What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 109 added, 102 removed, 204 unchanged (51% of the section changed)

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

The following Management’s Discussion and Analysis (“MD&A”) provides a discussion of our results of operations and financial position for the three and six months ended June 30, 2020 and June 30, 2019.

The following Management’s Discussion and Analysis (“MD&A”) provides a discussion of our results of operations and financial position for the three and nine months ended September 30, 2020 and September 30, 2019.

The MD&A should be read together with our Unaudited 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, 2019, filed with the Securities and Exchange Commission on March 27, 2020 (“2019 Annual Report”).

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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.

We offer our customers “OneSource for Asset Protection Solutions ® " and are a leading global provider of technology-enabled asset protection solutions used to evaluate the structural integrity and reliability of critical energy, commercial aerospace and defense, industrial and public infrastructure.

We combine industry-leading products and technologies, expertise in mechanical integrity (MI), Non-Destructive Testing (NDT), Destructive Testing (DT), mechanical and predictive maintenance (PdM) services, process and fixed asset engineering and consulting services, proprietary data analysis and our world class enterprise inspection database management and analysis software, PCMS, to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity management and assessments.

These mission critical solutions enhance our customers’ ability to comply with governmental safety and environmental regulations, extend the useful life of their assets, increase productivity, minimize repair costs, manage risk and avoid catastrophic disasters.

Our comprehensive “OneSource” portfolio of customized solutions, utilizing a proven systematic method that creates a closed-loop lifecycle for addressing continuous asset protection and improvement, helps us to deliver value to our customers.

The Company is a leading "one source" multinational provider of integrated technology-enabled asset protection solutions, helping to maximize the safety and operational uptime for civilization’s most critical industrial and civil assets.

Backed by an innovative, data-driven asset protection portfolio, proprietary technologies, and decades-long legacy of industry leadership, the Company leads clients in the oil and gas, aerospace and defense, power generation, infrastructure, and manufacturing industries towards achieving and maintaining operational excellence.

By supporting these organizations that help fuel our vehicles and power our society;

inspecting components that are trusted for commercial, defense, and space craft;

and building real-time monitoring equipment to enable safe travel across bridges, the Company helps the world at large.

The Company enhances value for its clients by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial IoT-connected digital software and monitoring solutions.

The company’s core capabilities also

Mistras Group, Inc.

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include non-destructive testing (“NDT”) field inspections enhanced by advanced robotics, laboratory quality control and assurance testing, sensing technologies and NDT equipment, asset and mechanical integrity engineering services, and light mechanical maintenance and access services.

Our operations consist of three reportable segments:

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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 defense, power generation (natural gas, fossil, nuclear, alternative, renewable, and transmission and distribution), public infrastructure, chemicals, transportation, primary metals and metalworking and research and engineering institutions.

These markets include oil and gas (downstream, midstream, upstream and petrochemical), commercial aerospace and defense, power generation (fossil, nuclear, alternative, renewable, and transmission and distribution), public infrastructure, chemicals, transportation, primary metals and metalworking and research and engineering institutions.

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.

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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.

In March 2020, the World Health Organization declared the outbreak of the COVID-19 coronavirus (COVID-19) as a pandemic, which continues to infect the population throughout the United States and most other parts of the world.

The COVID-19 pandemic has caused significant volatility in domestic and international markets.

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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 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.

In addition, oil prices have dropped significantly, and airline traffic has experienced a significant decline.

In response to various factors surrounding the COVID-19 pandemic and, in the case of the oil and gas market, other macroeconomic events, companies within the oil and gas and aerospace industries (including our customers) have reduced spending and/or slowed down (or temporarily ceased) production.

This, in turn, resulted in decreases in awards of new contracts or adjustments, reductions, suspensions or cancellations of existing contracts.

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 customers, suppliers and contractors.

These negative factors have also resulted in significant volatility and uncertainty in the markets in which we operate.

To successfully navigate through this unprecedented period, we continue to focus on the following key priorities:

• Ensuring the health and safety of our employees and those of our customers and suppliers;

These negative

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factors have also resulted in significant volatility and uncertainty in the markets in which we operate.

To successfully navigate through this unprecedented period, we continue to focus on the following key priorities:

• Ensuring the health and safety of our employees and those of our customers and suppliers;

• Maintaining business continuity and financial strength and stability;

• 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:

While we cannot fully assess the impact that the COVID-19 pandemic or the significant volatility in oil prices will continue to have on our operations at this time, there are certain impacts that we have identified:

• 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.

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See Note 9- Intangible Assets and Note 13- 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.

To respond to the economic downturn resulting from the factors discussed above, in March 2020 we initiated a cost reduction and efficiency program.

As part of this program, our named executive officers took voluntarily temporary salary reductions ranging from 25% to 45% of their base salary.

In addition, we instituted a reduction for certain 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.

These reductions became effective at the beginning of the second quarter of 2020 and, except for the salary reductions for certain lower salaried employees, continued through the end of the third quarter of 2020.

In addition, our non-employee directors voluntarily agreed to a $3,750 reduction in their second and third quarter 2020 director's fee payments.

Beginning in the fourth quarter of 2020, all salary and director fees reductions were removed and pay levels were returned to first quarter levels, though certain other cost reduction measures have remained in place.

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.

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Refer to Item 1A.

Risk Factors in Part I of our 2019 Annual Report on Form 10-K ("2019 Annual Report") for the year ended December 31, 2019, filed with the Securities and Exchange Commission ("SEC") on March 27, 2020.

Risk Factors in Part I of our 2019 Annual Report.

Note About Non-GAAP Measures

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The acquisition related costs and special items can be a net expense or credit in any given period.

Our management uses "Income (loss) before special items" for each of our three segments, the Corporate segment and the Total Company as a measure of operating performance and liquidity to assist in comparing performance from period to period on a consistent basis, as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations.

We believe investors and other users of our financial statements benefit from the presentation of "Income (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.

Income (loss) before

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special items is not used to determine incentive compensation for executives or employees, nor is it a replacement for the reported GAAP financial performance and/or necessarily comparable to the non-GAAP financial measures of other companies.

Results of Operations

Condensed consolidated results of operations for the three and six months ended June 30, 2020 and June 30, 2019 were as follows:

Three months ended June 30, Six months ended June 30,

Condensed consolidated results of operations for the nine months ended September 30, 2020 and September 30, 2019 were as follows:

Three months ended September 30, Nine months ended September 30,

2020 2019 2020 2019

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Gross profit as a % of Revenue 32.0 % 30.1 % 29.9 % 29.3 %

Total operating expenses 41,541 44,652 193,413 97,922

Operating expenses as a % of Revenue 33.4 % 22.3 % 68.1 % 25.9 %

Income (loss) from operations 5,742 10,779 (105,869) 21,802

Income (loss) from Operations as a % of Revenue 3.9 % 5.6 % (24.5) % 3.8 %

Interest expense 2,976 3,579 5,765 7,106

Income (loss) before provision (benefit) for income taxes 2,097 7,820 (115,279) 11,737

Provision (benefit) for income taxes (694) 4,397 (16,189) 1,760

Net income (loss) 1,553 3,087 (99,634) 5,244

Net income (loss) attributable to non-controlling interests, net of taxes (9) 12 (22) 19

Net income (loss) attributable to Mistras Group, Inc.

$ 1,523 $ 3,093 $ (99,642) $ 5,231

Revenue was $124.4 million for the three months ended June 30, 2020, a decrease of $76.2 million, or 38.0%, compared with the three months ended June 30, 2019.

Revenue for the six months ended June 30, 2020 was $283.9 million, a decrease of $93.5 million, or 24.8%, compared with the six months ended June 30, 2019.

Revenue by segment for the three and six months ended June 30, 2020 and June 30, 2019 were as follows:

Three months ended June 30, Six months ended June 30,

Revenue was $147.9 million for the three months ended September 30, 2020, a decrease of $44.3 million, or 23.0%, compared with the three months ended September 30, 2019.

Revenue for the nine months ended September 30, 2020 was $431.8 million, a decrease of $137.8 million, or 24.2%, compared with the nine months ended September 30, 2019.

Revenue by segment for the three and nine months ended September 30, 2020 and 2019 were as follows:

Three months ended September 30, Nine months ended September 30,

2020 2019 2020 2019

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$ 147,894 $ 192,192 $ 431,794 $ 569,595

In the three months ended June 30, 2020, total revenue decreased 38.0% due predominantly to a double-digit organic decline and, to a much lesser extent, the low single-digit unfavorable impact of foreign exchange 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 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, partially offset by low single-digit acquisition growth.

International segment revenue decreased 42.5%, due predominantly to the organic decline and, to a much lesser extent, the low single-digit unfavorable impact of foreign exchange rate.

In the three months ended September 30, 2020, total revenue decreased 23.0% versus the prior year comparable period due predominantly to a double-digit organic decline offset by low single-digit favorable impact of foreign exchange rates and acquisition growth.

The decrease in revenue across all our segments was primarily the result of the impact of COVID-19, which disrupted the timing of projects or purchases for many of our customers.

Services segment revenue decreased 21.5%, driven predominantly by a double-digit organic decline and, to a lesser extent, low single-digit unfavorable impact of foreign exchange rates, partially offset by low single-digit acquisition growth.

International segment revenue decreased 28.5%, due predominantly to the organic decline partially offset by low single-digit favorable impact of foreign exchange rates.

Products and Systems segment revenue decreased by 28.8%, due to organic decline.

Oil and gas customer revenue comprised approximately 55% and 59% of total revenue for the three months ended September 30, 2020 and 2019, respectively.

Aerospace and defense customer revenue comprised approximately 10% and 12% of total revenue for the three months ended September 30, 2020 and 2019, respectively.

The Company’s top ten customers comprised

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Oil and gas customer revenue comprised approximately 54% and 60% of total revenue for the three months ended June 30, 2020 and 2019, respectively.

Aerospace and defense customer revenue comprised approximately 14% and 12% of total revenue for the three months ended June 30, 2020 and 2019, respectively.

The Company’s top ten customers comprised approximately 29% of total revenue for the three months ended June 30, 2020, as compared to 38% for the three months ended June 30, 2019, with no customer accounting for 10% or more of total revenue in either three-month period.

In the six months ended June 30, 2020, total revenue decreased 24.8% due predominantly to a double-digit organic decline and, to a much lesser extent, the low single-digit unfavorable impact of foreign exchange 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, partially offset by low single-digit acquisition growth.

International segment revenue decreased 30.2%, due predominantly to the organic decline and, to a much lesser extent, the low single-digit unfavorable impact of foreign exchange rate.

approximately 29% of total revenue for the three months ended September 30, 2020, as compared to 34% for the three months ended September 30, 2019, with no customer accounting for 10% or more of total revenue in either three-month period.

In the nine months ended September 30, 2020, total revenue decreased 24.2% versus the prior year comparable period due predominantly to a double-digit organic decline and, to a lesser extent, low single-digit unfavorable impact of foreign exchange rates, partially offset by low single-digit acquisition growth.

The decrease in revenue across all our segments was primarily the result of the impact of COVID-19, which disrupted the timing of projects or deferral of purchases for many of our customers.

Services segment revenue decreased 23.1%, driven predominantly by a double-digit organic decline and, to a lesser extent, low single-digit unfavorable impact of foreign exchange rates, partially offset by low single-digit acquisition growth.

International segment revenue decreased 29.7%, due predominantly to the organic decline and, to a lesser extent, low single-digit unfavorable impact of foreign exchange rate.

Products and Systems segment revenue decreased by 18.7%, due to the organic decline.

Oil and gas customer revenue comprised approximately 56% and 59% of total revenue for the six months ended June 30, 2020 and 2019, respectively.

Aerospace and defense customer revenue comprised approximately 15% and 13% of total revenue for the six months ended June 30, 2020 and 2019, respectively.

The Company’s top ten customers comprised approximately 31% of total revenue for the six months ended June 30, 2020, as compared to 39% for the six months ended June 30, 2019, with no customer accounting for 10% or more of total revenue in either six-month period.

Gross profit decreased by $18.9 million, or 31.5%, in the three months ended June 30, 2020, on a decrease in sales of 38.0%.

Gross profit decreased by $27.1 million, or 24.9%, in the six months ended June 30, 2020, on a decrease in sales of 24.8%.

Gross profit by segment for the three and six months ended June 30, 2020 and June 30, 2019 was as follows:

Three months ended June 30, Six months ended June 30,

Oil and gas customer revenue comprised approximately 56% and 59% of total revenue for the nine months ended September 30, 2020 and 2019, respectively.

Aerospace and defense customer revenue comprised approximately 13% and 13% of total revenue for the nine months ended September 30, 2020 and 2019, respectively.

The Company’s top ten customers comprised approximately 30% of total revenue for the nine months ended September 30, 2020, as compared to 35% for the nine months ended September 30, 2019, with no customer accounting for 10% or more of total revenue in either nine-month period.

Gross profit decreased by $10.4 million, or 18.0%, in the three months ended September 30, 2020 versus the prior year comparable period, on a decrease in revenue of 23.0%.

Gross profit decreased by $37.5 million, or 22.5%, in the nine months ended September 30, 2020, on a decrease in sales of 24.2%.

Gross profit by segment for the three and nine months ended September 30, 2020 and September 30, 2019 was as follows:

Three months ended September 30, Nine months ended September 30,

2020 2019 2020 2019

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% of total revenue 32.0 % 30.1 % 29.9 % 29.3 %

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;

Gross profit margin was 32.0% and 30.1% for the three-month periods ended September 30, 2020 and 2019, respectively.

COVID-19, the significant drop in oil prices and a 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

Services segment gross profit margins had a year-on-year increase of 300 basis points to 31.4% during the three months ended September 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 60 basis points to 31.0% during the three months ended September 30, 2020, due primarily to reduced volumes and unfavorable sales mix.

Products and Systems segment gross margin had a year-on-year decrease of 820 basis points to 41.4% during the three months ended September 30, 2020 due to unfavorable sales mix.

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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.

Gross profit margin was 28.8% and 28.9% for the six-month periods ended June 30, 2020 and 2019, respectively.

Services segment gross profit margins had a year-on-year increase of 70 basis points to 28.8% in the six months ended June 30, 2020, on a decrease in sales volume.

International segment gross margins had a year-on-year decline of 300 basis points to 26.6% in the six months ended June 30, 2020 due to lower levels of employee utilization.

Products and Systems segment gross margin had a year-on-year decline of 740 basis points to 32.4% in the six months ended June 30, 2020, due to unfavorable sales mix.

Gross profit margin was 29.9% and 29.3% for the nine months ended September 30, 2020 and 2019, respectively.

Services segment gross profit margins had a year-on-year increase of 150 basis points to 29.7% in the nine months ended September 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 220 basis points to 28.1% in the nine months ended September 30, 2020 due to lower levels of employee utilization and sales mix.

Products and Systems segment gross margin had a year-on-year decline of 820 basis points to 35.7% in the nine months ended September 30, 2020, due to unfavorable sales volume and 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,

Operating expenses for the three and nine months ended September 30, 2020 and 2019 was as follows:

Three months ended September 30, Nine months ended September 30,

2020 2019 2020 2019

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Depreciation and amortization 3,182 4,089 10,359 12,380

Legal settlement (360) — (360) —

Acquisition-related expense (benefit), net 709 (32) 186 970

$ 41,541 $ 44,652 $ 193,413 $ 97,922

% of total revenue 33.4 % 22.3 % 68.1 % 25.9 %

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.

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.

Operating expenses decreased $5.3 million, or 11%, for the three months ended September 30, 2020 compared to the three months ended September 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.

These reductions were partially offset during the three months ended September 30, 2020 by an additional $0.2 million additive selling, general and administration expenses related to the Company’s most recent acquisition in September 2019.

During the three months ended September 30, 2020, there was approximately $0.7 million additional foreign currency exchange losses as compared with the prior period due to volatility in certain foreign currencies.

Operating expenses increased $90.1 million, or 62%, for the nine months ended September 30, 2020 compared to the nine months ended September 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 the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.

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.

These decreases in expense were partially offset by approximately $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 administration expenses related to the Company’s most recent acquisition.

Operating expenses for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 also decreased due to lower bad debt, pension withdrawal, depreciation and amortization, and net acquisition-related expenses.

These decreases in expense were partially offset by approximately $3.0 million foreign currency exchange losses during the nine months ended September 30, 2020 as compared with the prior period due to volatility in certain foreign currencies, as well as approximately an incremental $1.1 million in selling, general and administration expenses related to the Company’s most recent acquisition in September 2019.

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

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2020 2019 2020 2019

Income (loss) from operations (GAAP) $ 13,599 $ 15,757 $ (57,058) $ 40,715

Bad debt provision (benefit) for troubled customers, net of recoveries — (1,977) — 2,778

Bad debt provision for troubled customers, net of recoveries — — — 2,778

Impairment charges — — 86,200 —

Pension withdrawal expense — — — 534

Pension withdrawal expense (benefit) — (45) — 489

Reorganization and other costs 58 125 125 202

Legal settlement (360) — (360) —

Acquisition-related expense (benefit), net 709 (125) 186 577

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Income (loss) from operations (GAAP) $ (66) $ 2,921 $ (22,422) $ 5,155

Bad debt provision (benefit) for troubled customers, net of recoveries — (716) — 20

Bad debt provision for troubled customers, net of recoveries — — — 20

Impairment charges — — 19,862 —

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Products and Systems:

Loss from operations (GAAP) $ (96) $ (405) $ (1,776) $ (1,733)

Income (loss) from operations (GAAP) $ (160) $ 509 $ (1,936) $ (1,224)

Reorganization and other costs 5 218 5 218

Loss before special items (non-GAAP) $ (155) $ 727 $ (1,931) $ (1,006)

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Income (loss) from operations (GAAP) $ 5,742 $ 10,779 $ (105,869) $ 21,802

Bad debt provision (benefit) for troubled customers, net of recoveries — (2,693) — 2,798

Bad debt provision for troubled customers, net of recoveries — — — 2,798

Impairment charges — — 106,062 —

Pension withdrawal expense — — — 534

Pension withdrawal expense (benefit) — (45) — 489

Reorganization and other costs 98 477 580 879

Loss on debt modification — — 645 —

Legal settlement (360) — (360) —

Acquisition-related expense (benefit), net 709 (32) 186 970

Income (loss) before special items (non-GAAP) $ 6,189 $ 11,179 $ 1,244 $ 26,938

See section Note About Non-GAAP Measures in this report for an explanation of the use of non-GAAP measurements.

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For the three months ended June 30, 2020, income (loss) from operations (GAAP) 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 0.6% in the three months ended June 30, 2020 from 6.7% in the three months ended June 30, 2019.

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.

For the three months ended September 30, 2020, income (loss) from operations (GAAP) decreased $5.0 million or 47%, compared with the three months ended September 30, 2019, while income (loss) before special items (non-GAAP) decreased $5.0 million, or 45%.

As a percentage of revenue, income (loss) before special items decreased by 160 basis points to 4.2% in the three months ended September 30, 2020 from 5.8% in the three months ended September 30, 2019.

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.

These negative factors have resulted in significant volatility and uncertainty in the markets in which we operate.

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of this Form 10-Q for further discussion.

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) decreased $20.7 million, or 131%.

As a percentage of 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 the primary reason for the impairment charges.

For the nine months ended September 30, 2020, income (loss) from operations (GAAP) decreased $127.7 million, compared with the nine months ended September 30, 2019, while income (loss) before special items (non-GAAP) decreased $25.7 million, or 95%.

As a percentage of revenue, income (loss) before special items decreased by 440 basis points to 0.3% in the nine months ended September 30, 2020 from 4.7% in the nine months ended September 30, 2019.

During the nine months ended September 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 the primary reason for the impairment charges.

These negative factors have resulted in significant volatility and uncertainty in the markets in which we operate.

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Interest Expense

Interest expense was approximately $3.0 million and $3.6 million for the three months ended June 30, 2020 and 2019, respectively.

Interest expense was approximately $5.8 million and $7.1 million for the six months ended June 30, 2020 and 2019, respectively.

Interest expense was approximately $3.6 million and $3.0 million for the three months ended September 30, 2020 and 2019, respectively.

The increase was due to an increase in the base borrowing rate during the second quarter as a result of the May 2020 amendment to our Credit Agreement.

Interest expense was approximately $9.4 million and $10.1 million for the nine months ended September 30, 2020 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 base borrowing rate during the second quarter as a result of the May 2020 amendment to our Credit Agreement.

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 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 will not realize income tax benefits, partially offset by income tax benefits of the CARES Act enacted on March 27, 2020.

The Company’s effective income tax rate was approximately 26% and 61% for the three months ended September 30, 2020 and 2019, respectively.

The Company's effective income tax rate was approximately 14% and 55% for the nine months ended September 30, 2020 and 2019.

The effective income tax rate for the three months ended September 30, 2020 was greater than the statutory rate due to the unfavorable impact of taxes in other jurisdictions and other permanent book to tax differences offset by the favorable impact of the CARES act.

The effective income tax rate for the nine months ended September 30, 2020 was lower than the statutory rate primarily due to impairments for which the Company will 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 five-year carryback of net operating losses generated in years 2018 through 2020.

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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 a cash refund in 2021 of taxes paid in prior years.

The effective income tax rate for the three 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 the December 22, 2017 passage of the Tax Cuts and Jobs Act and foreign tax rates different than statutory rates in the U.S.

The effective income tax rate for the three and nine months ended September 30, 2019 was higher than the statutory rate due to the impact of discrete items, the global intangible low-taxed income, executive compensation, 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.

Mistras Group, Inc.

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Cash flows are summarized in the table below:

Six months ended June 30,

Nine months ended

Net cash provided by (used in):

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Cash Flows from Operating Activities

During the six months ended June 30, 2020, cash provided by operating activities was $34.9 million, representing a year-on-year increase of $13.8 million, or 65%.

During the nine months ended September 30, 2020, cash provided by operating activities was $41.8 million, representing a year-on-year increase of $1.3 million, or 3%.

The increase was primarily attributable to movements in working capital.

Cash Flows from Investing Activities

During the six months ended June 30, 2020, cash used in investing activities was $7.2 million, compared with $11.0 million in 2019.

The decrease is primarily attributable to a reduction in capital expenditures to $7.6 million for the six months ended June 30, 2020 compared with $12.0 million in the comparable 2019 period.

During the nine months ended September 30, 2020, cash used in investing activities was $10.6 million, compared with $21.6 million in 2019.

The decrease is primarily attributable to a reduction in capital expenditures to $11.0 million for the nine months ended September 30, 2020 compared with $18.0 million in the comparable 2019 period.

Cash Flows from Financing Activities

Net cash used in financing activities was $20.3 million for the six months ended June 30, 2020, compared to net cash used of $23.1 million for the six months ended June 30, 2019.

During the six months ended June 30, 2020, net repayments of debt was approximately $5.2 million higher as compared to 2019.

In addition, for the six months ended June 30, 2020 we made payments of $1.3 million and $1.5 million for acquisition-related contingent consideration and financing costs, respectively.

Net cash used in financing activities was $25.1 million for the nine months ended September 30, 2020, compared to net cash used of $29.5 million for the nine months ended September 30, 2019.

During the nine months ended September 30, 2020, net repayments of debt was approximately $3.7 million lower as compared to 2019.

In addition, for the nine months ended September 30, 2020 we made payments of $1.3 million and $1.5 million for acquisition-related contingent consideration and financing costs, respectively offset by $2.6 million less taxes paid related to net share settlement of share-based awards.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

The effect of exchange rate changes on our cash and cash equivalents was an increase of $0.3 million in the six months ended June 30, 2020, compared to a slight increase for the six months ended June 30, 2019.

The effect of exchange rate changes on our cash and cash equivalents was an increase of $0.9 million in the nine months ended September 30, 2020, compared to a decrease of $0.5 million for the nine months ended September 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 2019 Annual Report under the Section “Liquidity and Capital Resources”, except as described in Note 11 – Long Term Debt to the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report, under the heading " Senior Credit Facility ".

As of June 30, 2020, we had cash and cash equivalents totaling $22.6 million and available borrowing capacity of $33.1 million under our Credit Agreement with borrowings of $230.2 million and $3.9 million of letters of credit outstanding.

The terms of our Credit Agreement are set forth in Part II, Item 7 of our 2019 Annual Report under the Section “Liquidity and Capital Resources”, as modified as described in Note 11- Long-Term Debt to the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report, under the heading " Senior Credit Facility ".

As of September 30, 2020, we had cash and cash equivalents totaling $22.1 million and available borrowing capacity of $35.3 million under our Credit Agreement with borrowings of $226.4 million and $4.3 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 June 30, 2020, 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.

As of September 30, 2020, we were in compliance with the terms of the Credit Agreement and will continuously monitor our compliance with the covenants contained in the Credit Agreement.

Contractual Obligations

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Off-balance Sheet Arrangements

During the six months ended June 30, 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.

During the nine months ended September 30, 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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis