What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-04 compared with 2021-05-07 · 143 added, 100 removed, 159 unchanged (60% 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 months ended March 31, 2021 and 2020.

The following Management’s Discussion and Analysis (“MD&A”) provides a discussion of our results of operations and financial position for the three and six months ended June 30, 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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Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those discussed in the “Business—Forward-Looking Statements,” and “Risk Factors” sections of our 2020 Annual Report as well as those discussed in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

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.

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 ongoing economic disruption worldwide, although the Company has nevertheless begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas.

Our discussion below is qualified by the unknown impact that the COVID-19 pandemic will continue to have on our business and the economy in general, including the duration of the health risk the COVID-19 pandemic will cause and the resulting economic disruption.

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

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

Backed by an innovative, data-driven asset protection portfolio, proprietary technologies, and decades-long legacy of industry leadership, the Company helps clients with asset-intensive infrastructure in the oil and gas, aerospace and defense, industrials, power generation and transmission (including alternative and renewable energy), other process industries and infrastructure, research and engineering and other industries towards achieving and maintaining operational excellence.

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

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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’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) March 31,

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

(tabular dollars are in thousands)

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, including OneSuite™, which serves as an ecosystem platform, pulling together all of the Company’s software and data services capabilities, for the benefit of its customers.

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

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 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.

These markets include companies in the oil and gas, aerospace and defense, industrials, power generation and transmission (including alternative and renewable energy), other process industries and infrastructure, research and engineering and other industries.

We have focused on providing our advanced asset protection solutions to our customers using proprietary, technology-enabled software and testing instruments, including those developed by our Products and Systems segment.

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Recent Developments

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

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

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

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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

(tabular dollars are in thousands) March 31,

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.

(tabular dollars are in thousands)

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

maintain business continuity and financial strength and stability;

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

The COVID-19 pandemic uncertainty, significant volatility in oil prices and decreased traffic in the aerospace industry have adversely affected our workforce and operations, as well as the operations of our customers, suppliers and contractors beginning in 2020.

These negative factors continue to cause volatility and uncertainty in the markets in which we operate, although we have nevertheless begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas.

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 resulting in impairment charges in 2020.

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.

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

The Company has reinstated substantially all of the temporary cost reduction initiatives undertaken in 2020, although, the Company continues to manage and evaluate these actions in response to the ongoing impact of the COVID-19 pandemic.

Our cash position and liquidity remains strong.

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

As of June 30, 2021, the cash balance was approximately $19.9 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.

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

At this time, it is difficult to determine the magnitude and timing of the impact that climate change initiatives and legislation, if any, will have on these markets and the resulting impact on our 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 are currently unable to predict the overall impact that the COVID-19 pandemic uncertainty, 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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Management's Discussion and Analysis of Financial Condition and Results of Operations

(tabular dollars are in thousands) March 31,

(tabular dollars are in thousands)

Results of Operations

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

Condensed consolidated results of operations for the three and six months ended June 30, 2021 and 2020 were as follows:

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

2021 2020 2021 2020

Revenues $ 177,677 $ 124,435 $ 331,412 $ 283,900

Gross profit 55,336 41,158 95,337 81,802

Gross profit as a % of Revenue 31.1 % 33.1 % 28.8 % 28.8 %

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.

Income (loss) from operations 11,374 (383) 6,628 (111,611)

Income (Loss) from Operations as a % of Revenue 6.4 % (0.3) % 2.0 % (39.3) %

Income (loss) before provision (benefit) for income taxes 8,219 (3,359) 260 (117,376)

Net income (loss) 5,945 (2,665) 586 (101,187)

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

$ 5,937 $ (2,656) $ 575 $ (101,165)

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,

Revenue was $177.7 million for the three months ended June 30, 2021, an increase of $53.2 million, or 42.8%, compared with the three months ended June 30, 2020.

Revenue for the six months ended June 30, 2021 was $331.4 million, an increase of $47.5 million, or 16.7%, compared with the six months ended June 30, 2020.

Revenue by segment for the three and six months ended June 30, 2021 and 2020 was as follows:

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

2021 2020 2021 2020

Services $ 144,977 $ 100,677 $ 269,275 $ 229,550

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$ 177,677 $ 124,435 $ 331,412 $ 283,900

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.

In the three months ended June 30, 2021, total revenue increased 42.8% versus the comparable prior period.

The increase was due predominantly to organic growth.

Specifically, the Company has been recovering from the effect of COVID-19 which was more impactful to our financial results in 2020.

In addition, the Company realized low single-digit favorable revenue impact from foreign exchange rates.

Services segment revenue increased 44.0% and International segment revenue increased 49.7%, both due predominantly to similar organic growth in addition to single-digit favorable revenue impact from foreign exchange rates.

Oil and gas customer revenue comprised approximately 57% and 54% of total revenue for the three months ended June 30, 2021 and 2020, respectively.

Aerospace and defense customer revenue comprised approximately 10% and 14% of total revenue for the three months ended June 30, 2021 and 2020, respectively.

The Company’s top ten customers comprised approximately 35% of total revenue for the three months ended June 30, 2021, as compared to 29% for the three months ended June 30, 2020, with no customer accounting for 10% or more of total revenue in either three-month period.

For the three months ended June 30, 2021, revenue in all our primary end market industries increased versus the comparable prior period, except for aerospace and defense which was flat, although aerospace and defense was up year-over year in the International segment.

Mistras Group, Inc.

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

(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,

(tabular dollars are in thousands)

In the six months ended June 30, 2021, total revenue increased 16.7% versus the comparable prior period.

The increase was due predominantly to organic growth.

Specifically, the Company has been recovering from the effect of COVID-19 which was more impactful to our financial results in 2020.

In addition, the Company realized low single-digit favorable revenue impact from foreign exchange rates.

Services segment revenue increased 17.3% due predominantly to similar organic growth.

International segment revenue increased 18.3% due to high-single digit organic growth and high-single digit favorable impact of foreign exchange rates.

Oil and gas customer revenue comprised approximately 59% and 56% of total revenue for the six months ended June 30, 2021 and 2020, respectively.

Aerospace and defense customer revenue comprised approximately 10% and 14% of total revenue for the six months ended June 30, 2021 and 2020, respectively.

The Company’s top ten customers comprised approximately 35% of total revenue for the six months ended June 30, 2021, as compared to 31% for the six months ended June 30, 2020, with no customer accounting for 10% or more of total revenue in either six-month period.

For the six months ended June 30, 2021 revenue in all our primary end market industries increased versus the comparable prior period, except for aerospace and defense and industrial.

Gross profit increased by $14.2 million, or 34.4%, in the three months ended June 30, 2021 versus the prior year comparable period, on an increase in revenue of 42.7%.

Gross profit increased by $13.5 million, or 16.5%, in the six months ended June 30, 2021 on a increase in revenue of 16.7%.

Gross profit by segment for the three and six months ended June 30, 2021 and 2020 was as follows:

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

2021 2020 2021 2020

Services $ 43,761 $ 33,940 $ 74,837 $ 66,177

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% of total revenue 31.1 % 33.1 % 28.8 % 28.8 %

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.

Gross profit margin was 31.1% and 33.1% for the three-month periods ended June 30, 2021 and 2020, respectively.

Gross profit margin decreased primarily due to unfavorable sales mix and higher level of reimbursable travel costs in the Services segment partially offset by favorable sales mix and better utilization in the International and Products and Systems segments.

Gross profit margin was 28.8% and 28.8% for the six-month periods ended June 30, 2021 and 2020, respectively.

Gross profit margin remained flat primarily due to unfavorable sales mix and higher level of reimbursable travel costs in the Services segment offset by favorable sales mix and better utilization in the International and Products and Systems segments.

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

Operating Expenses

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

Three months ended March 31,

Operating expenses for the three and six months ended June 30, 2021 and 2020 was as follows:

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

2021 2020 2021 2020

Operating Expenses

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Legal settlement and litigation charges, net — — 1,030 —

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

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

Acquisitions-related expense 545 19 822 (523)

Operating expenses increased $2.4 million, or 6%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Selling, general and administrative expenses increased $2.1 million during the three months ended June 30, 2021 compared to the three months ended June 30, 2020, due to the Company reinstating several of the temporary cost reduction initiatives undertaken during 2020 in response to the COVID-19 pandemic, as further detailed in the Recent Developments section above.

Acquisition-related expense increased $0.5 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 due to remeasurement of acquisition related contingent consideration.

Operating expenses decreased $104.7 million, or 54%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, due predominantly to impairment charges of $106.1 million in 2020 as more fully described in Note 8– Goodwill and Note 9– Intangible Assets included in the Notes to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.

Excluding the 2020 impairment charges, operating expenses increased due to the Company reinstating several of the temporary cost reduction initiatives undertaken during 2020 in response to the COVID-19 pandemic, as further detailed in the Recent Developments section above, as well as 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.

Depreciation and amortization decreased $1.0 million during the six months ended June 30, 2021 compared to the six months ended June 30, 2020, due to the 2020 impairment charges reducing the net book value on certain of our intangible assets.

Acquisition-related expense increased $1.3 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to remeasurement of acquisition related contingent consideration.

Mistras Group, Inc.

and Subsidiaries

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

(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.

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.

(tabular dollars are in thousands)

Income (loss) from Operations

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

Three months ended March 31,

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

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

2021 2020 2021 2020

Income (loss) from operations (GAAP) $ 18,358 $ 10,837 $ 22,906 $ (70,657)

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International:

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

Income (loss) from operations (GAAP) $ 1,809 $ (1,937) $ 989 $ (22,356)

Impairment charges — — — 19,862

Reorganization and other costs 30 366 126 292

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

Income (loss) before special items (non-GAAP) $ 1,839 $ (1,571) $ 1,115 $ (2,202)

Products and Systems:

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

Income (loss) from operations (GAAP) $ 209 $ (96) $ (372) $ (1,776)

Reorganization and other costs — — 27 —

Loss before special items (non-GAAP) $ (554) $ (1,680)

Income (loss) before special items (non-GAAP) $ 209 $ (96) $ (345) $ (1,776)

Corporate and Eliminations:

Loss from operations (GAAP) $ (9,002) $ (9,187) $ (16,895) $ (16,822)

Loss on debt modification 277 645 277 645

Legal settlement and litigation charges, net — — (620) —

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Total Company:

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

Income (loss) from operations (GAAP) $ 11,374 $ (383) $ 6,628 $ (111,611)

Impairment charges — — — 106,062

Reorganization and other costs (benefit) 194 (15)

Reorganization and other costs 56 497 250 482

Loss on debt modification 277 645 277 645

Legal settlement and litigation charges, net — — 1,030 —

Acquisition-related expense (benefit), net 545 19 822 (523)

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

Income (loss) before special items (non-GAAP) $ 12,252 $ 778 $ 9,007 $ (4,945)

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) 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.

(tabular dollars are in thousands)

For the three months ended June 30, 2021, the income (loss) from operations (GAAP) increased $11.8 million, compared with the three months ended June 30, 2020, while income before special items (non-GAAP) increased $11.5 million.

As a percentage of revenue, income before special items increased by 630 basis points to 6.9% in the three months ended June 30, 2021 from 0.6% in the three months ended June 30, 2020.

For the six months ended June 30, 2021, income (loss) from operations (GAAP) increased $118.2 million, compared with the six months ended June 30, 2020, while income (loss) before special items (non-GAAP) increased $14.0 million.

As a percentage of revenue, income (loss) before special items increased by 440 basis points to 2.7% in the six months ended June 30, 2021 from (1.7)% in the six months ended June 30, 2020.

During the six months ended June 30, 2021, the Company experienced overall organic growth.

Specifically, the Company has been recovering from the effect of COVID-19 which was more impactful to our financial results in 2020.

During the six months ended June 30, 2020, the COVID-19 initial outbreak and significant drop in oil prices had adversely affected our workforce and operations, as well as the operations of our customers, suppliers and contractors.

These negative factors have continued to result in volatility and uncertainty in the markets in which we operate in 2021, although we have nevertheless begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas.

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

Refer to Item 1A.

Risk Factors in Part I of our 2020 Form 10-K, and the additional risk factors included in Part II, Item 1.A.

of this Form 10-Q for further discussion.

Interest Expense

Interest expense 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.

Interest expense was approximately $3.2 million and $3.0 million for the three months ended June 30, 2021 and 2020, respectively.

Interest expense was approximately $6.4 million and $5.8 million for the six months ended June 30, 2021 and 2020, respectively.

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

An amendment in May 2021 to our Credit Agreement removed the LIBOR floor of 1.0%, which provided that if LIBOR is below 1.0%, the interest rate will be calculated as if LIBOR is 1.0%.

Now the actual LIBOR rate is used to calculate interest, even if LIBOR is below 1.0%.

This will reduce our interest rate, when LIBOR is below 1.0%.

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.

Our effective income tax rate was approximately 27.7% and 20.7% for the three months ended June 30, 2021 and 2020, respectively.

Our effective income tax rate was approximately (125.4)% and 13.8% for the six months ended June 30, 2021 and 2020.

The effective income tax rate for the three months ended June 30, 2021 was higher than the statutory rate due to earnings in jurisdictions with higher income tax rates than the United States.

The effective income tax rate for the three months ended June 30, 2020 approximated the statutory rate, as the favorable impact of the CARES Act was offset by the unfavorable impact of taxes in other jurisdictions and other permanent book to tax differences.

The effective income tax rate for the six months ended June 30, 2021 was lower than the statutory rate due to capitalization of certain non-US intercompany balances which resulted in a deductible foreign exchange loss in the US.

The effective income tax rate for the six months ended June 30, 2020 was lower than the statutory rate primarily due to impairments for which we did not realize income tax benefits, partially offset by income tax benefits of the CARES Act.

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.

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

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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Cash flows are summarized in the table below:

Three months ended March 31,

Six months ended June 30,

Net cash provided by (used in):

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Cash Flows from Operating Activities

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.

During the six months ended June 30, 2021, cash provided by operating activities was $18.1 million, representing a year-on-year decrease of $16.7 million, or 48%.

The decrease was primarily attributable to increase in working capital investments.

Specifically, revenue increased 16.7% versus the prior year comparable period due predominantly to organic growth.

Specifically, the Company has been recovering from the effect of COVID-19 which was more impactful to our financial results in 2020.

As we are increasing our work compared to the comparable prior period, our cash flows are lower in the current quarter as collections of receivables lag behind revenues.

Cash Flows from Investing Activities

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.

During the six months ended June 30, 2021 and 2020, cash used in investing activities was $10.3 million primarily attributable to capital expenditures of $10.8 million compared to $7.6 million of capital expenditures in the prior period driven by increased operating activities.

Cash Flows from Financing Activities

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.

Net cash used in financing activities was $13.0 million for the six months ended June 30, 2021, compared to net cash used in financing activities of $20.3 million for the six months ended June 30, 2020.

During the six months ended June 30, 2021, net borrowings of debt were approximately $6.8 million lower as compared to 2020 resulting in less debt paydown during the period as cash flows were used to fund operating activities.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

The effect of exchange rate changes on our cash and cash equivalents was 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.

The effect of exchange rate changes on our cash and cash equivalents was a decrease of $0.7 million in the six months ended June 30, 2021, compared to an increase of $0.3 million for the six months ended June 30, 2020.

Cash Balance and Credit Facility Borrowings

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.

As of June 30, 2021, we had cash and cash equivalents totaling $19.9 million and $41.2 million of unused commitments under our Credit Agreement with borrowings of $203.9 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 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.

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

As of June 30, 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.

The May 2021 Amendment to our Credit Agreement also reduced the borrowing capacity on our revolving loan line of credit to $165 million, and will be further reduced to $155 million on September 30, 2021, and to $150 million on December 31, 2021.

Additionally, quarterly payments on the term loan increased to $3.75 million through March 31, 2022, and to $5.0 million for each quarterly payment thereafter, with a final balloon payment at maturity.

Contractual Obligations

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Off-balance Sheet Arrangements

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.

During the six months ended June 30, 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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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis