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Item 7. Management’s Discussion and Analysis

2021-03-16 compared with 2020-03-27 · 195 added, 165 removed, 215 unchanged (63% of the section changed)

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Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact.

These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.

See “Forward-Looking Statements” at the beginning of Item 1 of this Annual Report.

At the time of this report, the COVID-19 coronavirus is having a negative impact on our key markets and is causing significant economic disruption worldwide.

Our discussion below is qualified by the unknown impact that the COVID-19 coronavirus could have on our business and the economy in general, including the duration of the health risk the virus will cause and 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.

At the time of this report, the COVID-19 pandemic is continuing to have a negative impact on us and 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.

The Company is a leading "OneSource™" 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’s core capabilities also include non-destructive testing (“NDT”) field inspections enhanced by advanced robotics, laboratory quality control and assurance testing, sensing technologies and NDT equipment, asset and mechanical integrity engineering services, and light mechanical maintenance and access services.

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.

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Our operations consist of three reportable segments:

Services, International, and Products and Systems.

• Services provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of NDT, inspection, mechanical and engineering services that are used to evaluate the structural integrity and reliability of critical energy, industrial and public infrastructure.

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 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.

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majority of our solutions to our customers on a regular, recurring basis.

We perform these services largely at our customers’ facilities, while primarily servicing our aerospace customers at our growing network of state-of-the-art, in-house laboratories.

These solutions typically include NDT and inspection services, and can also include a wide range of mechanical services, including engineering assessments, heat tracing, pre-inspection insulation stripping, inspections, coating applications, reinsulation, and long-term condition-monitoring.

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 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.

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 and leverage our fixed costs.

We have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the integration of acquired companies.

These acquisitions have provided us with additional service lines, technologies, resources and customers that we believe will enhance our advantages over our competition.

The acquisition of Onstream, completed in December 2018, helps support many of our Corporate initiatives.

Onstream's strong presence in inline inspection provides us with a strong foundation within the midstream oil and gas market, which is an important piece of our overall growth strategy.

We have already generated new business opportunities through introduction of our inline inspection capabilities to existing midstream customers.

The acquisition of Onstream also provides us with an additional digital solution, Streamview™ software, which is an innovative application of advanced digital technology.

These acquisitions have provided us with additional service lines, technologies, resources and customers which we believe enhance our advantages over our competition.

We believe long-term growth can be realized in all of our target markets.

We expect the timing of our oil and gas customers inspection spend to be impacted by oil price fluctuations.

Demand for our services in the aerospace industry are strong and we continue to focus on expanding our capabilities to service this market.

In addition, 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.

Recent acquisitions have provided us with additional products, technologies, resources and customers that we believe will enhance our advantages over our competition.

Our level of business and financial results are impacted by world-wide macro- and micro-economic conditions generally, as well as those within our target markets.

Among other things, we expect the timing of our oil and gas customers inspection spend to be impacted by oil price fluctuations.

2020 Developments

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.

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 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

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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;

• 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 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.

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 to the 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 determined that the 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 Note 17-Leases to the consolidated financial statements.

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, 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 on a prospective basis, 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.

We will continue to monitor market conditions and respond accordingly.

Refer to Item 1A.

Risk Factors in Part I of this 2020 Annual Report.

Note about Non-GAAP Measures

In this MD&A under the heading "Income 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’s or Segment’s core business operations.

The Company prepares its consolidated financial statements in accordance with U.S.

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 presentation excludes from "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

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have been excluded from the GAAP measure because these expenses and credits are not related to our or any 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.

Our management uses this non-GAAP measure as a measure of operating performance and liquidity to assist in comparing performance from period to period on a consistent basis, as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations.

We believe investors and other users of our financial statements benefit from the presentation of this non-GAAP measure 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 other companies' non-GAAP financial measures.

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

Consolidated Results of Operations

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Gross profit as a % of Revenue 30.1 % 29.0 %

Total operating expenses 193,160 185,653

Operating expenses as a % of Revenue 25.8 % 25.0 %

Income from operations 24,137 22,221

Income from operations as a % of Revenue 3.2 % 3.0 %

Interest expense 13,698 7,950

Income before provision for income taxes 10,439 14,271

Provision for income taxes 4,359 7,426

Net income 6,080 6,845

net income attributable to noncontrolling interests, net of taxes 20 9

Net income attributable to Mistras Group, Inc.

Income (loss) from operations (101,217) 24,137

Income (loss) from operations as a % of Revenue (17.1) % 3.2 %

Income (loss) before provision for income taxes (114,172) 10,439

Net income (loss) (99,466) 6,080

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

$ (99,461) $ 6,060

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$ 592,571 $ 748,586

Revenue was $748.6 million for the year ended December 31, 2019, an increase of $6.2 million, or 0.8%, compared with the year ended December 31, 2018.

The increase was driven by the Services segment, which increased by $20.5 million, or 3.6%, driven by mid-single-digit acquisition growth primarily relating to the acquisition of Onstream in the fourth quarter of 2018, partially offset by low single-digit organic decline and the unfavorable impact of foreign exchange rates.

The International segment revenues decreased 6.0%, driven primarily by the unfavorable impact of foreign exchange rates.

The Products and Systems segment decreased 20.7%, driven by lower sales volume and by the sale of a subsidiary during the third quarter of 2018.

Revenues from oil and gas customers comprised 58% and 56% for the years ended December 31, 2019 and 2018, respectively.

Revenues from aerospace and defense customers comprised 13% and 15% for the years ended December 31, 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 18– Commitments and Contingencies to the consolidated financial statements, and the increase in volume in the oil and gas market is due to the Onstream acquisition completed in the fourth quarter of 2018.

Gross profit by segment for the years ended December 31, 2019 and December 31, 2018 was as follows:

Revenue was $592.6 million for the year ended December 31, 2020, a decrease of $156.0 million, or 20.8%, compared with the year ended December 31, 2019.

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.

The decrease primarily was driven by the Services segment, which experienced a revenue decrease of $119.0 million, or 20.0%, driven by double-digit organic decline.

The International segment revenues decreased 25.4% due predominantly to the double-digit organic decline.

The Products and Systems segment decreased 11.5%, driven by lower sales volume.

Revenues from oil and gas customers comprised 57% and 58% of total revenue for the years ended December 31, 2020 and 2019, respectively.

Revenues from aerospace and defense customers comprised 12% and 13% of total revenue for the years

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ended December 31, 2020 and 2019, respectively.

The Company's top ten customers comprised approximately 32% of total revenue for the year ended December 31, 2020, as compared to 34% for the year ended December 31, 2019, with no customer accounting for 10% or more of total revenue in either twelve month period.

Gross profit by segment for the years ended December 31, 2020 and 2019 was as follows:

For the year ended December 31,

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% of total revenue 30.1 % 29.0 %

Gross profit increased $9.4 million, or 4.5%, for the year ended December 31, 2019 compared to the year ended December 31, 2018, with a sales increase of 0.8%.

Gross profit decreased $38.8 million, or 17.8%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, with a sales decrease of $156.0 million, or 20.8%.

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 driven by the Services segment.

Gross profit margin was 30.1% and 29.0% for the years ended December 31, 2020 and 2019, respectively.

Services segment gross profit margins had a year-on-year increase of 140 basis points to 27.8% for the year ended December 31, 2019, due primarily to favorable operating leverage and service mix.

International segment gross margins had a year-on-year increase of 30 basis points to 29.9% for the year ended December 31, 2019, due primarily to favorable sales mix.

Products and Systems segment gross margins improved by 140 basis points for the year ended December 31, 2019 to 46.5%, driven by favorable sales mix.

Services segment gross profit margins had a year-on-year increase of 180 basis points to 29.6% for the year ended December 31, 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 decrease of 100 basis points to 28.9% for the year ended December 31, 2020, due primarily to lower levels of employee utilization and sales mix.

Products and Systems segment gross margins decreased by 500 basis points for the year ended December 31, 2020 to 41.5%, driven by unfavorable sales mix.

Operating Expenses

Operating expenses for the years ended December 31, 2019 and December 31, 2018 was as follows:

Operating expenses for the years ended December 31, 2020 and 2019 was as follows:

For the year ended December 31,

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Selling, general and administrative expenses $ 157,157 $ 168,621

Impairment charges 106,062 —

Bad debt provision for troubled customers, net of recoveries — 3,038

Pension withdrawal expense — 848

Gain on sale of subsidiary — (2,384)

Legal settlement and litigation charges, net (220) —

Research and engineering 2,892 3,045

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Acquisition-related expense, net 337 875

$ 193,160 $ 185,653

% of total revenue 25.8 % 25.0 %

Operating expenses increased $7.5 million, or 4.0%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Operating expenses, as a percentage of revenue, increased to 25.8% for the year ended December 31, 2019 compared to 25.0% for the year ended December 31, 2018.

Operating expenses related to the 2019 and 2018 acquisitions within our Services segment contributed approximately $13.6 million of additional expenses, inclusive of approximately $5.5 million in depreciation and amortization.

Transactional foreign exchange expense was approximately $1.8 million lower in 2019 as compared to 2018, primarily as a result of a stronger Canadian dollar compared to the U.S.

dollar during 2019.

The Company incurred approximately $1.7 million in additional bad debt expense mainly attributable to customer disputes (see Note 4– Accounts Receivable to the consolidated financial statements).

Legal related expenses were approximately $1.0 million lower in 2019 as compared with 2018, primarily due to the pension withdrawal and legal related matters as discussed in Note 18–

Commitments and Contingencies to the consolidated financial statements.

There were approximately $3.8 million less operating expenses related to special items as presented below.

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.

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 2018 and $0.8 million during 2019 for this potential withdrawal liability.

The Company’s subsidiary reached an agreement with one of the pension funds in September 2019 and made a final payment of $0.9 million in complete satisfaction of the withdrawal liability of the subsidiary.

Excluding the settlement payment, the Company has made monthly payments totaling $3.3 million through December 31, 2019.

The balance of the estimated total amount of this potential liability as of December 31, 2019 is approximately $2.5 million.

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 expired beginning in 2019.

Due to the limit on the length of service allowed under the German Labor Lease Act, employees are being transitioned off the customer contracts.

The German subsidiary has terminated, or will terminate, some of these employees, creating a severance obligation to the terminated employees, and has transitioned, or will transition other employees to the Company's other customers.

During December 2019, the Company executed an agreement to sell the rights of certain customer contracts for total consideration of approximately $0.1 million, effective January 1, 2020.

No other assets or liabilities other than those employee benefits related to employees working on the customer contracts were included in the sale.

As of December 31, 2019, the Company accrued approximately $0.8 million for estimated severance payment obligations, which takes into account the Company's estimate with respect to the employees that have been or will be transitioned to the German subsidiaries' other customers.

The $0.8 million of estimated obligations is net of $0.2 million in payments and $0.5 million in reversals due to employees being transitioned to customer contracts.

During 2018, the Company recorded approximately $1.2 million in charges related to labor claims against 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 December 31, 2019.

Income from Operations

The following table shows a reconciliation of segment income from operations to income before special items for the years ended December 31, 2019 and 2018:

Operating expenses increased $86.6 million, or 44.8%, for the year ended December 31, 2020 compared to the year ended December 31, 2019 due predominantly to impairment charges of $106.1 million in 2020 as more fully described in Note 8-Goodwill, Note 9-Intangible Assets and Note 17-Leases to the consolidated financial statements.

Amortization expense

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decreased from prior year due to a lower net carrying amount of intangible assets as a result of the 2020 impairment charges.

Selling, general and administrative expenses decreased $11.5 million, or 6.8% for the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily 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 2020 Developments under the Overview of this section.

Transactional foreign exchange expense, which is included within selling, general and administrative expenses, was approximately $3.6 million higher in 2020 as compared to 2019, due to volatility in certain foreign currencies.

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Income (Loss) from Operations

The following table shows a reconciliation of segment income (loss) from operations to income (loss) before special items (unaudited) for the years ended December 31, 2020 and 2019:

For the year ended December 31,

($ in thousands)

Income from operations (GAAP) $ 49,593 $ 47,126

Income (loss) from operations (GAAP) $ (44,222) $ 49,593

Pension withdrawal expense — 848

Impairment charges 86,200 —

Bad debt provision for troubled customers, net of recoveries — 3,018

Reorganization and other costs 141 302

Acquisition-related expense, net 541 576

Income before special items (non-GAAP) $ 54,302 $ 54,696

Legal settlement and litigation charges, net 81 —

Acquisition-related expense (benefit), net 337 541

Income before special items (unaudited, non-GAAP) $ 42,537 $ 54,302

International:

Income from operations (GAAP) $ 5,856 $ 3,953

Income (loss) from operations (GAAP) $ (21,855) $ 5,856

Impairment charges 19,862 —

Reorganization and other costs 1,290 266

Acquisition-related (benefit), net — (409)

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

Income before special items (non-GAAP) $ 6,142 $ 7,510

Income (loss) before special items (unaudited, non-GAAP) $ (703) $ 6,142

Products and Systems:

Income (loss) from operations (GAAP) $ (529) $ 2,368

Gain on sale of subsidiary — (2,384)

Loss from operations (GAAP) $ (936) $ (529)

Reorganization and other costs 5 218

Income (loss) before special items (non-GAAP) $ (311) $ 13

Loss before special items (unaudited, non-GAAP) $ (931) $ (311)

Corporate and Eliminations:

Loss from operations (GAAP) $ (34,204) $ (30,783)

Legal settlement and litigation charges, net (301) —

Loss on debt modification 645 —

Reorganization and other costs 177 104

Acquisition-related expense, net 334 365

Loss before special items (non-GAAP) $ (30,345) $ (30,556)

Acquisition-related expense (benefit), net — 334

Loss before special items (unaudited, non-GAAP) $ (33,683) $ (30,345)

Total Company:

Income from operations (GAAP) $ 24,137 $ 22,221

Income (loss) from operations (GAAP) $ (101,217) $ 24,137

Pension withdrawal expense — 848

Gain on sale of subsidiary — (2,384)

Impairment charges 106,062 —

Bad debt provision for troubled customers, net of recoveries — 3,038

Legal settlement and litigation charges, net (220) —

Loss on debt modification 645 —

Reorganization and other costs 1,613 890

Acquisition-related expense, net 875 532

Income before special items (non-GAAP) $ 29,788 $ 31,663

Acquisition-related expense (benefit), net 337 875

Income before special items (unaudited, non-GAAP) $ 7,220 $ 29,788

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

Total Company income from operations (GAAP) decreased by $125.4 million, or 519.3% compared to the year ended December 31, 2019.

Total Company income (loss) before special items (non-GAAP) decreased by $22.6 million or 75.8%

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compared with the year ended December 31, 2019.

Operating expenses, excluding special items (non-GAAP), as a percentage of revenue, was 28.9% for the year ended December 31, 2020 compared to 25.0% for the year ended December 31, 2019.

Total Company income from operations (GAAP) increased by $1.9 million, or 8.6% compared to the year ended December 31, 2018.

Total Company income before special items (non-GAAP) decreased by $1.9 million or 5.9% compared with the year ended December 31, 2018.

Income before

special items decreased by 30 basis points to 4.0% for the year ended December 31, 2019 from 4.3% for the year ended December 31, 2018.

The COVID-19 outbreak and volatility 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.

Income before special items as a percentage of revenue decreased by 280 basis points to 1.2% for the year ended December 31, 2020 from 4.0% for the year ended December 31, 2019.

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 change in oil prices may have on our business, results of operations, or liquidity.

Refer to Item 1A.

Risk Factors in Part I of this annual report for further discussion.

Interest Expense

Interest expense was $13.0 million and $13.7 million for the years ended December 31, 2020 and December 31, 2019, respectively.

The increase is related to higher average levels of borrowings on the Company's credit agreement, which is primarily attributable to the Onstream acquisition completed during the fourth quarter of 2018, and to a lesser extent, from an increase in the base borrowing rate.

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 effected during the second quarter as a result of the May 2020 amendment to our Credit Agreement.

Our effective income tax rate was approximately 12.9% for the year ended December 31, 2020, compared to 41.8% for the year ended December 31, 2019.

The change in effective tax rate was primarily driven by decrease due to a tax reform in the United States resulting in a transition tax impact in prior years, a decrease in a Canadian provincial tax rate, partially offset by an increase in nondeductible share-based compensation.

On June 28, 2019, the Canadian province of Alberta enacted the Job Creation Tax Cut which reduced the Alberta corporate income tax rate from 12% to 11% starting in 2019 with further annual reductions to 10% in 2020, 9% in 2021, and 8% in 2022.

This rate reduction had a favorable impact of approximately $1.9 million on the Company’s net deferred tax liabilities in this jurisdiction.

The United States enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

The decrease in effective tax rate was primarily driven by the impact of the non-deductible goodwill impairment partially offset by the benefit from the carryback of the current year domestic net operating loss, along with a decrease in the impact on our effective tax rate of nondeductible share based compensation, and foreign rate changes.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

The CARES Act is an approximately $2 trillion emergency economic stimulus package in response to the Coronavirus outbreak, which among other things contains numerous income tax provisions.

Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment.

The Company is currently evaluating the impact of the CARES Act on its consolidated financial position, results of operations, and cash flows.

On December 22, 2017, the United States enacted fundamental changes to federal tax law following the passage of the Tax Cuts and Jobs Act (the “Tax Act”).

The Tax Act is complex and significantly changes the U.S.

corporate tax system.

During the year ended December 31, 2018, the Company completed the accounting for the effects of the Tax Act on the period ended December 31, 2017, which resulted in income tax expense of $1.7 million.

This consisted primarily of an increase of $0.1 million in our net deferred tax liabilities due to the reduction in the federal corporate rate from 35% to 21%, an increase of $1.3 million in tax expense attributable to the transition tax, and a decrease in deferred tax assets of $0.4 million due to changes made to executive compensation.

Some of these tax provisions are effective retroactively for years ending before the date of enactment.

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 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 of $1.9 million.

We project that the income tax effects of the CARES Act will result in a cash refund of $4.8 million in 2021 of taxes paid in prior years.

On December 27, 2020, the United States enacted the Consolidated Appropriations Act, 2021, (the "Appropriations Act") an additional stimulus package providing financial relief for individuals and small business.

The Appropriations Act contains a variety of tax provisions, including full expensing of business meals in 2021 and 2022, and expansion of the employee retention tax credit.

We are currently evaluating the impact of this guidance on our consolidated financial position, results of operations, and cash flows, but does not expect it to have a material impact.

In response to the COVID-19 pandemic, the American Rescue Plan Act was signed into law on March 11, 2021.

This act, among other things, provides economic relief provisions to individuals and funding to certain businesses and programs.

We are currently evaluating the impact of this guidance on our consolidated financial position, results of operations, and cash flows, but does not expect it to have a material impact.

This rate reduction had a favorable impact of approximately $1.9 million on our net deferred tax liabilities in this jurisdiction in 2019.

As part of Alberta’s Recovery plan associated with the COVID-19 pandemic, Alberta accelerated the decrease in income tax rates from 10% in 2020 to 8% effective July 1, 2020.

The accelerated tax rate reduction did not have a material impact on our net deferred tax liabilities but did reduce current taxes.

Income tax expense varies as a function of pre-tax income and the level of non-deductible expenses, such as certain amounts of meals and entertainment expense, valuation allowances, and other permanent differences.

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Our effective income tax rate may fluctuate over the next few years due to many variables including the amount and future geographic distribution of our pre-tax income, changes resulting from our acquisition strategy, and increases or decreases in our permanent differences.

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Liquidity and Capital Resources

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Cash provided by operating activities for the year ended December 31, 2020 was $67.8 million, an increase of $8.7 million from the prior year.

The increase was primarily attributable to movements in working capital.

The increase was primarily attributable to movements in working capital driven by the increase in net accounts receivable collections of $19.0 million offset by less net income.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 2019 was $25.3 million, a decline of $130.2 million from the prior year.

In addition, the Company used $1.8 million less for purchases of property, plant and equipment and intangible assets in 2019 compared to 2018.

Net cash used in investing activities for the year ended December 31, 2020 was $15.0 million, a decrease of $10.3 million from the prior year as a response to the COVID-19 pandemic.

In addition, the Company used $7.1 million less of cash for purchases of property, plant and equipment and intangible assets in 2020 compared to 2019.

In 2019, the Company used $4.2 million for acquisitions, net of dispositions.

Cash Flows from Financing Activities

Net cash used by financing activities for the year ended December 31, 2019 was $44.1 million, compared to net cash provided by financing activities of $114.0 million for the year ended December 31, 2018.

In 2018, the Company had net borrowings of $125.2 million, the proceeds of which were primarily used to fund acquisitions, of which approximately $29.7 million was repaid during 2019.

Net cash used by financing activities for the year ended December 31, 2020 was $44.2 million, compared to $44.1 million for the year ended December 31, 2019.

During the year ended December 31, 2020, net repayment of debt was approximately $0.4 million higher compared to 2019.

In addition, for the year ended December 31, 2020 we incurred $1.2 million and $1.5 million of additional acquisition-related contingent consideration and financing costs compared to 2019, respectively offset by $2.7 million less taxes paid related to net share settlement of share-based awards.

Cash Balance and Credit Facility Borrowings

As of December 31, 2019, the Company had cash and cash equivalents totaling $15.0 million and available borrowing capacity of up to $149.6 million under its credit agreement (as defined below).

The terms of our Credit Agreement as modified and described in Note 11-Long-Term Debt of the Notes to Consolidated Financial Statements in this Annual Report, under the heading "Senior Credit Facility", the provisions of which are incorporated herein.

As of December 31, 2020, we had cash and cash equivalents totaling $25.8 million and available borrowing capacity of up to $50.4 million under our existing Credit Agreement.

Borrowings of $210.1 million and letters of credit of $4.3 million were outstanding under the Credit Agreement at December 31, 2020.

We finance our operations primarily through our existing cash balances, cash collected from operations, bank borrowings and lease financing.

We finance our operations primarily through our existing cash

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balances, cash collected from operations, bank borrowings and lease financing.

We believe these sources are sufficient to fund our operations for the foreseeable future.

On December 13, 2018, the Company entered into a Fifth Amended and Restated Credit Agreement (“Credit Agreement”).

The Credit Agreement increased the Company’s revolving line of credit from $250 million to $300 million and provides that under certain circumstances the line of credit can be increased to $450 million.

In addition, the Credit Agreement provided the Company with a $100 million senior secured term loan A facility.

The Company increased its borrowing capacity under the Credit Agreement primarily to fund an acquisition in December 2018.

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 continue to 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.

Loans under the Credit Agreement bear interest at LIBOR plus an applicable LIBOR margin ranging from 1% to 2%, or a base rate less a margin of 1.25% to 0.375%, at the option of the Company, based upon the Company’s Funded Debt Leverage Ratio.

Funded Debt Leverage Ratio is 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 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 affecting 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 some 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 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 paid in cash during the period, -to- (b) the sum of (i) all interest, premium payments, debt discount, fees, charges and related expenses of us and our subsidiaries in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case, to the extent treated as interest in accordance with U.S.

generally accepted accounting principles ("GAAP") 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 the Credit Agreement, and (iii) payments made during the period under all leases that have been or should be, in accordance with GAAP as in effect for our 2017 audited financial statement, recorded as capitalized leases.

On March 9, 2020, the Credit Agreement was amended to provide that the maximum Funded Debt Leverage Ratio is 4.0 to 1 for the quarters ended December 31, 2019 through June 30, 2020;

3.75 to 1 for the quarter ending September 30, 2020;

and 3.5 to 1 for the quarter ending December 31, 2020 and each quarter end thereafter, and increased the maximum LIBOR margin from 2.0% to 2.25% if the Funded Debt Leverage Ratio exceeds 3.75 to 1.

Beginning in 2020, the Company can elect to increase the maximum Funded Debt Leverage Ratio to 4.0 to 1 for four fiscal quarters immediately following the fiscal quarter in which the Company acquires another business, with the maximum permitted ratio reducing back to 3.5 to 1 in the fifth fiscal quarter following such acquisition.

The Company can make this election twice during the term of the Credit Agreement.

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 our stock, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements.

The Credit Agreement does not limit the Company’s ability to acquire other businesses or companies except that the acquired business or company must be in the Company's line of business, the Company must be in compliance with the 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.

However, as amended on March 9, 2020, for acquisitions completed prior to April 1, 2021, (a) the aggregate consideration for all acquisitions made on or after March 9, 2020 and prior to April 1, 2021 shall not exceed $5,000,000, and (b) prior to the first of any such acquisition, the Company shall have demonstrated a Funded Debt Leverage Ratio of not greater than 3.0 to 1.0 for two consecutive fiscal quarters immediately prior to such acquisition.

As of December 31, 2019, the Company was in compliance with the terms of the Credit Agreement, and has undertaken to continuously monitor compliance with these covenants.

See 11-Long-Term Debt to the consolidated financial statements for additional information.

As of December 31, 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.

Liquidity and Capital Resources Outlook

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Our revolving credit facility is available for cash advances required for working capital and for letters of credit to support our operations.

Acquisitions are funded through available cash and borrowings under the Credit Agreement.

Acquisitions, if any, are funded through available cash and borrowings under the Credit Agreement.

Future Uses of Cash

We expect our future uses of cash will primarily be for repayment of debt, international expansion, stock repurchases, purchases or manufacture of field-testing equipment to support growth, additional investments in technology and software products and the replacement of existing assets and equipment used in our operations.

We expect our future uses of cash will primarily be for repayment of debt, international expansion, purchases or manufacture of field-testing equipment to support growth, additional investments in technology and software products and the replacement of existing assets and equipment used in our operations.

We often make purchases to support new sources of revenues, particularly in our Services segment.

In addition, we will need to fund a certain amount of replacement equipment, including our fleet vehicles.

In addition, we annually fund a certain amount of replacement equipment, including a portion of our fleet vehicles.

We historically spend approximately 2% to 3% of our total revenues on capital expenditures, excluding acquisitions, and expect to fund these expenditures through a combination of cash and lease financing.

Our cash capital expenditures, excluding acquisitions, for each of the years ended December 31, 2019 and 2018 were approximately 3% of revenues.

However, the current COVID-19 coronavirus pandemic will negatively impact our cash flow and our uses of cash, particularly if we experience a material reduction in our revenues due to actions taken to combat the spread of the virus.

We are taking steps to reduce spending and preserve cash.

As a result of restrictions in our credit agreement, as amended, we do not expect to make any acquisitions in 2020.

Our cash capital expenditures, excluding acquisitions, for each of the years ended December 31, 2020 and 2019 were approximately 2.7% and 3.1% of revenues, respectively.

We continue to take steps to reduce spending and preserve cash.

As a result of restrictions in our credit agreement, as amended, we do not expect to make any acquisitions in 2021 other than small acquisitions with the banks’ approval.

We acquired one company during each of the years ended December 31, 2019 and 2018, for an aggregate cash outlay of $144.2 million.

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Our future working capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new solutions and enhancements to existing solutions and our expansion of sales and marketing and product development activities.

To the extent that our cash and cash equivalents and future cash flows from operating activities are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements, public or private equity financings, or debt financings.

We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products that will complement our existing operations.

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The following table summarizes our outstanding contractual obligations as of December 31, 2020:

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($ in thousands) Total 2021 2022 2023 2024 2025 Thereafter

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The preparation of financial statements in accordance with generally accepted accounting principles requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period.

The Company has established policies and control procedures intended to ensure that estimation methods, including any judgments made as part of such methods, are well-controlled, independently reviewed and applied consistently from period to period.

The accounting policies that we believe require more significant estimates and assumptions include:

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The primary method used to estimate standalone selling price is a relative selling price based on price lists.

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Contract modifications are not routine in the performance of our contracts.

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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.

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.

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As of December 31, 2020 and December 31, 2019, we had $92.7 million and $98.6 million in net property, plant and equipment, respectively, and $68.6 million and $109.5 million in intangible assets, net, respectively.

See Note 9-Intangible Assets to the consolidated financial statements for the 2020 impairment charge.

Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets.

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Our annual impairment test is conducted on the first day of our fourth quarter, which is October 1.

Goodwill is also tested for impairment whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

If the fair value of a reporting unit is less than its carrying value, this is an indicator that the goodwill assigned to that reporting unit may be impaired.

As a result of the Company adopting ASU 2017-04, impairment will be recorded in the amount that fair value is less than carrying value, as the ASU eliminated step two of the goodwill impairment process.

The Company considers the income and market approaches to estimating the fair value of our reporting units, which requires significant judgment in evaluation of economic and industry trends, estimated future cash flows, discount rates and other factors.

Sustained declines in the Company’s stock price and related market capitalization could impact key assumptions in the overall estimated fair values of its reporting units and could result in non-cash impairment charges that could be material to the Company's consolidated balance sheet or results of operations.

As of December 31, 2019, there are no indicators of an impairment.

See Note 8– Goodwill to the consolidated financial statements for additional information.

In testing for goodwill impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative impairment test is not necessary.

If we conclude otherwise, we are required to perform a quantitative impairment test.

As a result of our adopting ASU 2017-04, impairment will be recorded in the amount that fair value is less than carrying value, as the ASU eliminated step two of the goodwill quantitative impairment process.

We consider the income and market approaches to estimating the fair value of our reporting units, which requires significant judgment in evaluation of economic

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and industry trends, estimated future cash flows, discount rates and other factors.

Sustained declines in our stock price and related market capitalization could impact key assumptions in the overall estimated fair values of its reporting units and could result in non-cash impairment charges that could be material to our consolidated balance sheet or results of operations.

During the first quarter of 2020, our 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, we concluded that multiple triggering events occurred and, accordingly, an interim quantitative goodwill impairment test was performed for each reporting unit as of March 31, 2020.

Based upon the results of the interim quantitative goodwill impairment test during the first quarter of 2020, we 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.

We elected to perform a qualitative assessment of goodwill on October 1, 2020.

Our qualitative assessment considered relevant events and circumstances occurring since our interim quantitative goodwill impairment test performed as of March 31, 2020.

Specifically, we considered changes in macroeconomic conditions, industry and market conditions, our internal forecasts of future revenue and expenses, our stock price, any significant events affecting the Company and actual changes in the carrying values of our net assets.

After considering all positive and negative evidence for the assessment as of October 1, 2020, we concluded that it was not more likely than not that our carrying values exceeded fair values and as such, no additional impairment was indicated.

Additionally, as of December 31, 2020, there are no indicators of an impairment.

See Note 8-Goodwill t o the consolidated financial statements for additional information regarding the 2020 impairment charge.

We allocate the purchase price of acquired businesses to their identifiable tangible assets and liabilities as well as identifiable intangible assets, such as customer relationships, technology, non-compete agreements and trade names.

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What changed 10-K

Item 7. Management’s Discussion and Analysis