expected that theThe German subsidiary thenhas terminated, or will either terminate, some these employees, creating a severance obligation to the terminated employees, and has transitioned, or will transition themother employees to the Company's other customers. As of September 30,During December 2019, the Company accruedexecuted an agreement to sell the rights of certain customer contracts for total consideration of approximately $1.1$0.1 million, foreffective 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, 2020, the Company has approximately $0.4 million of accrued estimated severance payment obligations, which takes into account the Company's estimate with respect to the employees that wouldhave been or will be transitioned to the German subsidiaries' other customers. The $1.1$0.4 million of estimated obligations is net of $0.2$0.3 million in payments made and $0.2$0.8 million in reversals due to employees being transitioned to customer contracts.
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, 2019,2020, total potential acquisition-related contingent consideration ranged from zero0 to approximately $7.9$5.7 million and would be payable upon the achievement of specific performance metrics by certain of the acquired companies over the next year. See Note 5–Acquisitions and Dispositions to these condensed consolidated financial statements for further discussion of the Company’s acquisitions.2.2 years.
During the third quarter of 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 $1.6$1.3 million is remaining as of SeptemberJune 30, 2019.2020. The agreement is based on third partythird-party pricing and the Company's planned purchase requirements over the three yearthree-year purchase period to meet the minimum contractual purchases.
15.Segment Disclosure
The Company’s three3 operating segments are:
•Services. This segment provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of NDT, and inspection, mechanical and engineering services that are used to evaluate the safety, structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components.
PCMS software and pipeline related software and data analysis solutions are included in this segment.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
•International. This segment offers services, products and systems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.
•Products and Systems. 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. 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. All such intersegment transactions are eliminated in the Company’s consolidated financial reporting.
Selected consolidated financial information by segment for the periods shown was as follows: (with intercompany transactions eliminated in Corporate and eliminations)
| | | | | | | | | | | | Three months ended June 30, | | | Six months ended June 30, | |
| Three months ended | | Nine months ended | | 2020 | | 2019 | | 2020 | | 2019 |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 | |
Revenues | |
| | |
| | | | | |
Revenue | | Revenue | | | | | | | |
Services | $ | 152,572 |
| | $ | 141,340 |
| | $ | 454,079 |
| | $ | 434,653 |
| Services | $ | 100,677 | | | $ | 161,210 | | | $ | 229,550 | | | $ | 301,507 | |
International | 37,050 |
| | 36,671 |
| | 109,302 |
| | 116,238 |
| International | 21,343 | | | 37,090 | | | 50,410 | | | 72,252 | |
Products and Systems | 5,521 |
| | 5,716 |
| | 13,222 |
| | 17,286 |
| Products and Systems | 4,002 | | | 4,269 | | | 6,814 | | | 7,701 | |
Corporate and eliminations | (2,951 | ) | | (1,558 | ) | | (7,008 | ) | | (6,585 | ) | Corporate and eliminations | (1,587) | | | (1,953) | | | (2,874) | | | (4,057) | |
| $ | 192,192 |
| | $ | 182,169 |
| | $ | 569,595 |
| | $ | 561,592 |
| | $ | 124,435 | | | $ | 200,616 | | | $ | 283,900 | | | $ | 377,403 | |
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
Gross profit | |
| | |
| | | | |
Services | $ | 43,330 |
| | $ | 38,838 |
| | $ | 127,903 |
| | $ | 113,675 |
|
International | 11,695 |
| | 10,877 |
| | 33,113 |
| | 34,273 |
|
Products and Systems | 2,739 |
| | 2,604 |
| | 5,803 |
| | 7,707 |
|
Corporate and eliminations | 5 |
| | 13 |
| | (105 | ) | | (96 | ) |
| $ | 57,769 |
| | $ | 52,332 |
| | $ | 166,714 |
| | $ | 155,559 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
Income (loss) from operations | |
| | |
| | | | |
Services | $ | 15,757 |
| | $ | 8,289 |
| | $ | 40,715 |
| | $ | 36,892 |
|
International | 2,921 |
| | (662 | ) | | 5,155 |
| | 2,713 |
|
Products and Systems | 509 |
| | 2,415 |
| | (1,224 | ) | | 2,032 |
|
Corporate and eliminations | (8,408 | ) | | (7,025 | ) | | (22,844 | ) | | (21,917 | ) |
| $ | 10,779 |
| | $ | 3,017 |
| | $ | 21,802 |
| | $ | 19,720 |
|
Income (loss) from operations by operating segment includes intercompany transactions, which are eliminated in Corporate and eliminations.
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
| | | | | | | | | | | | Three months ended June 30, | | | Six months ended June 30, | |
| Three months ended | | Nine months ended | | 2020 | | 2019 | | 2020 | | 2019 |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 | |
Depreciation and amortization | |
| | |
| | |
| | |
| |
Gross profit | | Gross profit | | | | | | | |
Services | $ | 6,882 |
| | $ | 5,951 |
| | $ | 21,360 |
| | $ | 17,892 |
| Services | $ | 33,940 | | | $ | 47,208 | | | $ | 66,177 | | | $ | 84,573 | |
International | 2,027 |
| | 2,179 |
| | 6,158 |
| | 6,720 |
| International | 5,392 | | | 11,058 | | | 13,415 | | | 21,418 | |
Products and Systems | 312 |
| | 362 |
| | 901 |
| | 1,091 |
| Products and Systems | 1,838 | | | 1,825 | | | 2,206 | | | 3,064 | |
Corporate and eliminations | 50 |
| | 5 |
| | 121 |
| | 33 |
| Corporate and eliminations | (12) | | | (20) | | | 4 | | | (110) | |
| $ | 9,271 |
| | $ | 8,497 |
| | $ | 28,540 |
| | $ | 25,736 |
| | $ | 41,158 | | | $ | 60,071 | | | $ | 81,802 | | | $ | 108,945 | |
| | | | | | | | Three months ended June 30, | | | Six months ended June 30, | |
| September 30, 2019 | | December 31, 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Intangible assets, net | |
| | |
| |
Income (loss) from operations | | Income (loss) from operations | | | | | | | |
Services | $ | 95,350 |
| | $ | 98,362 |
| Services | $ | 10,837 | | | $ | 20,905 | | | $ | (70,657) | | | $ | 24,958 | |
International | 9,982 |
| | 11,143 |
| International | (1,937) | | | 2,450 | | | (22,356) | | | 2,234 | |
Products and Systems | 1,247 |
| | 1,438 |
| Products and Systems | (96) | | | (405) | | | (1,776) | | | (1,733) | |
Corporate and eliminations | 314 |
| | 452 |
| Corporate and eliminations | (9,187) | | | (7,531) | | | (16,822) | | | (14,436) | |
| $ | 106,893 |
| | $ | 111,395 |
| | $ | (383) | | | $ | 15,419 | | | $ | (111,611) | | | $ | 11,023 | |
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Total assets | |
| | |
|
Services | $ | 545,863 |
| | $ | 523,506 |
|
International | 147,844 |
| | 146,535 |
|
Products and Systems | 15,029 |
| | 12,264 |
|
Corporate and eliminations | 19,291 |
| | 11,732 |
|
| $ | 728,027 |
| | $ | 694,037 |
|
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, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Depreciation and amortization | | | | | | | |
Services | $ | 6,211 | | | $ | 7,209 | | | $ | 13,286 | | | $ | 14,478 | |
International | 2,077 | | | 2,042 | | | 4,217 | | | 4,131 | |
Products and Systems | 255 | | | 300 | | | 508 | | | 589 | |
Corporate and eliminations | (13) | | | 50 | | | (14) | | | 71 | |
| $ | 8,530 | | | $ | 9,601 | | | $ | 17,997 | | | $ | 19,269 | |
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Intangible assets, net | | | |
Services | $ | 60,713 | | | $ | 98,284 | |
International | 8,859 | | | 9,814 | |
Products and Systems | 1,095 | | | 1,181 | |
Corporate and eliminations | 181 | | | 258 | |
| $ | 70,848 | | | $ | 109,537 | |
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Total assets | | | |
Services | $ | 409,745 | | | $ | 537,518 | |
International | 124,519 | | | 153,380 | |
Products and Systems | 15,426 | | | 16,028 | |
Corporate and eliminations | 17,988 | | | 12,952 | |
| $ | 567,678 | | | $ | 719,878 | |
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Refer to Note 2–Revenue, for revenuesrevenue by geographic area for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.June 30, 2019.
16. RepurchaseSubsequent Events
Joint Venture
On July 3, 2020, a Canadian subsidiary of Common Stock
the Company entered into a joint venture with the Mikisew First Nation through a limited partnership named Mikisew-Mistras Limited Partnership. The Company's BoardCanadian subsidiary is a limited partner with a 49% interest in Mikisew-Mistras Limited Partnership (the limited partnership), and a 49% shareholder in the corporate general partner of Directors approved a $50 million stock repurchase planthe limited partnership. Mikisew holds the other 51% interest in 2015.the limited partnership and the corporate general partner. The limited partnership’s purpose is to provide nondestructive testing, inspection and related services to producers and extractors of oil and gas in the Greater Wood Buffalo region of Alberta, Canada. The limited partnership will subcontract with the Company to provide the nondestructive testing, inspection and related services for the customers of the limited partnership. The Company retired all its repurchased shares duringwill also be providing certain administrative support services for the fourth quarter of 2017. The Board of Directors approved the terminationlimited partnership, such as billing and collecting. None of the stock repurchase plan effective on April 1, 2019. There were no repurchases of common stock during 2019.
Company’s existing contracts will be transferred to the limited partnership, but any new NDT and inspection services in the Greater Wood Buffalo region the Company seeks to perform would be done through the limited partnership.
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
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, 20192020 and SeptemberJune 30, 2018.2019. 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 Annual Report on Form 10-K for the year ended December 31, 2018, dated2019, filed with the Securities and Exchange Commission on March 15, 27, 2020 (“2019 (“2018 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
•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 20182019 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. 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.
Overview
We offer our customers “OneSource for Asset Protection Solutions®”Solutions®" and are a leading global provider of technology-enabled asset protection solutions used to evaluate the safety, structural integrity and reliability of critical energy, commercial aerospace and defense, industrial and public infrastructure,infrastructure. We combine industry-leading products and commercial aerospace components.
Ourtechnologies, expertise in mechanical integrity (MI), Non-Destructive Testing (NDT), Destructive Testing (DT), mechanical and predictive maintenance (PdM) services, process and fixed asset protections are intendedengineering and consulting services, proprietary data analysis and our world class enterprise inspection database management and analysis software, PCMS, to help maximize safetydeliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity management and uptime of our customers' assets and facilities.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. We deliver value through aOur comprehensive “OneSource” portfolio of customized solutions, utilizing a proven systematic method that creates a closed-loop lifecycle for addressing continuous asset protection and improvement.improvement, helps us to deliver value to our customers.
Our specialized asset protection solutions include:
• Field Inspections
• Consulting
• Maintenance
• Data Management
��� Access
• Monitoring
• Laboratory Quality Assurance/Control (QA/QC)
• Equipment
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Our OneSource model emphasizes the integration of these solutions to service our customers throughout their assets’ lifetimes. Under this business model, many customers outsource their inspection and other asset protection needs to us on a “run-and maintain” basis to ensure the continued safety and structural and operational integrity of their assets.
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:
• Oil & Gas (Downstream, Midstream, Upstream and Petrochemical)
• Aerospace & Defense
• Industrial
• Power Generation and Transmission (including nuclear and renewable)
• Public Infrastructure, Research and Engineering
• Process Industries
Asset protection plays a crucial role in assuring the integrity and reliability of critical infrastructure. As an asset protection solutions provider, MISTRAS seeks to maximize the uptime and safety of critical infrastructure by helping customers to detect, locate, mitigate and prevent damages such as corrosion, cracks, leaks, manufacturing flaws and other concerns to operating and structural integrity. In addition to these core utilities, the storage and analysis of collected inspection and mechanical integrity data is also a key aspect of asset protection.
NDT has historically been a prominent solution in the asset protection industry due to its capacity to detect defects without compromising the integrity of the tested materials or equipment. The supply of NDT inspection services has traditionally come from many small vendors, who provide services to a small geographic region. A trend has emerged, however, for customers to engage a select few vendors capable of providing a wider spectrum of asset protection solutions for global infrastructure, in addition to an increased demand for advanced non-destructive testing (ANDT) solutions and data acquisition software, both of which require a highly-trained workforce.
Due to these trends, we believe those vendors offering integrated solutions, scalable operations, skilled personnel and a global footprint have a distinct competitive advantage. We believe these trends also enable us to be opportunistic as we consider strategic acquisitions of smaller providers of inspection services. Moreover, we believe that vendors that are able to effectively deliver both advanced solutions and data analytics, by virtue of their access to customers’ data, create a significant barrier to entry for competitors, leading to the opportunity to further create significant recurring revenues.
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, and inspection, mechanical and engineering services that are used to evaluate the structural integrity and reliability of critical energy, industrial and materials, public infrastructure and commercial aerospace components.
PCMS software and pipeline related software and data analysis solutions are included in this segment.
•International offers services, products and systems similar to those of our Services and Products and Systemsthe other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.
•Products and Systems designs, manufactures, sells, installs and services ourthe Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States.
MostGiven the role our solutions play in enhancing the safe and efficient operation of our revenues are generated by deploying technicians at our customers' locations. However, theinfrastructure, we have historically provided a majority of our revenues fromsolutions to our customers on a regular, recurring basis. We perform these services largely at our customers’ facilities, while primarily servicing our aerospace customers at our network of state-of-the-art, in-house laboratories. These solutions typically include NDT and inspection services, and can also include a wide range of mechanical services, including heat tracing, pre-inspection insulation stripping, coating applications, re-insulation, engineering assessments and long-term condition-monitoring. Under this business model, many customers outsource their inspection to us on a “run and maintain” basis. We have established long-term relationships as a critical solutions provider to many of the leading companies with asset-intensive infrastructure in our target markets. These markets include oil and gas (downstream, midstream, upstream and petrochemical), commercial aerospace and certain manufacturing clients are generated by performing inspectionsdefense, power generation (natural gas, fossil, nuclear, alternative, renewable, and testing at our various in-house laboratories.transmission and distribution), public infrastructure, chemicals, transportation, primary metals and metalworking and research and engineering institutions.
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
We have focused on providing our advanced asset protection solutions to our customers using proprietary, technology-enabled software and testing instruments, including those developed by our Products and Systems segment. We have made numerous acquisitions in an effort to grow our base of experienced, certified personnel, expand our service lines and technical capabilities, increase our geographical reach, complement our existing offerings, and leverage our fixed costs. We have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the integration of acquired companies. WeThese acquisitions have provided us with additional service lines, technologies, resources and customers that we believe these actions, including the acquisitions made will enhance our advantages over our competition.
Our Onstream acquisition, which was completedWe believe long-term growth can be realized in December 2018, helps support manyall of our Corporate initiatives. Onstream's strong presencetarget markets. We expect the timing of our oil and gas customers inspection spend to be impacted by oil price fluctuations.
Recent Developments
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread throughout the United States. The COVID-19 pandemic has caused significant volatility in inline inspection provides us with a strong foundationdomestic and international markets. There is on-going uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies. In addition, oil prices have varied significantly and airline traffic has also dropped significantly. In response to the COVID-19 pandemic, companies within the midstreamoil and gas and aerospace industries (including our customers) have announced spending cuts and/or slowdowns (or temporary cessation) in production which, in turn, may result in decreases in awards of new contracts or adjustments, reductions, suspensions or cancellations of existing contracts. These declines were driven in large measure by various factors surrounding the COVID-19 pandemic and, in the case of the oil and gas market, which is an important pieceother macroeconomic events such as the geopolitical tensions between OPEC and Russia.
The COVID-19 pandemic, 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 overall growth strategy. Wecustomers, suppliers and contractors. These negative factors have already generated new business opportunitiesalso resulted in significant volatility and uncertainty in the markets in which we operate. To successfully navigate through introductionthis unprecedented period, we continue to focus on the following key priorities:
•Ensuring the health and safety of our inline inspection capabilities to existing midstream customers. The acquisitionemployees and those of Onstream also provides us with an additional digital solution for our customers the Streamview™ software, which is an innovative application of advanced digital technology.
We believe the following represent key dynamics of the asset protection industry, and that the market available to us will continue to grow as these macro-market trends continue to develop:
Extending the Useful Life of Aging Infrastructure While Increasing Utilization. Due to the prohibitive costs and challenges of building new infrastructure, many companies have chosen to extend the useful life of existing assets through enhancements, rather than replacing these assets. This has resulted in the significant aging and increased utilization of existing infrastructure in our target markets. Increasing demand for refined petroleum products, combined with high plant-utilization rates, are driving refineries to upgrade facilities to make them more efficient and expand capacities. Aging infrastructure requires more frequent inspection and maintenance in comparison to new infrastructure,thereby requiring companies and public authorities to continue to spend on asset protection to ensure their aging infrastructure assets continue to operate effectively.
Outsourcing of Non-Core Activities and Technical Resource Constraints. Due to the increasing sophistication and automation of NDT programs, a decreasing supply of skilled professionals and increasing governmental regulations, companies are increasingly outsourcing NDT to third-party providers with advanced solution portfolios, engineering expertise and trained workforces.
Increasing Corrosion from Low-Quality Inputs. The increased availability and low cost of crude oil from areas such as shale plays and oil sands resources have led to the use of lower-grade raw materials and feedstock. This leads to higher rates of corrosion, especially in refining processes involving petroleum with higher sulfur content, which in turn increases the need for asset protection solutions to detect and/or proactively prevent corrosion-related issues.
Increasing Use of Advanced Materials. Customers in various of our target markets, particularly aerospace and defense, are increasingly utilizing advanced materials, such as composites and other unique technologies in their assets. These materials often cannot be tested using traditional NDT techniques. We believe that demand for more advanced testing and assessment solutions will increase along with the demand for these advanced materials during the design, manufacturing, operating and quality control phases.
Meeting Safety Regulations. Owners and operators of refineries, pipelines and petrochemical and chemical plants increasingly face strict government regulations and more stringent process safety enforcement standards. This includes the continued implementation of the Occupational Safety and Health Administration’s (OSHA) National Emphasis Program (NEP). Failure to meet these standards can result in significant financial liabilities, increased scrutiny by government and industry regulators, higher insurance premiums and tarnished corporate brand value. As a result, these owners and operators are seeking highly reliable asset protection suppliers with a track record of assisting organizations in meeting increasingly stringent regulations. Our customers benefit from MISTRAS’ extensive engineering consulting base that supports them in devising mechanical integrity programs that both meet regulatory compliance standards and enable enhanced safety and uptime at their facilities.
Expanding Addressable End-Markets. The continued emergence of and advances in asset protection technologies and software based systems are increasing the demand for asset protection solutions in applications where existing techniques were previously ineffective.
suppliers;
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
•Maintaining business continuity and financial strength and stability; and
Expanding Aerospace Industry•Serving our customers as they provide essential products and services to the world.
While we cannot fully assess the impact that the COVID-19 pandemic or the significant volatility in oil prices will have on all of our operations at this time, there are certain impacts that we have identified:
•The financial market volatility that resulted from COVID-19 and the drop in oil prices required that we reassess the goodwill we had recorded related to various prior acquisitions under the guidance of ASC 350 during the first quarter of 2020. We determined that the fair values of various reporting units were less than their carrying values (including goodwill). As a result, we recorded an impairment charge related to goodwill of approximately $77.1 million during the first quarter of 2020. See Note 8–Goodwill in the Unaudited Condensed Consolidated Financial Statements.
•These same events required that we reassess the tangible and intangible assets recorded under the guidance of ASC 360 during the first quarter of 2020. We believedetermined that increased demandthe fair values of certain asset groups were less than their carrying values (excluding goodwill). As a result, we recorded impairment charges related to intangible assets of approximately $28.8 million and a right-of-use asset of approximately $0.2 million during the first quarter of 2020. See Note 9–Intangible Assets and Note13–Leases in the Unaudited Condensed Consolidated Financial Statements.
To respond to the economic downturn resulting from the COVID-19 pandemic and the then drop in oil prices, in March 2020, we initiated a cost reduction and efficiency program. As part of this program, our named executive officers have voluntarily taken temporary salary reductions ranging from 25% to 45% of their base salary. In addition, we instituted a reduction for our other salaried employees, at lower percentages, and suspended our voluntary match under our sponsored savings plans for our U.S. and Canadian employees. These reductions became effective at the beginning of the second quarter of 2020 and, except for the salary reductions for certain lower salaried employees, will continue through the third quarter. At the end of the third quarter, management will assess whether to change these cost saving measures. In addition, our non-employee directors voluntarily agreed to a $3,750 reduction in their second and third quarter 2020 payments.
We are currently unable to predict with certainty the overall impact that the COVID-19 pandemic and volatility in oil prices may have on our business, results of operations, liquidity or in other ways which we cannot yet determine. We will continue to come from the aerospace industry duemonitor market conditions and respond accordingly. Refer to the approximately decade-long backlog for next-generation commercial aircraft to be built, driving the need for advanced solutions that drive cost and quality efficiencies.
Crude Oil Prices. We believe that this present range for crude oil prices is expected to persistItem 1A. Risk Factors in Part I of our 2019 Annual Report on Form 10-K ("2019 Annual Report") for the foreseeable future. Withyear ended December 31, 2019, filed with the prices lower, we have seen reductions in NDTSecurities and maintenance spending, but not to the extent as in recent years due to the price stabilization. We do believe customers will defer inspection or maintenance spending from time to time, which we will see occurring in later 2019 into earlyExchange Commission ("SEC") on March 27, 2020.
More Effective NDT Services. We believe customers are constantly looking for ways to reduce their overall inspection and maintenance spending, while maintaining the reliability and safety of their operations. Accordingly, we believe providers of NDT and inspection services that utilize data analytics, risk-based inspection planning and other advanced tools and platforms that can provide customers with effective inspections at an overall lower cost will be more successful and gain market share.
Note About Non-GAAP Measures
In this MD&A under the heading "Income (loss) from Operations", the non-GAAP financial performance measure "Income (loss) before special items” is used for each of our three segments, the Corporate segment and the "Total Company", with tables reconciling the measure to a financial measure under GAAP. This non-GAAP measure excludes from the GAAP measure "Income (loss) from Operations" (a) transaction expenses related to acquisitions, such as professional fees and due diligence costs, (b) the net changes in the fair value of acquisition-related contingent consideration liabilities, (c) impairment charges, (d) reorganization and other costs, which includes items such as severance, labor relations matters and asset and lease termination costs and (e) other special items. These adjustments 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.
We believe investors and other users of our financial statements benefit from the presentation of "Income (loss) before special items" for each of our three segments, the Corporate segment and the Total Company in evaluating our performance. Income (loss) before special items excludes the identified adjustments, which provides additional tools to compare our core business operating performance on a consistent basis and measure underlying trends and results in our business. Income (loss) before special items is not used to determine incentive compensation for executives or employees, nor is it a replacement for GAAP and/or necessarily comparable to the non-GAAP financial measures of other companies.
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Results of Operations
Condensed consolidated results of operations for the ninethree and six months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 20182019 were as follows:
| | | | | | | | | | | | Three months ended June 30, | | | Six months ended June 30, | |
| Three months ended | | Nine months ended | | 2020 | | 2019 | | 2020 | | 2019 |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 | |
Revenues | $ | 192,192 |
| | $ | 182,169 |
| | $ | 569,595 |
| | $ | 561,592 |
| |
Revenue | | Revenue | $ | 124,435 | | | $ | 200,616 | | | $ | 283,900 | | | $ | 377,403 | |
Gross profit | 57,769 |
| | 52,332 |
| | 166,714 |
| | 155,559 |
| Gross profit | 41,158 | | | 60,071 | | | 81,802 | | | 108,945 | |
Gross profit as a % of Revenue | 30.1 | % | | 28.7 | % | | 29.3 | % | | 27.7 | % | Gross profit as a % of Revenue | 33.1 | % | | 29.9 | % | | 28.8 | % | | 28.9 | % |
Total operating expenses | 46,990 |
| | 49,315 |
| | 144,912 |
| | 135,839 |
| Total operating expenses | 41,541 | | | 44,652 | | | 193,413 | | | 97,922 | |
Operating expenses as a % of Revenue | 24.4 | % | | 27.1 | % | | 25.4 | % | | 24.2 | % | Operating expenses as a % of Revenue | 33.4 | % | | 22.3 | % | | 68.1 | % | | 25.9 | % |
Income from operations | 10,779 |
| | 3,017 |
| | 21,802 |
| | 19,720 |
| |
Income from Operations as a % of Revenue | 5.6 | % | | 1.7 | % | | 3.8 | % | | 3.5 | % | |
Income (loss) from operations | | Income (loss) from operations | (383) | | | 15,419 | | | (111,611) | | | 11,023 | |
Income (loss) from Operations as a % of Revenue | | Income (loss) from Operations as a % of Revenue | (0.3) | % | | 7.7 | % | | (39.3) | % | | 2.9 | % |
Interest expense | 2,959 |
| | 1,894 |
| | 10,065 |
| | 5,581 |
| Interest expense | 2,976 | | | 3,579 | | | 5,765 | | | 7,106 | |
Income before provision for income taxes | 7,820 |
| | 1,123 |
| | 11,737 |
| | 14,139 |
| |
Provision for income taxes | 4,733 |
| | 2,133 |
| | 6,493 |
| | 6,229 |
| |
Income (loss) before provision (benefit) for income taxes | | Income (loss) before provision (benefit) for income taxes | (3,359) | | | 11,840 | | | (117,376) | | | 3,917 | |
Provision (benefit) for income taxes | | Provision (benefit) for income taxes | (694) | | | 4,397 | | | (16,189) | | | 1,760 | |
Net income (loss) | 3,087 |
| | (1,010 | ) | | 5,244 |
| | 7,910 |
| Net income (loss) | (2,665) | | | 7,443 | | | (101,187) | | | 2,157 | |
Less: Net income (loss) attributable to non-controlling interests, net of taxes | (6 | ) | | 1 |
| | 13 |
| | 13 |
| Less: Net income (loss) attributable to non-controlling interests, net of taxes | (9) | | | 12 | | | (22) | | | 19 | |
Net income (loss) attributable to Mistras Group, Inc. | $ | 3,093 |
| | $ | (1,011 | ) | | $ | 5,231 |
| | $ | 7,897 |
| Net income (loss) attributable to Mistras Group, Inc. | $ | (2,656) | | | $ | 7,431 | | | $ | (101,165) | | | $ | 2,138 | |
Revenue
RevenuesRevenue was $124.4 million for the three months ended SeptemberJune 30, 2019 were $192.2 million, an increase2020, a decrease of $10.0$76.2 million, or 6%38.0%, compared with the three months ended SeptemberJune 30, 2018. Revenues2019. Revenue for the ninesix months ended SeptemberJune 30, 2019 were $569.62020 was $283.9 million, an increasea decrease of $8.0$93.5 million, or 1%24.8%, compared with the ninesix months ended SeptemberJune 30, 2018.2019.
RevenuesRevenue by segment for the three and ninesix months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 20182019 were as follows:
| | | | | | | | | | | | Three months ended June 30, | | | Six months ended June 30, | |
| Three months ended | | Nine months ended | | 2020 | | 2019 | | 2020 | | 2019 |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 | |
Revenues | |
| | |
| | | | | |
Revenue | | Revenue | | | | | | | |
Services | $ | 152,572 |
| | $ | 141,340 |
| | $ | 454,079 |
| | $ | 434,653 |
| Services | $ | 100,677 | | | $ | 161,210 | | | $ | 229,550 | | | $ | 301,507 | |
International | 37,050 |
| | 36,671 |
| | 109,302 |
| | 116,238 |
| International | 21,343 | | | 37,090 | | | 50,410 | | | 72,252 | |
Products and Systems | 5,521 |
| | 5,716 |
| | 13,222 |
| | 17,286 |
| Products and Systems | 4,002 | | | 4,269 | | | 6,814 | | | 7,701 | |
Corporate and eliminations | (2,951 | ) | | (1,558 | ) | | (7,008 | ) | | (6,585 | ) | Corporate and eliminations | (1,587) | | | (1,953) | | | (2,874) | | | (4,057) | |
| $ | 192,192 |
| | $ | 182,169 |
| | $ | 569,595 |
| | $ | 561,592 |
| | $ | 124,435 | | | $ | 200,616 | | | $ | 283,900 | | | $ | 377,403 | |
Three Months
In the three months ended SeptemberJune 30, 2019,2020, total revenues increased 6%revenue decreased 38.0% due predominantly to a combination of mid-single-digit acquisition growthdouble-digit organic decline and, to a much lesser extent, the low single-digit organic growth, partially offset by the unfavorable impact of foreign exchange rates. Services segment revenues increased 8%, driven by mid-single-digit acquisition growth and low single-digit organic growth,rates, partially offset by low single-digit acquisition growth. The decrease in revenue was primarily the low-single digitresult of the impact of COVID-19, which disrupted the timing of projects for many of our customers. Services segment revenue decreased 37.5%, driven predominantly by a double-digit organic decline and, to a much lesser extent, the low single-digit unfavorable impact of foreign exchange rates. International segment revenues increased 1%, driven by mid-single-digit organic growth,rates, partially offset by low single-digit acquisition growth. International segment revenue decreased 42.5%, due predominantly to the mid-single-digitorganic decline and, to a much lesser extent, the low single-digit unfavorable impact of foreign exchange rates.rate. Products and Systems segment revenuesrevenue decreased by 3%6.3%, due primarily to the sale of a subsidiary within the segment during the third quarter of 2018.
organic decline.
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Oil and gas customer revenuesrevenue comprised approximately 59%54% and 55%60% of total revenuesrevenue for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. Aerospace and defense customer revenuesrevenue comprised approximately 12%14% and 14%12% of total revenuesrevenue for the three months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively. This decrease in aerospace and defense customer revenues is attributed to the run-off of the German staff leasing contracts in the International segment, as more fully described in Note 14–Commitments and Contingencies to the condensed consolidated financial statements in this Quarterly Report, and the increase in volume in the oil and gas market is due to the Onstream acquisition completed in the fourth quarter of 2018. The Company’s top ten customers comprised approximately 34%29% of total revenuesrevenue for the three months ended SeptemberJune 30, 2019,2020, as compared to 32%38% for the three months ended SeptemberJune 30, 2018,2019, with no customer accounting for 10% or more of total revenuesrevenue in either three-month period.
NineSix months
In the ninesix months ended SeptemberJune 30, 2019,2020, total revenues increased 1%revenue decreased 24.8% due predominantly to a combination of mid-single-digit acquisition growth, partially offset by low single-digitdouble-digit organic decline and, to a much lesser extent, the low single-digit unfavorable impact of foreign exchange rates. Services segment revenues increased 5%, driven by mid-single-digit acquisition growth,rates, partially offset by low single-digit acquisition growth. The decrease in revenue was primarily the result of the impact of COVID-19, which disrupted the timing of projects for many of our customers. Services segment revenue decreased 23.9%, driven predominantly by a double-digit organic decline and, to a much lesser extent, the low single-digit unfavorable impact of foreign exchange rates.rates, partially offset by low single-digit acquisition growth. International segment revenuesrevenue decreased 6%30.2%, driven bydue predominantly to the organic decline and, to a much lesser extent, the low single-digit unfavorable impact of foreign exchange rates.rate. Products and Systems segment revenuesrevenue decreased by 24% driven by lower sales volume and by11.5%, due to the sale of a subsidiary in this segment during the third quarter of 2018.organic decline.
Oil and gas customer revenuesrevenue comprised approximately 59%56% and 56%59% of total revenuesrevenue for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. Aerospace and defense customer revenuesrevenue comprised approximately 13%15% and 15%13% of total revenuesrevenue for the ninesix months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively. This decrease in aerospace and defense customer revenues is attributed to the run-off of the German staff leasing contracts in the International segment, as more fully described in Note 14–Commitments and Contingencies to the condensed consolidated financial statements in this Quarterly Report, and the increased volume in the oil and gas market is due to the Onstream acquisition completed in the fourth quarter of 2018. The Company’s top ten customers comprised approximately 35%31% of total revenuesrevenue for both the ninesix months ended SeptemberJune 30, 2019 and2020, as compared to 39% for the ninesix months ended SeptemberJune 30, 2018,2019, with no customer accounting for 10% or more of total revenuesrevenue in either nine-monthsix-month period.
Gross Profit
Gross profit increaseddecreased by $5.4$18.9 million, or 10%31.5%, in the three months ended SeptemberJune 30, 2019,2020, on an increasea decrease in sales of 6%38.0%. Gross profit increaseddecreased by $11.2$27.1 million, or 7%24.9%, in the ninesix months ended SeptemberJune 30, 2019,2020, on an increasea decrease in sales of 1%24.8%.
Gross profit by segment for the ninethree and six months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 20182019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Gross profit | | | | | | | |
Services | $ | 33,940 | | | $ | 47,208 | | | $ | 66,177 | | | $ | 84,573 | |
% of segment revenue | 33.7 | % | | 29.3 | % | | 28.8 | % | | 28.1 | % |
International | 5,392 | | | 11,058 | | | 13,415 | | | 21,418 | |
% of segment revenue | 25.3 | % | | 29.8 | % | | 26.6 | % | | 29.6 | % |
Products and Systems | 1,838 | | | 1,825 | | | 2,206 | | | 3,064 | |
% of segment revenue | 45.9 | % | | 42.8 | % | | 32.4 | % | | 39.8 | % |
Corporate and eliminations | (12) | | | (20) | | | 4 | | | (110) | |
| $ | 41,158 | | | $ | 60,071 | | | $ | 81,802 | | | $ | 108,945 | |
% of total revenue | 33.1 | % | | 29.9 | % | | 28.8 | % | | 28.9 | % |
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 |
Gross profit | |
| | |
| | | | |
Services | $ | 43,330 |
| | $ | 38,838 |
| | $ | 127,903 |
| | $ | 113,675 |
|
% of segment revenue | 28.4 | % | | 27.5 | % | | 28.2 | % | | 26.2 | % |
International | 11,695 |
| | 10,877 |
| | 33,113 |
| | 34,273 |
|
% of segment revenue | 31.6 | % | | 29.7 | % | | 30.3 | % | | 29.5 | % |
Products and Systems | 2,739 |
| | 2,604 |
| | 5,803 |
| | 7,707 |
|
% of segment revenue | 49.6 | % | | 45.6 | % | | 43.9 | % | | 44.6 | % |
Corporate and eliminations | 5 |
| | 13 |
| | (105 | ) | | (96 | ) |
| $ | 57,769 |
| | $ | 52,332 |
| | $ | 166,714 |
| | $ | 155,559 |
|
% of total revenue | 30.1 | % | | 28.7 | % | | 29.3 | % | | 27.7 | % |
Three months
Gross profit margin was 33.1% and 29.9% for the three-month periods ended June 30, 2020 and 2019, respectively. COVID-19, the significant drop in oil prices and decrease in aerospace production have had a significant unfavorable impact on sales volume; however, gross profit margin improved due primarily to better employee utilization and, to a lesser extent, the favorable impact of mix of sales. Services segment gross profit margins had a year-on-year increase of 440 basis points to 33.7% during the three months ended June 30, 2020, due primarily to better employee utilization, favorable mix of sales on lower sales volume and Canadian wage subsidies. International segment gross margins had a year-on-year decline of 450 basis points to 25.3% during the three months ended June 30, 2020, due primarily to reduced volumes and lower employee
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
utilization. Products and Systems segment gross margin had a year-on-year increase in gross profit margin to 45.9% during the three months ended June 30, 2020 due to favorable sales mix.
Three
Six months
Gross profit margin was 30.1% 28.8%and 28.7%28.9% for the three monthsix-month periods ended SeptemberJune 30, 20192020 and 2018,2019, respectively. Services segment gross profit margins had a year-on-year increase of 9070 basis points to 28.4% during28.8% in the threesix months ended SeptemberJune 30, 2019, due primarily to mix of sales, increase2020, on a decrease in sales volume related to the acquisition completed in the fourth quarter of 2018 and favorable operating leverage.volume. International segment gross margins had a year-on-year increasedecline of 190300 basis points to 31.6% during26.6% in the threesix months ended SeptemberJune 30, 2019, due primarily to favorable sales mix and improved labor utilization. Products and Systems segment gross margin had a year-on-year increase of 400 basis points to 49.6% during the three months ended September 30, 20192020 due to a favorable sales mix.
Nine months
Gross profit margin was 29.3%and 27.7% for the nine months ended September 30, 2019 and 2018, respectively. Services segment gross profit margins had a year-on-year increaselower levels of 200 basis points to 28.2% during the nine months ended September 30, 2019, due primarily to favorable operating leverage and service mix, and increase in sales volume related the acquisition completed in the fourth quarter of 2018. International segment gross margins had a year-on-year increase of 80 basis points to 30.3% during the nine months ended September 30, 2019 due to a favorable sales mix.employee utilization. Products and Systems segment gross margin had a year-on-year decline of 70740 basis points to 43.9%32.4% in the ninesix months ended SeptemberJune 30, 2020, due to unfavorable sales mix.
Operating Expenses
Operating expenses for the three and six months ended June 30, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Operating Expenses | | | | | | | |
Selling, general and administrative expenses | $ | 37,607 | | | $ | 41,923 | | | $ | 79,165 | | | $ | 83,686 | |
Bad debt provision for troubled customers, net of recoveries | — | | | (2,693) | | | — | | | 2,798 | |
Impairment charges | — | | | — | | | 106,062 | | | — | |
Pension withdrawal expense | — | | | — | | | — | | | 534 | |
| | | | | | | |
Research and engineering | 708 | | | 754 | | | 1,532 | | | 1,611 | |
Depreciation and amortization | 3,207 | | | 4,119 | | | 7,177 | | | 8,291 | |
| | | | | | | |
Acquisition-related expense (benefit), net | 19 | | | 549 | | | (523) | | | 1,002 | |
| $ | 41,541 | | | $ | 44,652 | | | $ | 193,413 | | | $ | 97,922 | |
% of total revenue | 33.4 | % | | 22.3 | % | | 68.1 | % | | 25.9 | % |
Three months
Operating expenses decreased $3.1 million, or 7%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, due predominantly to the Company's cost reduction and efficiency program initiated during the first quarter of 2020 in response to COVID-19 as more fully described in Recent Developments under the Overview of this section. During the three months ended June 30, 2020, there was an additional $0.8 million additive selling, general and administration expenses related to the Company’s most recent acquisition. During the three months ended June 30, 2020, there was approximately $1.3 million additional foreign currency exchange losses as compared with the prior period due to volatility in certain foreign currencies.
Six months
Operating expenses increased $95.5 million, or 98%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, due predominantly to impairment charges of $106.1 million in 2020 as more fully described in Note 8–Goodwill and Note 9–Intangible Assets to these Unaudited Condensed Consolidated Financial Statements. Excluding the 2020 impairment charges, operating expenses decreased due to the Company's cost reduction and efficiency program initiated during the first quarter of 2020 in response to COVID-19 as more fully described in Recent Developments under the Overview of this section. In addition, this decrease was due to lower bad debt, pension withdrawal, depreciation and amortization, and net acquisition-related expenses for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. This decrease was primarily drivenThese decreases in expense were partially offset by a lower sales volumeapproximately $2.3 million foreign currency exchange losses during the six months ended June 30, 2020 as compared with the prior period due to volatility in certain foreign currencies, as well as approximately an incremental $1.8 million in selling, general and less favorable sales mix.
administration expenses related to the Company’s most recent acquisition.
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Income (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 and for the Company in total:
| | | | | | | | | | | | Three months ended June 30, | | | Six months ended June 30, | |
| Three months ended | | Nine months ended | | 2020 | | 2019 | | 2020 | | 2019 |
| September 30, 2019 | | September 30, 2018 | | September 30, 2019 | | September 30, 2018 | |
Services: | |
| | |
| | | | | Services: | | | | | | | |
Income from operations (GAAP) | $ | 15,757 |
| | $ | 8,289 |
| | $ | 40,715 |
| | $ | 36,892 |
| |
Bad debt provision for troubled customers, net of recoveries | — |
| | — |
| | 2,778 |
| | — |
| |
Income (loss) from operations (GAAP) | | Income (loss) from operations (GAAP) | $ | 10,837 | | | $ | 20,905 | | | $ | (70,657) | | | $ | 24,958 | |
Bad debt provision (benefit) for troubled customers, net of recoveries | | Bad debt provision (benefit) for troubled customers, net of recoveries | — | | | (1,977) | | | — | | | 2,778 | |
Impairment charges | | Impairment charges | — | | | — | | | 86,200 | | | — | |
Pension withdrawal expense | | Pension withdrawal expense | — | | | — | | | — | | | 534 | |
Reorganization and other costs | 125 |
| | 292 |
| | 202 |
| | 292 |
| Reorganization and other costs | 45 | | | 77 | | | 67 | | | 77 | |
Pension withdrawal expense (benefit) | (45 | ) | | 5,886 |
| | 489 |
| | 5,886 |
| |
Acquisition-related expense (benefit), net | (125 | ) | | 181 |
| | 577 |
| | (809 | ) | Acquisition-related expense (benefit), net | 19 | | | 397 | | | (522) | | | 702 | |
Income before special items (non-GAAP) | 15,712 |
| | 14,648 |
| | 44,761 |
| | 42,261 |
| Income before special items (non-GAAP) | $ | 10,901 | | | $ | 19,402 | | | $ | 15,088 | | | $ | 29,049 | |
International: | |
| | |
| | |
| | |
| International: | |
Income (loss) from operations (GAAP) | 2,921 |
| | (662 | ) | | 5,155 |
| | 2,713 |
| Income (loss) from operations (GAAP) | $ | (1,937) | | | $ | 2,450 | | | $ | (22,356) | | | $ | 2,234 | |
Bad debt provision (benefit) for troubled customers, net of recoveries | | Bad debt provision (benefit) for troubled customers, net of recoveries | — | | | (716) | | | — | | | 20 | |
Impairment charges | | Impairment charges | — | | | — | | | 19,862 | | | — | |
Reorganization and other costs | 90 |
| | 2,808 |
| | 355 |
| | 3,544 |
| Reorganization and other costs | 366 | | | 107 | | | 292 | | | 265 | |
Acquisition-related expense (benefit), net | — |
| | — |
| | — |
| | (409 | ) | |
Bad debt provision for troubled customers, net of recoveries | — |
| | — |
| | 20 |
| | — |
| |
Income before special items (non-GAAP) | 3,011 |
| | 2,146 |
| | 5,530 |
| | 5,848 |
| |
| Income (loss) before special items (non-GAAP) | | Income (loss) before special items (non-GAAP) | $ | (1,571) | | | $ | 1,841 | | | $ | (2,202) | | | $ | 2,519 | |
Products and Systems: | |
| | |
| | |
| | |
| Products and Systems: | |
Income (loss) from operations (GAAP) | 509 |
| | 2,415 |
| | (1,224 | ) | | 2,032 |
| |
Gain on sale of subsidiary | — |
| | (2,384 | ) | | — |
| | (2,384 | ) | |
Reorganization and other costs | 218 |
| | — |
| | 218 |
| | 29 |
| |
Income (loss) before special items (non-GAAP) | 727 |
| | 31 |
| | (1,006 | ) | | (323 | ) | |
Loss from operations (GAAP) | | Loss from operations (GAAP) | $ | (96) | | | $ | (405) | | | $ | (1,776) | | | $ | (1,733) | |
| Loss before special items (non-GAAP) | | Loss before special items (non-GAAP) | $ | (96) | | | $ | (405) | | | $ | (1,776) | | | $ | (1,733) | |
Corporate and Eliminations: | |
| | |
| | |
| | |
| Corporate and Eliminations: | |
Loss from operations (GAAP) | (8,408 | ) | | (7,025 | ) | | (22,844 | ) | | (21,917 | ) | Loss from operations (GAAP) | $ | (9,187) | | | $ | (7,531) | | | $ | (16,822) | | | $ | (14,436) | |
Loss on debt modification | | Loss on debt modification | 645 | | | — | | | 645 | | | — | |
Reorganization and other costs | 44 |
| | 305 |
| | 104 |
| | 305 |
| Reorganization and other costs | 86 | | | — | | | 123 | | | 60 | |
Acquisition-related expense, net | 93 |
| | 36 |
| | 393 |
| | 75 |
| Acquisition-related expense, net | — | | | 152 | | | — | | | 300 | |
Loss before special items (non-GAAP) | (8,271 | ) | | (6,684 | ) | | (22,347 | ) | | (21,537 | ) | Loss before special items (non-GAAP) | $ | (8,456) | | | $ | (7,379) | | | $ | (16,054) | | | $ | (14,076) | |
Total Company: | |
| | |
| | |
| | |
| Total Company: | |
Income from operations (GAAP) | $ | 10,779 |
| | $ | 3,017 |
| | $ | 21,802 |
| | $ | 19,720 |
| |
Income (loss) from operations (GAAP) | | Income (loss) from operations (GAAP) | $ | (383) | | | $ | 15,419 | | | $ | (111,611) | | | $ | 11,023 | |
Bad debt provision (benefit) for troubled customers, net of recoveries | | Bad debt provision (benefit) for troubled customers, net of recoveries | — | | | (2,693) | | | — | | | 2,798 | |
Impairment charges | | Impairment charges | — | | | — | | | 106,062 | | | — | |
Pension withdrawal expense | (45 | ) | | 5,886 |
| | 489 |
| | 5,886 |
| Pension withdrawal expense | — | | | — | | | — | | | 534 | |
Gain on sale of subsidiary | — |
| | (2,384 | ) | | — |
| | (2,384 | ) | |
Bad debt provision for troubled customers, net of recoveries | — |
| | — |
| | 2,798 |
| | — |
| |
| Reorganization and other costs | 477 |
| | 3,405 |
| | 879 |
| | 4,170 |
| Reorganization and other costs | 497 | | | 184 | | | 482 | | | 402 | |
Loss on debt modification | | Loss on debt modification | 645 | | | — | | | 645 | | | — | |
Acquisition-related expense (benefit), net | (32 | ) | | 217 |
| | 970 |
| | (1,143 | ) | Acquisition-related expense (benefit), net | 19 | | | 549 | | | (522) | | | 1,002 | |
Income before special items (non-GAAP) | $ | 11,179 |
| | $ | 10,141 |
| | $ | 26,938 |
| | $ | 26,249 |
| |
Income (loss) before special items (non-GAAP) | | Income (loss) before special items (non-GAAP) | $ | 778 | | | $ | 13,459 | | | $ | (4,944) | | | $ | 15,759 | |
Three months
For the three months ended September 30, 2019, income from operations (GAAP) increased $7.8 million, or 257%, compared with the three months ended September 30, 2018, while income before special items (non-GAAP) increased $1.0 million, or 10%. As a percentage of revenues, income before special items increased by 20 basis points to 5.8% in the three months ended September 30, 2019 from 5.6% in the three months ended September 30, 2018.
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Three months
Operating expensesFor the three months ended June 30, 2020, income (loss) from operations (GAAP), as decreased $15.8 million, compared with the three months ended June 30, 2019, while income (loss) before special items (non-GAAP) decreased $12.7 million, or 94%. As a percentage of revenue, income (loss) before special items decreased by 610 basis points to 24% for0.6% in the three months ended SeptemberJune 30, 20192020 from 27% for6.7% in the three months ended SeptemberJune 30, 2018. Operating expenses, excluding2019. The COVID-19 outbreak, significant drop in oil prices has adversely affected our workforce and operations, as well as the operations of our customers, suppliers and contractors. These negative factors have resulted in significant volatility and uncertainty in the markets in which we operate. We are currently unable to predict or determine the overall impact that the COVID-19 pandemic and drop in oil prices may have on our business, results of operations, or liquidity. Refer to Item 1A. Risk Factors in Part I of our 2019 Form 10-K, and the additional risk factors included in Part II, Item 1.A. of this Form 10-Q for further discussion.
Six months
For the six months ended June 30, 2020, income (loss) from operations (GAAP) decreased $122.6 million, compared with the six months ended June 30, 2019, while income (loss) before special items (non-GAAP), as decreased $20.7 million, or 131%. As a percentage of revenues,revenue, income (loss) before special items decreased by 590 basis points to (1.7)% in the six months ended June 30, 2020 from 4.2% in the six months ended June 30, 2019. During the six months ended June 30, 2020, the COVID-19 outbreak and significant drop in oil prices has adversely affected our workforce and operations, as well as the operations of our customers, suppliers and contractors and was 24% of revenuethe primary reason for the three months ended September 30, 2019 compared to 23% for the three months ended September 30, 2018. The table above highlights the special expense items thatimpairment charges. These negative factors have resulted in a lower GAAP operatingsignificant volatility and uncertainty in the markets in which we operate. We are currently unable to predict or determine the overall impact that the COVID-19 pandemic and drop in oil prices may have on our business, results of operations, or liquidity. Refer to Item 1A. Risk Factors in Part I of our 2019 Form 10-K, and the additional risk factors included in Part II, Item 1.A. of this Form 10-Q for further discussion.
Interest Expense
Interest expense percentage for 2019 compared to 2018. In addition to the special items, for both GAAPwas approximately $3.0 million and non-GAAP comparisons, there was $3.3 million of operating expenses relating to the Onstream acquisition, inclusive of depreciation and amortization of $1.3$3.6 million for the three months ended SeptemberJune 30, 2019.
The Company2020 and 2019, respectively. Interest expense was notified that a significant project was awarded to another contractor in January 2018,approximately $5.8 million and as a result, one of the Company’s subsidiaries experienced a significant reduction in the number of its employees covered by one of the CBAs. Under certain circumstances, such a reduction in the number of employees participating in multi-employer pension plans pursuant to this CBA could result in a complete or partial withdrawal liability to these multi-employer pension plans under the Employee Retirement Income Security Act of 1974 ("ERISA"). Management explored options to retain a level of union work that would avoid withdrawal liability to the pension plans, but concluded during the third quarter of 2018 that the Company's subsidiaries probably would not obtain sufficient union work to avoid withdrawal liability. Therefore, the Company determined that it is probable that its subsidiary will incur a withdrawal liability related to these multi-employer pension plans. Accordingly, the Company recorded a charge of $5.9 million during the third quarter of 2018 and $0.5 million during the nine months ended September 30, 2019 for this potential withdrawal liability. The Company’s subsidiary reached an agreement with one of the pension funds in September 2019, for a final payment of $0.9 million in complete satisfaction of the withdrawal liability of the subsidiary. This payment was subsequently paid in October 2019. The balance of the estimated total amount of this potential liability as of September 30, 2019 is approximately $3.1 million, which includes the $0.9 million paid in October 2019.
Nine months
For the nine months ended September 30, 2019, income from operations (GAAP) increased $2.1 million, compared with the nine months ended September 30, 2018, while income before special items (non-GAAP) increased $0.7 million, or 3%. As a percentage of revenues, income before special items was consistent at 4.7% for the nine months ended September 30, 2019 and nine months ended September 30, 2018, respectively.
Operating expenses (GAAP), as a percentage of revenue, increased to 25% for the nine months ended September 30, 2019 from 24% for the nine months ended September 30, 2018. Operating expenses, excluding special items (non-GAAP), as a percentage of revenues, increased to 25% of revenues for the nine months ended September 30, 2019 from 23% for the nine months ended September 30, 2018. The chart above highlights the special expense items that resulted in a higher GAAP operating expense percentage for 2019 compared to 2018. In addition to the special items, for both GAAP and non-GAAP comparisons, there was $9.6 million of operating expenses for the Onstream acquisition, inclusive of depreciation and amortization of $3.9$7.1 million for the ninesix months ended SeptemberJune 30, 2019.
In2020 and 2019, respectively. The decrease was due to lower average level of borrowings on our Credit Agreement attributable primarily to payments on borrowings for the acquisition completed during the fourth quarter of 2018, partially offset by an increase in the Company recorded a reserve of $0.7 million for a renewable energy industry customer, based in part on the available information about the financial difficulties of the customer. This customer filed for a voluntary insolvency proceeding on April 9, 2019 at which time payments under the previously agreed upon payment plan ceased. As a result, during the first quarter of 2019, the Company recorded an additional charge of $5.7 million to fully reserve for the amount of the exposure related to this customer. During the second quarter of 2019, the Company reversed $1.0 million of this reserve based on additional information obtained during the quarter. There was no change during the third quarter of 2019.
During 2019, the Company sold to an unaffiliated third party, without recourse, its remaining outstanding receivables from a customer which filed a voluntary bankruptcy proceeding, which the Company had initially recorded as a chargebase borrowing rate during the second quarter as a result of 2017. During the first quarterMay 2020 amendment to our Credit Agreement.
Income Taxes
The Company’s effective income tax rate was approximately 21% and 37% for the three months ended June 30, 2020 and 2019, respectively. The Company's effective income tax rate was approximately 14% and 45% for the six months ended June 30, 2020 and 2019. The effective income tax rate for the three months ended June 30, 2020 approximated the statutory rate, as the favorable impact of 2019,the CARES Act was offset by the unfavorable impact of taxes in other jurisdictions and other permanent book to tax differences. the effective income tax rate for the six months ended June 30, 2020 was lower than the statutory rate primarily due to impairments for which the Company recordedwill not realize income tax benefits, partially offset by income tax benefits of the CARES Act enacted on March 27, 2020. The CARES Act provides a recoveryfive-year carryback of $0.2 millionnet operating losses generated in years 2018 through 2020. As the statutory federal income tax rate applicable to certain years within the carryback period is 35%, carryback to those years of our estimated 2020 annual federal tax loss provides a tax benefit in excess of the current federal statutory rate of 21%, resulting in an increased income tax benefit. We project that the income tax effects of the CARES Act will result in additional income tax benefit recognized throughout the 2020 tax year and during the second quartera cash refund in 2021 of 2019, the Company recorded a recovery $1.7 million, related to a bad debt provisiontaxes paid in prior years. The effective income tax rate for the receivablesthree months ended March 31, 2019 was higher than the statutory rate due to the impact of discrete items, the global intangible low-taxes income, and executive compensation, and other provisions resulting from this customer. This matter is considered fully resolved.the December 22, 2017 passage of the Tax Cuts and Jobs Act and foreign tax rates different than statutory rates in the U.S.
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Interest Expense
Interest expense was approximately $3.0 million and $1.9 million for the three months ended September 30, 2019 and 2018, respectively. Interest expense was approximately $10.1 million and $5.6 million for the nine months ended September 30, 2019 and 2018, respectively. The increases were due to higher average levels of borrowing on the Company's Credit Agreement attributable primarily to borrowings for the acquisition completed during the fourth quarter of 2018, and to a lesser extent, from an increase in the base borrowing rate.
Income Taxes
The Company’s effective income tax rate was approximately 61% and 190% for the three months ended September 30, 2019 and 2018, respectively. The Company's effective income tax rate was approximately 55% and 44% for the nine months ended September 30, 2019 and 2018, respectively. The effective income tax rate for the three and nine months ended September 30, 2019 and 2018 was higher than the statutory rate due to the impact of discrete items, GILTI and executive compensation, and other provisions resulting from the passage of the Tax Act and foreign tax rates different than statutory rates in the U.S. The discrete items had an impact on our effective tax rate of approximately 17% and 15% for the three and nine months ended September 30, 2019, respectively, and approximately 119% and 12% for the three and nine months ended September 30, 2018, respectively.
Liquidity and Capital Resources
Cash flows are summarized in the table below:
| | | | | | | | Six months ended June 30, | |
| Nine months ended | | 2020 | | 2019 |
| September 30, 2019 | | September 30, 2018 | |
Net cash provided by (used in): | |
| | |
| Net cash provided by (used in): | | | |
Operating activities | $ | 40,476 |
| | $ | 24,184 |
| Operating activities | $ | 34,862 | | | $ | 21,105 | |
Investing activities | (21,628 | ) | | (9,831 | ) | Investing activities | (7,248) | | | (11,048) | |
Financing activities | (29,521 | ) | | (23,905 | ) | Financing activities | (20,337) | | | (23,139) | |
Effect of exchange rate changes on cash | (499 | ) | | (916 | ) | Effect of exchange rate changes on cash | 295 | | | 39 | |
Net change in cash and cash equivalents | $ | (11,172 | ) | | $ | (10,468 | ) | Net change in cash and cash equivalents | $ | 7,572 | | | $ | (13,043) | |
Cash Flows from Operating Activities
During the ninesix months ended SeptemberJune 30, 2019,2020, cash provided by operating activities was $40.5$34.9 million, representing a year-on-year increase of $16.3$13.8 million, or 67%65%. The increase was primarily attributable to movements in working capital.
Cash Flows from Investing Activities
During the ninesix months ended SeptemberJune 30, 2019,2020, cash used in investing activities was $21.6$7.2 million, compared with $9.8$11.0 million in 2018. Capital2019. The decrease is primarily attributable to a reduction in capital expenditures were $18.0to $7.6 million for the first ninesix months of 2019,ended June 30, 2020 compared with $15.8$12.0 million in the comparable 20182019 period. During the nine months ended September 30, 2019, the Company paid $4.8 million for an acquisition. During the nine months ended September 30, 2018, the Company received $4.8 million from the sale of a subsidiary in the Products segment. (see Note 5–Acquisitions and Dispositions to the condensed consolidated financial statements in this Quarterly Report)
Cash Flows from Financing Activities
Net cash used in financing activities was $29.5$20.3 million for the ninesix months ended SeptemberJune 30, 2019. The Company paid down $21.8 million, net, on its Credit Agreement, inclusive of quarterly payments of the Term Loan, as well as payments of $4.1 million of finance lease obligations and other debt. For the comparable period in 2018,2020, compared to net cash used in financing activitiesof $23.1 million for the six months ended June 30, 2019. During the six months ended June 30, 2020, net repayments of debt was $23.9 million. The Company paid down $15.9approximately $5.2 million net, on its Credit Agreement, inclusive of quarterlyhigher as compared to 2019. In addition, for the six months ended June 30, 2020 we made payments of the Term Loan, as well as $4.6$1.3 million payments of capital lease obligations and other debt.$1.5 million for acquisition-related contingent consideration and financing costs, respectively.
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
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 impactan increase of $0.5$0.3 million in the first ninesix months of 2019,ended June 30, 2020, compared to a net impact of $0.9 millionslight increase for the first ninesix months of 2018.ended June 30, 2019.
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 20182019 Annual Report under the Section “Liquidity and Capital Resources”, under the heading “Cash Balance and Credit Facility Borrowings,” andexcept as described in Note 11–Long-Term11 – Long Term Debt to these condensed consolidated financial statementsthe Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report, under the heading “Senior"Senior Credit Facility.”Facility".
As of SeptemberJune 30, 2019,2020, we had cash and cash equivalents totaling $14.4$22.6 million and available borrowing capacity of $131.4$33.1 million under our Credit Agreement with borrowings of $259.4$230.2 million and $5.4$3.9 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, 2019, the Company was2020, we were in compliance with the terms of the Credit Agreement and will continuously monitor its compliance with the covenants contained in its Credit Agreement.
Contractual Obligations
There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 20182019 Annual Report.
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)
Off-balance Sheet Arrangements
During the ninesix months ended SeptemberJune 30, 2019,2020, 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 20182019 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 20182019 Annual Report.
ITEM 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2019,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, 2020, our disclosure controls and procedures were not effective, due to material weaknesses in our internal control over financial reporting processes and internal controls related to the accounting for income tax, as discussed below.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Management previously disclosed material weaknesses in internal control over financial reporting in our 2019 Annual Report pertaining to financial reporting processes and internal control related to accounting for income taxes.The Company remains committed to an effective internal control environment and management believes that these actions, and the improvements management expects to ensureachieve as a result, will remediate the material weakness. However, the material weaknesses will not be considered remediated until the controls operate for a sufficient period of time and management has concluded through testing that information requiredthese controls operate effectively.The Company continues to execute on the remediation plans as outlined below.
Remediation Plans
Our management, with oversight from the Audit Committee of the Board of Directors, is actively engaged in remediation efforts to address the identified material weaknesses over income taxes. These efforts include:
•Accelerate the risk assessment process related to changes in the business;
•Enhance the design of controls surrounding the preparation and review of the income tax provision, and enhance the automation of the income tax processes and controls to allow for a timelier completion and review of internal controls; and
•Accelerate all key activities within the income tax accounting and reporting process and controls by further increasing and expanding the capabilities of the income tax accounting resources in order to devote additional time and resources to the consolidated income tax accounting and reporting processes and controls.
During the current quarter management has reviewed and enhanced the current processes and controls surrounding the preparation of the income tax provision and engaged a third party accounting firm to assist with the documentation of these enhanced processes and controls. However, most controls over accounting for income taxes are annual controls, as such, the material weaknesses are not expected 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.remediated until year end.
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, 20192020 that has materially affected, or isare reasonably likely to materially affect, suchour internal control over financial reporting.reporting, other than as set forth in the remediation plan described above.
PART II—OTHER INFORMATION
ITEM 1.Legal Proceedings
See Note 14–Commitments and Contingencies to the condensed consolidated financial statementsNotes 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" in our 20182019 Annual Report, except as disclosed in such Note 14–Commitments and Contingencies.
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 20182019 Annual Report. There have been no material changes to the risk factors previously disclosed in the 20182019 Annual Report.Report, except for the addition of the following risk factors.
The COVID-19 pandemic has adversely affected and in the future periods is expected to continue to adversely affect our business and operations.
The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our business and operations and the business and operations of our customers.We have experienced and expect to continue to experience, unpredictable reductions in demand for our services and products.In response to the COVID-19 pandemic, companies within the oil and gas and aerospace industries (including our customers) have announced spending cuts and/or slowdowns (or temporary cessation) in production which, in turn, may result in decreases in awards of new contracts or adjustments, reductions, suspensions or cancellations of existing contracts.In addition, as a result of the COVID-19 pandemic, some of our customers have been and could continue to be negatively impacted as a result of disruption in demand, which has led to delays and could lead to defaults on collections of receivables from them. Such continued delays could negatively impact our business, results of operations and financial condition.
The continued spread of COVID-19 may result in a decrease in business and/or cause our customers to be unable to meet existing payment or other obligations to us, particularly in the event of a spread of COVID-19 in our market areas. The continued spread of COVID-19 could also negatively impact the availability of our key personnel necessary to conduct our business.In addition, any significant disruption of global financial markets, reducing our ability to access capital, could negatively affect our liquidity. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the impact on our business, financial condition and results of operations remains uncertain and difficult to predict. While we expect the COVID-19 pandemic to have an adverse effect on our business, financial condition, liquidity, cash flow and results of operations, we are unable to predict the extent, nature or duration of these impacts at this time, although we expect such negative impacts for the remainder of the fiscal year and perhaps longer.
If the economic disruption caused by the COVID-19 pandemic increases in magnitude or continues longer than expected, we may have difficulty meeting the financial covenants in our credit agreement with our banks.
The Company expected that the economic disruption being caused by the COVID-19 pandemic was likely to cause our results in upcoming quarters to be less than what was required to meet the financial covenants in our then existing credit agreement with our banks. We obtained an amendment to our credit agreement which included, among other terms, modifications to the financial covenants in the credit agreement, and a reduction in our revolving line of credit from $300 million to $175 million. We believe it is probable that we will be able to meet the amended financial covenants and that sufficient credit remains available under the amended Credit Facility to meet our liquidity needs. However, due to the uncertainties and risks created by the COVID-19 pandemic, no assurance can be given that we will comply with these amended covenants, particularly if the pandemic increases in intensity or its duration is longer than expected. If we are not able to meet the financial covenants in our credit agreement in future quarters, we will be in default, which would give the lenders the right to terminate the agreement, not allow us to borrow on our line of credit, call all of our loans to be due and payable, and exercise any other remedies available to the lenders.If we do default on our credit agreement and the lenders elect to not grant us a waiver or amendment and/or to commence exercising their remedies and we are unable to obtain other funding sources, our operations will be materially impacted and we may not be able to continue operating as a going concern.If we do obtain alternate funding sources, this alternate financing could be on substantially different and adverse terms than our existing credit agreement, materially
impacting our operations and profitability, and otherwise could significantly dilute our existing shareholders and have other materially adverse effects on us and our shareholders.
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 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, 2020 | — | | | $ | — | | | — | | | $ | — | |
May 31, 2020 | 24,129 | | | $ | 4.04 | | | — | | | $ | — | |
June 30, 2020 | 6,279 | | | $ | 3.79 | | | — | | | $ | — | |
|
| | | | | | | | | | | | | |
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 (1) |
July 31, 2019 | 4,831 |
| | $ | 15.02 |
| | — |
| | $ | — |
|
August 31, 2019 | 140,680 |
| | $ | 15.65 |
| | — |
| | $ | — |
|
September 30, 2019 | — |
| | $ | — |
| | — |
| | $ | — |
|
(1) - On October 7, 2015, the Company announced that its Board of Directors approved a share repurchase plan, which authorized the expenditure of up to $50.0 million for the purchase of the Company's common stock. Effective April 1, 2019, the Company's Board of Directors terminated its share repurchase plan, of which $25.1 million was remaining before the aforementioned termination of the plan.
ITEM 3.Defaults Upon Senior Securities
None.
ITEM 4.Mine Safety Disclosures
Not applicable.
ITEM 5.Other Information
None.
ITEM 6.Exhibits
| | | | | | | | |
Exhibit No. | | Description |
| | |
| | | | Description10.1 to Current Report on Form 8-K filed May 15, 2020 and incorporated herein by reference). |
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101.INS | | XBRL Instance Document |
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101.SCH | | XBRL Schema Document |
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101.CAL | | XBRL Calculation Linkbase Document |
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101.LAB | | XBRL Labels Linkbase Document |
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101.PRE | | XBRL Presentation Linkbase Document |
| | |
101.DEF | | XBRL Definition Linkbase Document |
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Exhibit 10.2 is a management contract or compensatory plan, contract, or arrangement.
* Filed herewith
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.
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| MISTRAS GROUP, INC. | |
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| By: | /s/ Edward J. Prajzner |
| | Edward J. Prajzner |
| | SeniorExecutive Vice President, Chief Financial Officer and Treasurer |
| | (Principal Financial and Accounting Officer and duly authorized officer) |
Date: November 6, 2019August 7, 2020