What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-06 · 125 added, 179 removed, 134 unchanged (69% 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 nine months ended September 30, 2020 and September 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 months ended March 31, 2021 and 2020.

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, 2020, filed with the Securities and Exchange Commission on March 16, 2021 (“2020 Annual Report”).

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• Forward-Looking Statements

• Results of Operations

• Note about Non-GAAP Measures

• Consolidated Results of Operations

• Liquidity and Capital Resources

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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

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

Mistras Group, Inc.

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

(tabular dollars are in thousands)

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.

(tabular dollars are in thousands) March 31,

integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial IoT-connected digital software and monitoring solutions.

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

These markets include companies in the 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 pharmaceutical/biotechnology and food processing industries, 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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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.

These acquisitions have provided us with additional service lines, technologies, resources and customers which we believe will 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.

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.

Recent 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 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

The COVID-19 pandemic has caused significant volatility in domestic and international markets and is expected to continue to result in significant economic disruption.

Our businesses have been classified as non-healthcare critical infrastructure as defined by the U.S.

Centers for Disease Control and Prevention (CDC).

As a result, a majority of our customers have been and currently remain open for business.

Our North American facilities have remained, and currently remain operating, with modified staffing in certain locations where appropriate.

Similarly, our European facilities have remained, and currently remain operating, with modified staffing in certain locations where appropriate, but at a slower pace than North America.

Overall, we have taken actions to ensure the health and safety of our employees and those of its customers and suppliers;

maintain business continuity and financial strength and stability;

and serve our customers as they provide essential products and services to the world.

Mistras Group, Inc.

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

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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 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 in the Unaudited Condensed Consolidated Financial Statements.

• These same events required that we reassess the tangible and intangible assets recorded under the guidance of ASC 360 during the first quarter of 2020.

We 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 13- Leases in the Unaudited Condensed 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, 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.

(tabular dollars are in thousands) March 31,

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

See Note 8- Goodwill, Note 9- Intangible Assets and Note 13- Leases to the Notes to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report for additional information.

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

The Company has reinstated several of the temporary cost reduction initiatives undertaken during 2020, although, the Company continues to manage and evaluate these actions in responding to the pandemic.

Our cash position and liquidity remains strong.

As of March 31, 2021, the cash balance was approximately $24.2 million.

In April 2021, the Biden Administration announced aggressive initiatives to battle climate change, which includes a significant reduction in the use of fossil fuels and a transition to electric vehicles and increased use of alternative energy.

Any legislation or regulations that may be adopted to implement these measures may have a negative our customers in the oil and gas market over the long-term, which presently is our largest market, but will likely benefit the alternative energy market, such as wind energy, for which we provide products and services.

At this time, it is difficult to determine the magnitude and timing of the impact that climate change initiatives and legislation, if any, will have on these markets and the resulting impact on our business and operational results.

We are currently unable to predict with certainty the overall impact that the COVID-19 pandemic, volatility in oil prices and climate change initiatives to reduce the use of fossil fuels 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.

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Note About Non-GAAP Measures

In this MD&A under the heading "Income (loss) from Operations", the non-GAAP financial performance measure "Income (loss) before special items” is used for each of our three segments, the Corporate segment and the "Total Company", with tables reconciling the measure to a financial measure under GAAP.

This non-GAAP measure excludes from the GAAP measure "Income (loss) from Operations" (a) transaction expenses related to acquisitions, such as professional fees and due diligence costs, (b) the net changes in the fair value of acquisition-related contingent consideration liabilities, (c) impairment charges, (d) reorganization and other costs, which includes items such as severance, labor relations matters and asset and lease termination costs and (e) other special items.

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 operating 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 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.

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.

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

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.

Mistras Group, Inc.

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

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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.

(tabular dollars are in thousands) March 31,

Results of Operations

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

Condensed consolidated results of operations for the three months ended March 31, 2021 and 2020 were as follows:

Three months ended March 31,

Revenue $ 153,735 $ 159,465

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Gross profit as a % of Revenue 26.0 % 25.5 %

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 %

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

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

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

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

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,

Loss from operations (4,746) (111,228)

Loss from Operations as a % of Revenue (3.1) % (69.8) %

Loss before benefit for income taxes (7,959) (114,017)

Net Loss (5,359) (98,522)

Net Loss attributable to Mistras Group, Inc.

$ (5,362) $ (98,509)

Revenue was $153.7 million for the three months ended March 31, 2021, a decrease of $5.7 million, or 3.6%, compared with the three months ended March 31, 2020.

Revenue by segment for the three months ended March 31, 2021 and 2020 were as follows:

Three months ended March 31,

Services $ 124,298 $ 128,873

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$ 153,735 $ 159,465

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

In the three months ended March 31, 2021, total revenue decreased 3.6% versus the prior year comparable period due predominantly to a single-digit organic decline offset by low single-digit favorable impact of foreign exchange rates.

The decrease in revenue across all our segments, other than Products and Systems, 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 3.6%, driven predominantly by a single-digit organic decline, partially offset by low single-digit favorable impact of foreign exchange rates.

International segment revenue decreased 4.9%, due predominantly to the double-digit organic decline partially offset by high single-digit favorable impact of foreign exchange rates.

Products and Systems segment revenue increased by 6.2%, due to organic growth.

Oil and gas customer revenue comprised approximately 60% and 58% of total revenue for the three months ended March 31, 2021 and 2020, respectively.

Aerospace and defense customer revenue comprised approximately 11% and 14% of total revenue for the three months ended March 31, 2021 and 2020, respectively.

The Company’s top ten customers comprised approximately 35% of total revenue for the three months ended March 31, 2021, as compared to 34% for the three months ended March 31, 2020, with no customer accounting for 10% or more of total revenue in either three-month period.

Mistras Group, Inc.

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

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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 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

(tabular dollars are in thousands) March 31,

Gross profit decreased by $0.6 million, or 1.6%, in the three months ended March 31, 2021 versus the prior year comparable period, on a decrease in revenue of 3.6%.

Gross profit by segment for the three months ended March 31, 2021 and 2020 was as follows:

Three months ended March 31,

Services $ 31,076 $ 32,237

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% of total revenue 26.0 % 25.5 %

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 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.

Mistras Group, Inc.

and Subsidiaries

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

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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.

Gross profit margin was 26.0% and 25.5% for the three-month periods ended March 31, 2021 and 2020, respectively.

COVID-19, the volatility 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 particularly in Products and Systems.

Services segment realized a consistent gross profit margin of 25.0% during the three months ended March 31, 2021 and 2020.

International segment realized a consistent gross profit margin of 27.6% during the three months ended March 31, 2021 and 2020.

Products and Systems segment gross margin had a year-on-year increase of 2,980 basis points to 42.9% during the three months ended March 31, 2021 due to favorable sales mix, as compared to gross margin of 13.1% during 2020.

Operating Expenses

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

Operating expenses for the three months ended March 31, 2021 and 2020 was as follows:

Three months ended March 31,

Operating Expenses

Selling, general and administrative expenses $ 39,639 $ 41,558

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

Impairment charges — 106,062

Pension withdrawal expense — (45) — 489

Research and engineering 727 824

Depreciation and amortization 3,074 3,970

Legal settlement (360) — (360) —

Legal settlement and litigation charges, net 1,030 —

Acquisition-related expense (benefit), net 277 (542)

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.

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.

Operating expenses decreased $107.1 million, or 71%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, due to the absence of any impairment charges in the current period compared to $106.1 million in impairment charges in 2020.

Selling, general and administrative expenses decreased $1.9 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, due to continued temporary cost reduction and efficiency programs further detailed in the Recent Developments section above.

Depreciation and amortization decreased $0.9

Mistras Group, Inc.

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

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(tabular dollars are in thousands) March 31,

million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, due to the 2020 impairment charges reducing the net book value on certain of our intangible assets.

This was partially offset during the three months ended March 31, 2021 by a $1.2 million increase in net legal settlement and litigation charges primarily related to the Justin Price v.

Mistras Group, Inc.

matter more fully described in Note- 14 Commitments and Contingencies under the "Litigation and Commercial Claims" section to the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.

During the three months ended March 31, 2021, there was approximately $0.2 million additional foreign currency exchange losses as compared with the prior period due to volatility in certain foreign currencies.

Income (loss) from Operations

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

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

2020 2019 2020 2019

Three months ended March 31,

Income (loss) from operations (GAAP) $ 4,548 $ (81,494)

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

Impairment charges — 86,200

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

Reorganization and other costs 71 22

Legal settlement (360) — (360) —

Legal settlement and litigation charges, net 1,650 —

Acquisition-related expense (benefit), net 243 (542)

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International:

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

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

Loss from operations (GAAP) $ (820) $ (20,419)

Impairment charges — 19,862

Reorganization and other costs 96 (75)

Income (loss) before special items (non-GAAP) $ (45) $ 3,011 $ (2,247) $ 5,530

Loss before special items (non-GAAP) $ (724) $ (632)

Products and Systems:

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

Loss from operations (GAAP) $ (581) $ (1,680)

Reorganization and other costs 27 —

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Loss from operations (GAAP) $ (7,893) $ (7,635)

Loss on debt modification — — 645 —

Legal settlement and litigation charges, net (620) —

Reorganization and other costs — 38

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Total Company:

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

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

Loss from operations (GAAP) $ (4,746) $ (111,228)

Impairment charges — 106,062

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

Reorganization and other costs 98 477 580 879

Loss on debt modification — — 645 —

Legal settlement (360) — (360) —

Reorganization and other costs (benefit) 194 (15)

Legal settlement and litigation charges, net 1,030 —

Acquisition-related expense (benefit), net 277 (542)

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

Loss before special items (non-GAAP) $ (3,245) $ (5,723)

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

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

(tabular dollars are in thousands)

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.

We are currently unable to predict or determine the overall impact that the COVID-19 pandemic and drop in oil prices may have on our business, results of operations, or liquidity.

Refer to Item 1A.

Risk Factors in Part I of our 2019 Form 10-K, and the additional risk factors included in Part II, Item 1.A.

of this Form 10-Q for further discussion.

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.

We are currently unable to predict or determine the overall impact that the COVID-19 pandemic and drop in oil prices may have on our business, results of operations, or liquidity.

Refer to Item 1A.

Risk Factors in Part I of our 2019 Form 10-K, and the additional risk factors included in Part II, Item 1.A.

of this Form 10-Q for further discussion.

(tabular dollars are in thousands) March 31,

For the three months ended March 31, 2021, the loss from operations (GAAP) decreased $106.5 million or 96%, compared with the three months ended March 31, 2020, while the loss before special items (non-GAAP) decreased $2.5 million, or 43%.

As a percentage of revenue, the loss before special items decreased by 150 basis points to (2.1)% in the three months ended March 31, 2021 from (3.6)% in the three months ended March 31, 2020.

Interest Expense

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 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.

As the statutory federal income tax rate applicable to certain years within the carryback period is 35%, carryback to those years of our estimated 2020 annual federal tax loss provides a tax benefit in excess of the current federal statutory rate of 21%, resulting in an increased income tax benefit.

We project that the income tax effects of the CARES Act will result in additional income tax benefit recognized throughout the 2020 tax year and a cash refund in 2021 of taxes paid in prior years.

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.

and Subsidiaries

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

(tabular dollars are in thousands)

Interest expense was approximately $3.2 million and $2.8 million for the three months ended March 31, 2021 and 2020, respectively.

The increase was due to a higher interest rate on our long-term debt as a result of the May 2020 Amendment to our Credit Agreement.

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

Our effective income tax rate was approximately 32.7% and 13.6% for the three months ended March 31, 2021 and 2020, respectively.

The effective income tax rate for the three months ended March 31, 2021 was higher than the statutory rate due to the capitalization of certain non-US intercompany balances which resulted in a deductible foreign exchange loss in the US.

The effective income tax rate for the three months ended March 31, 2020 was lower than the statutory rate primarily due to impairments recorded during the interim period for which no income tax benefits will be realized by us.

However, this unfavorable impact on our effective income tax rate was partially offset by income tax benefits of the CARES Act.

On December 27, 2020, 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.

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

It is also affected by discrete items that may occur in any given year but are not consistent from year to year.

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

Liquidity and Capital Resources

Cash flows are summarized in the table below:

Nine months ended

Three months ended March 31,

Net cash provided by (used in):

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Cash Flows from Operating Activities

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.

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands) March 31,

During the three months ended March 31, 2021, cash provided by operating activities was $3.1 million, representing a year-on-year decrease of $3.0 million, or 48%.

The decrease was primarily attributable to movements in working capital.

Cash Flows from Investing Activities

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.

During the three months ended March 31, 2021 and 2020, cash used in investing activities was $4.2 million primarily attributable to capital expenditures of $4.4 million in both periods.

Cash Flows from Financing Activities

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.

Net cash provided by financing activities was $0.4 million for the three months ended March 31, 2021, compared to net cash provided by financing activities of $0.5 million for the three months ended March 31, 2020.

During the three months ended March 31, 2021, net borrowings of debt were approximately $0.7 million lower as compared to 2020 resulting in debt paydown during the period.

In addition, $0.3 million more taxes were paid related to net share settlement of share-based awards during the three months ended March 31, 2021, partially offset by $0.4 million less in payments for acquisition-related contingent consideration and $0.5 million less in debt finance cost payments.

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 $0.9 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.

The effect of exchange rate changes on our cash and cash equivalents was an decrease of $1.0 million in the three months ended March 31, 2021, compared to a decrease of $0.4 million for the three months ended March 31, 2020.

Cash Balance and Credit Facility Borrowings

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.

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

As of March 31, 2021, we had cash and cash equivalents totaling $24.2 million and available borrowing capacity of $45.6 million under our Credit Agreement with borrowings of $213.0 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 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.

As of March 31, 2021, 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

There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2020 Annual Report.

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

Off-balance Sheet Arrangements

During the 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.

During the three months ended March 31, 2021, 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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What changed 10-Q

Item 2. Management’s Discussion and Analysis