Mistras Group, Inc. 10-Q

ITEM 1. Financial Statements Mistras Group, Inc. and Subsidiaries Condensed Consolidated Balance Sheets ( in thousands, except share and per share data ) June 30, 2021 December 31, 2020 ASSETS (unaudited) Current Assets Cash and cash equivalents $ 19,942 $ 25,760 Accounts receivable, net 122,887 107,628 Inventories 12,836 13,134 Prepaid expenses and other current assets 15,843 16,066 Total current assets 171,508 162,588 Property, plant and equipment, net 91,898 92,681 Intangible assets, net 64,608 68,642 Goodwill 208,175 206,008 Deferred income taxes 2,553 2,069 Other assets 48,639 51,325 Total assets $ 587,381 $ 583,313 LIABILITIES AND EQUITY Current Liabilities Accounts payable $ 18,015 $ 14,240 Accrued expenses and other current liabilities 87,472 78,500 Current portion of long-term debt 17,835 10,678 Current portion of finance lease obligations 3,809 3,765 Income taxes payable 1,269 2,664 Total current liabilities 128,400 109,847 Long-term debt, net of current portion 193,332 209,538 Obligations under finance leases, net of current portion 10,594 11,115 Deferred income taxes 8,623 8,236 Other long-term liabilities 44,783 47,358 Total liabilities 385,732 386,094 Commitments and contingencies Equity Preferred stock, 10,000,000 shares authorized — — Common stock, $ 0.01 par value, 200,000,000 shares authorized, 29,431,879 and 29,234,143 shares issued and outstanding 294 292 Additional paid-in capital 236,125 234,638 Accumulated Deficit ( 21,273 ) ( 21,848 ) Accumulated other comprehensive loss ( 13,707 ) ( 16,061 ) Total Mistras Group, Inc. stockholders’ equity 201,439 197,021 Non-controlling interests 210 198 Total equity 201,649 197,219 Total liabilities and equity $ 587,381 $ 583,313 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 1 Table of Contents Mistras Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Income (Loss) ( in thousands, except per share data ) Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 Revenue $ 177,677 $ 124,435 $ 331,412 $ 283,900 Cost of revenue 116,787 77,954 225,030 191,278 Depreciation 5,554 5,323 11,045 10,820 Gross profit 55,336 41,158 95,337 81,802 Selling, general and administrative expenses 39,719 37,607 79,358 79,165 Impairment charges — — — 106,062 Legal settlement and litigation charges, net — — 1,030 — Research and engineering 620 708 1,347 1,532 Depreciation and amortization 3,078 3,207 6,152 7,177 Acquisition-related expense (benefit), net 545 19 822 ( 523 ) Income (loss) from operations 11,374 ( 383 ) 6,628 ( 111,611 ) Interest expense 3,155 2,976 6,368 5,765 Income (loss) before benefit for income taxes 8,219 ( 3,359 ) 260 ( 117,376 ) Provision (benefit) for income taxes 2,274 ( 694 ) ( 326 ) ( 16,189 ) Net Income (loss) 5,945 ( 2,665 ) 586 ( 101,187 ) Less: net income (loss) attributable to noncontrolling interests, net of taxes 8 ( 9 ) 11 ( 22 ) Net Income (loss) attributable to Mistras Group, Inc $ 5,937 $ ( 2,656 ) $ 575 $ ( 101,165 ) Earnings (loss) per common share Basic $ 0.20 $ ( 0.09 ) $ 0.02 $ ( 3.49 ) Diluted $ 0.20 $ ( 0.09 ) $ 0.02 $ ( 3.49 ) Weighted-average common shares outstanding: Basic 29,602 29,085 29,514 29,024 Diluted 30,136 29,085 30,039 29,024 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 2 Table of Contents Mistras Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands ) Three months ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net Income (Loss) $ 5,945 $ ( 2,665 ) $ 586 $ ( 101,187 ) Other comprehensive income (loss): Foreign currency translation adjustments 2,947 6,122 2,355 ( 10,893 ) Comprehensive Income (Loss) 8,892 3,457 2,941 ( 112,080 ) Less: net income (loss) attributable to noncontrolling interest 8 ( 9 ) 11 ( 22 ) Less: Foreign currency translation adjustments attributable to noncontrolling interests 1 — 1 ( 6 ) Comprehensive income (loss) attributable to Mistras Group, Inc $ 8,883 $ 3,466 $ 2,929 $ ( 112,052 ) The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 3 Table of Contents Mistras Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Equity ( in thousands ) Three months ended Common Stock Additional paid-in capital Retained earnings (deficit) Accumulated other comprehensive income (loss) Total Mistras Group, Inc. Stockholders’ Equity Noncontrolling Interest Shares Amount Total Equity Balance at March 31, 2021 $ 29,347 $ 293 $ 235,413 $ ( 27,210 ) $ ( 16,653 ) $ 191,843 $ 201 $ 192,044 Net income — — — 5,937 — 5,937 8 5,945 Other comprehensive income, net of tax — — — — 2,946 2,946 1 2,947 Share-based payments — — 1,202 — — 1,202 — 1,202 Net settlement of restricted stock units 85 1 ( 490 ) — — ( 489 ) — ( 489 ) Balance at June 30, 2021 29,432 $ 294 $ 236,125 $ ( 21,273 ) $ ( 13,707 ) $ 201,439 $ 210 $ 201,649 Balance at March 31, 2020 29,042 $ 290 $ 230,472 $ ( 20,896 ) $ ( 38,294 ) $ 171,572 $ 181 $ 171,753 Net loss — — — ( 2,656 ) — ( 2,656 ) ( 9 ) ( 2,665 ) Other comprehensive income, net of tax — — — — 6,122 6,122 — 6,122 Share-based payments — — 1,373 — — 1,373 — 1,373 Net settlement of restricted stock units 68 1 ( 121 ) — — ( 120 ) — ( 120 ) Balance at June 30, 2020 29,110 $ 291 $ 231,724 $ ( 23,552 ) $ ( 32,172 ) $ 176,291 $ 172 $ 176,463 Six months ended Common Stock Additional paid-in capital Retained earnings (deficit) Accumulated other comprehensive loss Total Mistras Group, Inc. Stockholders’ Equity Noncontrolling Interest Shares Amount Total Equity Balance at December 31, 2020 29,234 $ 292 $ 234,638 $ ( 21,848 ) $ ( 16,061 ) $ 197,021 $ 198 $ 197,219 Net income — — — 575 — 575 11 586 Other comprehensive income, net of tax — — — — 2,354 2,354 1 2,355 Share-based payments — — 2,464 — — 2,464 — 2,464 Net settlement of restricted stock units 198 2 ( 977 ) — — ( 975 ) — ( 975 ) Balance at June 30, 2021 29,432 $ 294 $ 236,125 $ ( 21,273 ) $ ( 13,707 ) $ 201,439 $ 210 $ 201,649 Balance at December 31, 2019 28,945 $ 289 $ 229,205 $ 77,613 $ ( 21,285 ) $ 285,822 $ 200 $ 286,022 Net loss — — — ( 101,165 ) — ( 101,165 ) ( 22 ) ( 101,187 ) Other comprehensive loss, net of tax — — — — ( 10,887 ) ( 10,887 ) ( 6 ) ( 10,893 ) Share-based payments — — 2,798 — — 2,798 — 2,798 Net settlement of restricted stock units 165 2 ( 279 ) — — ( 277 ) — ( 277 ) Balance at June 30, 2020 29,110 $ 291 $ 231,724 $ ( 23,552 ) $ ( 32,172 ) $ 176,291 $ 172 $ 176,463 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 4 Table of Contents Mistras Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows (in thousands ) Six months ended June 30, 2021 2020 Cash flows from operating activities Net income (loss) $ 586 $ ( 101,187 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization 17,197 17,997 Impairment charges — 106,062 Deferred income taxes ( 152 ) ( 14,327 ) Share-based compensation expense 2,464 2,740 Fair value adjustments to contingent consideration 788 ( 523 ) Foreign currency loss 932 1,067 Other ( 64 ) 1,179 Changes in operating assets and liabilities, net of effect of acquisitions and dispositions Accounts receivable ( 15,577 ) 30,228 Inventories 279 ( 1,300 ) Prepaid expenses and other assets 299 ( 1,426 ) Accounts payable 3,751 ( 6,536 ) Accrued expenses and other liabilities 9,053 347 Income taxes payable ( 1,430 ) 541 Net cash provided by operating activities 18,126 34,862 Cash flows from investing activities Purchase of property, plant and equipment ( 10,188 ) ( 7,443 ) Purchase of intangible assets ( 618 ) ( 195 ) Acquisition of business, net of cash acquired ( 411 ) — Proceeds from sale of equipment 899 390 Net cash used in investing activities ( 10,318 ) ( 7,248 ) Cash flows from financing activities Repayment of finance lease obligations ( 2,050 ) ( 2,132 ) Proceeds from borrowings of long-term debt — 1,605 Repayment of long-term debt ( 7,957 ) ( 2,983 ) Proceeds from revolver 37,000 16,500 Repayment of revolver ( 37,500 ) ( 30,250 ) Payment of financing costs ( 550 ) ( 1,497 ) Payment of contingent consideration for business acquisitions ( 938 ) ( 1,303 ) Taxes paid related to net share settlement of share-based awards ( 975 ) ( 277 ) Net cash used in financing activities ( 12,970 ) ( 20,337 ) Effect of exchange rate changes on cash and cash equivalents ( 656 ) 295 Net change in cash and cash equivalents ( 5,818 ) 7,572 Cash and cash equivalents at beginning of period 25,760 15,016 Cash and cash equivalents at end of period $ 19,942 $ 22,588 Supplemental disclosure of cash paid Interest, net $ 5,898 $ 5,554 Income taxes, net of refunds $ 3,135 $ ( 70 ) Noncash investing and financing Equipment acquired through finance lease obligations $ 1,623 $ 1,266 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 5 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 1. Description of Business and Basis of Presentation Description of Business Mistras Group, Inc. and subsidiaries (the Company) is a leading “one source” 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 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; inspecting components that are trusted for commercial, defense, and space craft; and building real-time monitoring equipment to enable safe travel across bridges, the Company helps the world at large. The Company enhances value for its clients by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial IoT-connected digital software and monitoring solutions, 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. Recent Developments The COVID-19 coronavirus (COVID-19) pandemic has caused significant volatility in domestic and international markets and is expected to continue to result in ongoing economic disruption. The Company's 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 the Company's customers have been and currently remain open for business. North American facilities have remained, and currently remain operating, with modified staffing in certain locations where appropriate. Similarly, the Company's 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, the Company has taken actions to help ensure the health and safety of Company employees and those of its customers and suppliers; maintain business continuity and financial strength and stability; and serve 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 the operations of the Company's customers, suppliers and contractors beginning in the first quarter of 2020, and as a consequence, the Company's results of operations were adversely impacted. These negative factors continue to cause volatility and uncertainty in the markets in which the Company operates, although the Company in 2021 has nevertheless begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas. While the Company cannot fully assess the impact that the factors discussed above will have on its operations at this time, there were certain impacts that the Company identified resulting in impairment charges in 2020. See Note 8- Goodwill, Note 9- Intangible Assets and Note 13- Leases for additional information. To respond to the economic downturn resulting from the factors discussed above, the Company initiated a temporary cost reduction and efficiency program in April 2020. The Company has reinstated substantially all of the temporary cost reductions 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. 6 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) The Company is currently unable to predict with certainty the overall impact that the factors discussed above may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine. The Company will continue to monitor market conditions and respond accordingly. As of June 30, 2021, the cash balance was approximately $ 19.9 million. Basis of Presentation The Unaudited Condensed Consolidated Financial Statements contained in this report have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") and Securities and Exchange Commission guidance allowing for reduced disclosure for interim periods. In the opinion of management, the Unaudited Condensed Consolidated Financial Statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the years ending December 31, 2021 and December 31, 2020. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the notes to the Audited Consolidated Financial Statements contained in the Company's 2020 Annual Report on Form 10-K ("2020 Annual Report"). Principles of Consolidation The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of Mistras Group, Inc. as well as its wholly-owned subsidiaries, majority-owned subsidiaries and consolidated variable interest entities (VIE). For subsidiaries in which the Company’s ownership interest is less than 100%, the non-controlling interests are reported in stockholders’ equity in the accompanying Condensed Consolidated Balance Sheets. The non-controlling interests in net results, net of tax, is classified separately in the accompanying Unaudited Condensed Consolidated Statements of Income (Loss). All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations of companies acquired are included from the date of acquisition. Reclassification Certain amounts in prior periods have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the Company's financial condition or results of operations as previously reported Customers For each of the three and six months ended June 30, 2021 and 2020, no customer represented 10% or more of the Company's revenue. Significant Accounting Policies The Company’s significant accounting policies are disclosed in Note 1– Summary of Significant Accounting Policies and Practices in the 2020 Annual Report. On an ongoing basis, the Company evaluates its estimates and assumptions, including among other things, those related to revenue recognition, long-lived assets, goodwill and acquisitions. Since the date of the 2020 Annual Report, there have been no material changes to the Company's significant accounting policies. 7 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided if it is more likely than not that some or all of a deferred income tax asset will not be realized. A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current and prior years. US GAAP prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. US GAAP also provides guidance on de-recognition, measurement, and classification of amounts relating to uncertain tax positions, accounting for and disclosure of interest and penalties, accounting in interim periods and disclosures required. Interest and penalties related to unrecognized tax positions are recognized as incurred within “provision for income taxes” in the consolidated statements of income. The Company continues to evaluate its deferred tax assets each period to determine if a valuation allowance is required based on whether it is more likely than not that some portion of these deferred tax assets will not be realized. As of June 30, 2021 management concluded that it is more likely than not that a substantial portion of the Company's deferred tax assets will be realized. As part of the Company's analysis, it considered both positive and negative factors that impact profitability and whether those factors would lead to a change in the estimate of the Company's deferred tax assets that may be realized in the future. The Company’s effective income tax rate was approximately 27.7 % and 20.7 % for the three months ended June 30, 2021 and 2020, respectively. The Company’s effective income tax rate was approximately ( 125.4 )% and 13.8 % for the six months ended June 30, 2021 and 2020, respectively. 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 the income tax benefits of the CARES Act, partially offset by impairments for which the Company did not realize income tax benefits. Recent Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The ASU removes certain exceptions from the guidance in ASC 740 related to intra-period tax allocations, interim calculations and the recognition of deferred tax liabilities for outside basis differences and clarifies and simplifies several other aspects of accounting for income taxes. Different transition methods apply to the various income tax simplifications. The Company adopted ASU 2019-12 effective January 1, 2021. The impact of adopting this standard was not material to the Company’s consolidated financial position, results of operations, and cash flows. In March 2020 and updated in January 2021, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating applicable contracts and the available expedients provided by the new guidance. 8 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 2. Revenue The Company derives the majority of its revenue by providing services on a time and material basis, and are short-term in nature. The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers . Performance Obligations The Company provides highly integrated and bundled inspection services to its customers. The majority of the Company's contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the Company's best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is a relative selling price based on price lists. Contract modifications are not routine in the performance of the Company's contracts. Generally, when contracts are modified, the modification is to account for changes in scope to the goods and services that are provided. In most instances, contract modifications are for goods or services that are distinct, and, therefore, are accounted for as a separate contract. The Company's performance obligations are satisfied over time as work progresses or at a point in time. The majority of the Company's revenue is recognized over time as work progresses for the Company's service deliverables, which includes providing testing, inspection and mechanical services to our customers. Revenue is recognized over time based on time and material incurred to date which best portrays the transfer of control to the customer. The Company also utilizes an available practical expedient that provides for revenue to be recognized in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. Fixed fee arrangements are determined based on expected labor, material, and overhead to be consumed on fulfillment of such services. For these arrangements, revenue is recognized on a cost-to-cost method tracked on an input basis. The majority of our revenue recognized at a point in time is related to product sales when the customer obtains control of the asset, which is generally upon shipment to the customer. Contract costs include labor, material and overhead. The Company expects any significant remaining performance obligations to be satisfied within one year . Contract Estimates The majority of the Company's revenues are short-term in nature. The Company has many master service agreements (MSAs) that specify an overall framework and contract terms when the Company and customers agree upon services or products to be provided. The actual contracting to provide services or furnish products are triggered by a work order, purchase order, or some similar document issued pursuant to a MSA which sets forth the scope of services and/or identifies the products to be provided. From time-to-time, the Company may enter into long-term contracts, which can range from several months to several years. Revenue on certain contracts is recognized as work is performed based on total costs incurred to date in relation to the total estimated costs for the performance of the contract at completion. This includes contract estimates of costs to be incurred for the performance of the contract. Cost estimation is based upon the professional knowledge and experience of the Company's project managers, engineers and financial professionals. Factors that are considered in estimating the work to be completed include the availability of materials, the effect of any delays in the Company's project performance and the recoverability of any claims. Whenever revisions of estimates, contract costs and/or contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period. 9 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Revenue by Category The following series of tables present the Company's disaggregated revenue: Revenue by industry was as follows: Three Months Ended June 30, 2021 Services International Products Corp/Elim Total Oil & Gas $ 91,767 $ 9,580 $ 212 $ — $ 101,559 Aerospace & Defense 12,779 4,127 29 — 16,935 Industrials 11,242 6,194 418 — 17,854 Power Generation & Transmission 10,073 3,183 830 — 14,086 Other Process Industries 10,356 3,627 35 — 14,018 Infrastructure, Research & Engineering 5,174 3,254 825 — 9,253 Other 3,586 1,986 854 ( 2,454 ) 3,972 Total $ 144,977 $ 31,951 $ 3,203 $ ( 2,454 ) $ 177,677 Three Months Ended June 30, 2020 Services International Products Corp/Elim Total Oil & Gas $ 59,279 $ 7,339 $ 68 $ — $ 66,686 Aerospace & Defense 14,248 3,595 151 — 17,994 Industrials 10,298 3,817 419 — 14,534 Power Generation & Transmission 7,652 1,207 644 — 9,503 Other Process Industries 4,999 2,610 74 — 7,683 Infrastructure, Research & Engineering 2,994 2,020 1,900 — 6,914 Other 1,207 755 746 ( 1,587 ) 1,121 Total $ 100,677 $ 21,343 $ 4,002 $ ( 1,587 ) $ 124,435 Six Months Ended June 30, 2021 Services International Products Corp/Elim Total Oil & Gas $ 176,451 $ 17,588 $ 268 $ — $ 194,307 Aerospace & Defense 24,602 8,444 64 — 33,110 Industrials 20,061 11,043 745 — 31,849 Power Generation & Transmission 15,607 5,161 1,589 — 22,357 Other Process Industries 18,212 6,539 44 — 24,795 Infrastructure, Research & Engineering 8,343 7,010 1,969 — 17,322 Other 5,999 3,814 1,512 ( 3,653 ) 7,672 Total $ 269,275 $ 59,599 $ 6,191 $ ( 3,653 ) $ 331,412 Six Months Ended June 30, 2020 Services International Products Corp/Elim Total Oil & Gas $ 142,578 $ 16,443 $ 163 $ — $ 159,184 Aerospace & Defense 28,900 11,010 298 — 40,208 Industrials 23,165 8,736 907 — 32,808 Power Generation & Transmission 12,747 2,904 1,498 — 17,149 Other Process Industries 11,003 4,730 77 — 15,810 Infrastructure, Research & Engineering 7,511 4,481 2,460 — 14,452 Other 3,646 2,106 1,411 ( 2,874 ) 4,289 Total $ 229,550 $ 50,410 $ 6,814 $ ( 2,874 ) $ 283,900 10 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Revenue per key geographic location was as follows: Three Months Ended June 30, 2021 Services International Products Corp/Elim Total United States $ 122,762 $ 241 $ 1,668 $ ( 895 ) $ 123,776 Other Americas 21,288 1,149 101 ( 809 ) 21,729 Europe 596 30,084 503 ( 745 ) 30,438 Asia-Pacific 331 477 931 ( 5 ) 1,734 Total $ 144,977 $ 31,951 $ 3,203 $ ( 2,454 ) $ 177,677 Three Months Ended June 30, 2020 Services International Products Corp/Elim Total United States 88,205 $ 160 $ 2,053 $ ( 810 ) $ 89,608 Other Americas 12,046 959 72 ( 93 ) 12,984 Europe 263 20,031 588 ( 662 ) 20,220 Asia-Pacific 163 193 1,289 ( 22 ) 1,623 Total $ 100,677 $ 21,343 $ 4,002 $ ( 1,587 ) $ 124,435 Six Months Ended June 30, 2021 Services International Products Corp/Elim Total United States $ 227,308 $ 449 $ 3,128 $ ( 1,286 ) $ 229,599 Other Americas 40,166 2,326 168 ( 872 ) 41,788 Europe 890 55,978 963 ( 1,357 ) 56,474 Asia-Pacific 911 846 1,932 ( 138 ) 3,551 Total $ 269,275 $ 59,599 $ 6,191 $ ( 3,653 ) $ 331,412 Six Months Ended June 30, 2020 Services International Products Corp/Elim Total United States 197,786 $ 314 $ 3,612 $ ( 1,521 ) $ 200,191 Other Americas 30,781 2,464 350 ( 246 ) 33,349 Europe 371 46,266 928 ( 1,041 ) 46,524 Asia-Pacific 612 1,366 1,924 ( 66 ) 3,836 Total $ 229,550 $ 50,410 $ 6,814 $ ( 2,874 ) $ 283,900 Contract Balances The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets. Amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, generally at periodic intervals (e.g., weekly, bi-weekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities. These assets and liabilities are aggregated on an individual contract basis and reported on the Consolidated Balance Sheets at the end of each reporting period within accounts receivable, net or accrued expenses and other current liabilities. Revenue recognized during the six months ended June 30, 2021 and 2020 that was included in the contract liability balance at the beginning of such year was $ 3.3 million and $ 3.2 million, respectively. Changes in the contract asset and liability balances during these periods were not materially impacted by any other factors. The Company applies a practical expedient to expense incremental costs incurred related to obtaining a contract. The Company’s expenses are expected to be amortized over a period less than one year . 3. Share-Based Compensation 11 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) The Company has share-based incentive awards outstanding to its eligible employees and non-employee directors under two equity incentive plans: (i) the 2009 Long-Term Incentive Plan (the "2009 Plan") and (ii) the 2016 Long-Term Incentive Plan (the "2016 Plan"). No further awards may be granted under the 2009 Plan, although one stock option award granted under the 2009 Plan remains outstanding in accordance with its terms. Awards granted under the 2016 Plan may be in the form of stock options, restricted stock units and other forms of share-based incentives, including performance restricted stock units, stock appreciation rights and deferred stock rights. At the annual shareholders meeting on May 19, 2020, the Company’s shareholders approved an amendment to increase the total number of shares that may be issued under the 2016 Plan by 2.0 million, for a total of 3.7 million shares that are authorized for issuance under the 2016 Plan. Stock Options For each of the three and six months ended June 30, 2021 and 2020, the Company did no t recognize any share-based compensation expense related to the stock option award, as the one outstanding stock option award was already fully vested. No unrecognized compensation costs remained related to the stock option award as of June 30, 2021. The following table sets forth a summary of the stock option activity, weighted-average exercise prices and options outstanding as of June 30, 2021 and 2020: Six months ended June 30, 2021 2020 Common Stock Options Weighted Average Exercise Price Common Stock Options Weighted Average Exercise Price Outstanding at beginning of period: 5 $ 22.35 5 $ 22.35 Granted — $ — — $ — Exercised — $ — — $ — Expired or forfeited — $ — — $ — Outstanding at end of period: 5 $ 22.35 5 $ 22.35 Restricted Stock Unit Awards For the three months ended June 30, 2021 and June 30, 2020, the Company recognized share-based compensation expense related to restricted stock unit awards of $ 0.9 million and $ 1.4 million, respectively. For the six months ended June 30, 2021 and 2020, the Company recognized share-based compensation expense related to restricted stock unit awards of $ 1.8 million and $ 2.1 million, respectively. As of June 30, 2021, there was $ 7.7 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which is expected to be recognized over a remaining weighted-average period of 2.8 years. Upon vesting, restricted stock units are generally net share-settled to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock. A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows: Six months ended June 30, 2021 2020 Restricted stock awards vested 238 143 Fair value of awards vested $ 2,670 $ 542 A summary of the fully-vested common stock the Company issued to its six non-employee directors, in connection with its non-employee director compensation plan, is as follows: Six months ended June 30, 2021 2020 Awards issued 25 15 Grant date fair value of awards issued $ 258 $ 57 12 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) A summary of the Company's outstanding, non-vested restricted share units is as follows: Six months ended June 30, 2021 2020 Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Outstanding at beginning of period: 1,076 $ 7.41 559 $ 16.92 Granted 528 $ 10.07 557 $ 3.77 Released ( 238 ) $ 10.98 ( 143 ) $ 16.74 Forfeited ( 39 ) $ 8.77 ( 14 ) $ 13.74 Outstanding at end of period: 1,327 $ 7.78 959 $ 9.35 Performance Restricted Stock Units The Company maintains Performance Restricted Stock Units (PRSUs) that have been granted to select executives and senior officers whose ultimate payout is based on the Company’s performance over a one-year period based on specific metrics approved by the Compensation Committee of the Board of Directors of the Company. For 2020, the Compensation Committee approved the following four metrics: 1. Revenue. 2. Adjusted EBITDA defined as net income attributable to the Company plus: interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense and certain acquisition related costs (including transaction due diligence costs and adjustments to the fair value of contingent consideration), foreign exchange (gain) loss and, if applicable, certain special items which are noted). 3. Free Cash Flow as a percentage of revenue. 4. Return on Average Book Equity defined as net income divided by average book value of shareholders equity. The free cash flow and return on average book equity criteria are relative metrics, the performance of which are based upon how the Company performs relative to a peer group. For 2021, the Compensation Committee made changes to the Company’s equity incentive compensation plan for its executive officers and approved the new target awards for 2021. For 2021, the three metrics are: 1. Free Cash Flow net cash provided by operating activities less purchases of property, plant, equipment and intangible assets and is subject to adjustments approved by the Compensation Committee. 2. Adjusted EBITDA as defined in the 2020 metric section above. 3. Total Shareholder Return (TSR) measures the total return to shareholders of the Company during 2021 versus the total return to the shareholders of a predefined peer group of companies that provide inspection, testing, certification or similar industrial services. The return will be measured by the year over year percent change in share price. The share prices used to calculate the return are the average share price during the 20 -trading day period ending on the initial measurement date (the last 20 trading days of 2020), compared to the average share price during the 20 -trading day period ending on the final measurement date (the last 20 trading days of 2021). Any cash dividends or distributions paid in 2021 will be added to calculate the return to shareholders during the year. TSR is considered a market condition for which the fair value of PRSUs with this condition is determined using a Monte Carlo valuation model. Key assumptions in the Monte Carlo valuation model included: a. Expected Volatility. Expected volatility of the Company’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate 1-year performance period. b. Dividend Yield . The dividend yield assumption was based on historical and anticipated dividend payouts (assumed at zero ). c. Risk-Free Interest Rate . The risk-free interest rate assumption was based on observed interest rates consistent with the approximate 1-year performance measurement period. PRSUs are equity-classified and compensation costs are initially measured using the fair value of the underlying stock at the date of grant. Compensation costs related to the PRSUs are subsequently adjusted for changes in the expected outcomes of the performance conditions. Compensation cost related to the PRSUs with a market condition is not reversed if the market 13 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) condition is not achieved, provided the employee requisite service has been rendered. PRSUs generally vest ratably on each of the first four anniversary dates upon completion of the performance period, for a total requisite service period of up to five years and have no dividend rights. A summary of the Company's PRSU activity is as follows: Six months ended June 30, 2021 2020 Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Outstanding at beginning of period: 333 $ 8.84 260 $ 16.77 Granted 189 $ 12.59 292 $ 3.68 Performance condition adjustments ( 193 ) $ 7.80 1 $ 13.63 Released ( 22 ) $ 13.63 ( 79 ) $ 15.43 Forfeited — $ — — $ — Outstanding at end of period: 307 $ 12.56 474 $ 8.17 During the six months ended June 30, 2021 and June 30, 2020, the Compensation Committee approved the final calculation of the award metrics for calendar year 2020 and calendar year 2019, respectively. As a result, the calendar year 2020 PRSUs decreased by approximately 125,000 units (related to not achieving the 2020 Return on Average Book Equity metric) and the calendar year 2019 PRSUs increased by approximately 1,000 units. Calendar year 2021 PRSUs decreased by 68,000 units during the six months ended June 30, 2021 based on forecasted results for calendar year 2021. For the three months ended June 30, 2021 and June 30, 2020, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $ 0.3 million and $ 0.3 million, respectively. For the six months ended June 30, 2021 and June 30, 2020, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $ 0.4 million and $ 0.6 million, respectively. At June 30, 2021, there was $ 1.8 million of total unrecognized compensation costs related to approximately 307,000 non-vested PRSUs, which is expected to be recognized over a remaining weighted-average period of 2.4 years. 4. Earnings (loss) per Share Basic earnings (loss) per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, and (2) the dilutive effect of assumed conversion of equity awards using the treasury stock method. With respect to the number of weighted-average shares outstanding (denominator), diluted shares reflects: (i) the exercise of options to acquire common stock to the extent that the options’ exercise prices are less than the average market price of common shares during the period and (ii) the pro forma vesting of restricted stock units. 14 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) The following table sets forth the computations of basic and diluted earnings per share: Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 Basic income (loss) per share Numerator: Net income (loss) attributable to Mistras Group, Inc. $ 5,937 $ ( 2,656 ) $ 575 $ ( 101,165 ) Denominator: Weighted average common shares outstanding 29,602 29,085 29,514 29,024 Basic income (loss) per share $ 0.20 $ ( 0.09 ) $ 0.02 $ ( 3.49 ) Diluted income (loss) per share: Numerator: 0 -101165000 Net income (loss) attributable to Mistras Group, Inc. $ 5,937 $ ( 2,656 ) $ 575 $ ( 101,165 ) Denominator: 29086000 29024000 Weighted average common shares outstanding 29,602 29,085 29,514 29,024 Dilutive effect of stock options outstanding — — — — Dilutive effect of restricted stock units outstanding (1) 534 — 525 — 30,136 29,085 30,039 29,024 Diluted income (loss) per share $ 0.20 $ ( 0.09 ) $ 0.02 $ ( 3.49 ) _______________ (1) For the three and six months ended June 30, 2020, 118,000 and 223,000 shares, respectively, related to restricted stock were excluded from the calculation of diluted EPS due to the net loss for the period. 5. Acquisitions Acquisition-Related Expense In the course of its acquisition activities, the Company incurs costs in connection with due diligence, such as professional fees, and other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a quarterly basis. These amounts are reported as Acquisition-related expense, net on the Unaudited Condensed Consolidated Statements of Loss and were as follows for the three and six months ended June 30, 2021 and 2020: Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 Due diligence, professional fees and other transaction costs $ — $ — $ 34 $ — Adjustments to fair value of contingent consideration liabilities 545 19 788 ( 523 ) Acquisition-related expense, net $ 545 $ 19 $ 822 $ ( 523 ) The Company's contingent consideration liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheets. 6. Accounts Receivable, net Accounts receivable consisted of the following: 15 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) June 30, 2021 December 31, 2020 Trade accounts receivable $ 131,039 $ 115,841 Allowance for credit losses ( 8,152 ) ( 8,213 ) Accounts receivable, net $ 122,887 $ 107,628 The Company had $ 19.3 million and $ 11.9 million of unbilled revenue accrued as of June 30, 2021 and December 31, 2020, respectively. These amounts are included in the trade accounts receivable balances above. Unbilled revenue is generally billed in the subsequent quarter to their revenue recognition. For unbilled receivables, the Company considers them as short-term in nature as they are normally converted to trade receivables within 90 days, thus future changes in economic conditions will not have a significant effect on the credit loss estimate. The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of December 31, 2019, approximately $ 1.4 million of past due receivables were outstanding from this customer. The Company received notice from the customer in December 2019, alleging that the work performed was not in compliance with the contract. The Company recorded a full reserve for this matter during 2019 and the status of this situation has not changed since 2019. See Note 14- Commitments and Contingencies for additional details. 7. Property, Plant and Equipment, net Property, plant and equipment consisted of the following: Useful Life (Years) June 30, 2021 December 31, 2020 Land $ 2,799 $ 2,724 Buildings and improvements 30 - 40 25,363 25,731 Office furniture and equipment 5 - 8 20,626 19,902 Machinery and equipment 5 - 7 243,658 234,331 292,446 282,688 Accumulated depreciation and amortization ( 200,548 ) ( 190,007 ) Property, plant and equipment, net $ 91,898 $ 92,681 Depreciation expense for each of the three months ended June 30, 2021 and 2020 was approximately $ 6.2 million and $ 6.0 million, respectively. Depreciation expense for each of the six months ended June 30, 2021 and June 30, 2020 was $ 12.3 million and 12.1 million, respectively. 16 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 8. Goodwill Changes in the carrying amount of goodwill by segment is shown below: Services International Products and Systems Total Balance at December 31, 2020 $ 190,112 $ 15,896 $ — $ 206,008 Goodwill acquired during the period 388 — — 388 Adjustments to preliminary purchase price allocations — — — — Foreign currency translation 2,199 ( 420 ) — 1,779 Balance at June 30, 2021 $ 192,699 $ 15,476 $ — $ 208,175 The Company reviews goodwill for impairment on a reporting unit basis on October 1 of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. During the first quarter of 2020, the Company’s market capitalization declined significantly compared to the fourth quarter of 2019. Over the same period, the equity value of the Company’s peer group, and the overall U.S. stock market also declined significantly amid market volatility. In addition, oil prices had dropped significantly. These declines were driven in large part by the uncertainty surrounding the COVID-19 pandemic and other macroeconomic events such as the geopolitical tensions between OPEC and Russia. Based on these factors, the Company concluded that multiple triggering events occurred and, accordingly, an interim quantitative goodwill impairment test was performed as of the testing date for each reporting unit as of March 31, 2020 (“testing date”). During the first quarter of 2020, the Company also performed an analysis to determine any impairment of long-lived assets (see Note 9- Intangible Assets ) based on the triggering events noted above. In performing the interim quantitative goodwill impairment test and consistent with prior practice, the Company determined the fair value of each of the reporting units using a combination of the income approach and the market approach by assessing each of these valuation methodologies based upon availability and relevance of comparable company data and determining the appropriate weighting. Under the income approach, the fair value for each of the reporting units was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company used internal forecasts, updated for recent events, to estimate future cash flows with cash flows beyond the specific operating plans estimated using a terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on the Company’s most recent views of the long-term outlook for each reporting unit. The internal forecasts include assumptions about future market recovery, including the expected demand for the Company’s goods and services. Due to the inherent uncertainties involved in making estimates and assumptions, actual results may differ from those assumed in the forecasts. The Company derived the discount rates using a capital asset pricing model and analyzing published rates for industries relevant to the reporting units to estimate the cost of equity financing. The Company used discount rates that are commensurate with the risks and uncertainties inherent in the respective businesses and in the internally developed forecasts, updated for recent events. The market approach valuations were derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses was based on the markets in which the reporting units operate considering risk profiles, size, geography, and diversity of products and services. Based upon the results of the interim quantitative goodwill impairment test during the first quarter of 2020, the Company recorded an aggregate impairment charge of $ 77.1 million, which consisted of $ 57.2 million in the services reporting unit within the Services segment, and $ 19.3 million in the European reporting unit and $ 0.6 million in the Brazilian reporting unit, both within the International segment. The impairment was calculated based on the difference between the estimated fair value and the carrying value of the reporting units and are included in Impairment charges on the Unaudited Condensed Consolidated Statements of Income (Loss) for the three months ended March 31, 2020. Subsequent to March 31, 2020 through June 30, 2021, the Company did not identify any changes in circumstances that would indicate the carrying value of goodwill may not be recoverable. Significant adverse changes in future periods could negatively affect the Company's key assumptions and may result in future goodwill impairment charges which could be material. 17 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) The Company's cumulative goodwill impairment as of June 30, 2021 and December 31, 2020 was $ 100.2 million, of which $ 57.2 million related to the Services segment, $ 29.8 million related to the International segment and $ 13.2 million related to the Products and Systems segment. 9. Intangible Assets The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows: June 30, 2021 December 31, 2020 Useful Life (Years) Gross Amount Accumulated Amortization Net Carrying Amount Gross Amount Accumulated Amortization Impairment Net Carrying Amount Customer relationships 5 - 18 $ 113,576 $ ( 78,469 ) $ 35,107 $ 116,101 $ ( 75,649 ) $ ( 2,206 ) $ 38,246 Software/Technology 3 - 15 52,462 ( 25,137 ) 27,325 77,326 ( 23,519 ) ( 25,874 ) 27,933 Covenants not to compete 2 - 5 12,667 ( 12,350 ) 317 12,833 ( 12,162 ) ( 212 ) 459 Other 2 - 12 10,751 ( 8,892 ) 1,859 11,120 ( 8,614 ) ( 502 ) 2,004 Total $ 189,456 $ ( 124,848 ) $ 64,608 $ 217,380 $ ( 119,944 ) $ ( 28,794 ) $ 68,642 Amortization expense for the three months ended June 30, 2021 and 2020 was approximately $ 2.5 million and $ 2.6 million, respectively. Amortization expense for the six months ended June 30, 2021 and June 30, 2020 was $ 4.9 million and $ 5.9 million, respectively. As described in Note 8- Goodwill , during the first quarter of 2020, there were negative market indicators that were determined to be triggering events indicating a potential impairment of certain long-lived assets within asset groups in the Services, International, and Products and Systems segments, as well as Corporate. The asset groups are groupings of assets and liabilities determined at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability testing indicated that certain intangible assets and right of use assets (See Note 13- Leases ) were potentially impaired. For asset groups that required an impairment measurement, similar to the valuations performed to determine the goodwill impairment, the Company used income and market approaches to estimate the fair value of the long-lived assets, which requires significant judgment in evaluation of the useful lives of the assets, economic and industry trends, estimated future cash flows, discount rates, and other factors. The result of the analysis was an aggregate impairment charge of $ 28.8 million, which consisted of $ 25.9 million to software/technology, $ 2.2 million to customer relationships, $ 0.5 million to other intangibles and $ 0.2 million to covenants not to compete, all of which are in the Services reporting unit within the Services segment and are included in Impairment charges on the Unaudited Condensed Consolidated Statements of Income (Loss) for the six months ended June 30, 2020. 18 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 10. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following: June 30, 2021 December 31, 2020 Accrued salaries, wages and related employee benefits $ 35,311 $ 30,214 Contingent consideration, current portion 915 1,300 Accrued workers’ compensation and health benefits 4,001 3,948 Deferred revenue 8,213 6,538 Pension accrual 2,519 2,519 Right-of-use liability - Operating 10,212 10,348 Other accrued expenses 26,301 23,633 Total $ 87,472 $ 78,500 11. Long-Term Debt Long-term debt consisted of the following: June 30, 2021 December 31, 2020 Senior credit facility $ 119,503 $ 120,312 Senior secured term loan, net of unamortized debt issuance costs of $ 0.3 million and $ 0.3 million, respectively 84,120 89,745 Other 7,544 10,159 Total debt 211,167 220,216 Less: Current portion ( 17,835 ) ( 10,678 ) Long-term debt, net of current portion $ 193,332 $ 209,538 Senior Credit Facility The Company has a credit agreement with its banking group (as amended, the "Credit Agreement") which provides the Company with a revolving line of credit and a $ 100 million senior secured term loan A facility with a balance of $ 84.1 million as of June 30, 2021. Pursuant to the Amendment described below, the revolving line of credit was reduced from $ 175 million to $ 165 million, and will be further reduced to $ 155 million on September 30, 2021, then to $ 150 million on December 31, 202 1 . Both the revolving line of credit and the term loan A facility under the Credit Agreement have a maturity date of December 12, 2023. On May 19, 2021, the Company entered into the Fifth Amendment (the “Amendment”) to the Credit Agreement. The Amendment made the following changes: • 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 %. The LIBOR margins and base rate margins are unchanged but are based upon the new Total Consolidated Debt Leverage Ratio (defined below); previously the margin was based upon the Funded Debt Leverage Ratio. • Requires the Company to maintain a Total Consolidated Debt Leverage Ratio not to exceed 4.00 to 1.0 as of the end of each quarter through the quarter ending March 31, 2022, and for each quarter thereafter the ratio shall not exceed 3.50 to 1.0. ◦ Total Consolidated Debt Leverage Ratio means the ratio of (a) Total Consolidated Debt to (b) EBITDA (as defined in the Credit Agreement) for the trailing four consecutive quarters. ◦ Total Consolidated Debt means all indebtedness (including subordinated debt) of the Company on a consolidated basis (with a limited exception). 19 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) • If the Company incurs certain subordinated debt or other permitted indebtedness, then the Company must maintain a Total Consolidated Debt Leverage Ratio not to exceed 4.50 to 1.0 and maintain a ratio of Senior Debt to EBITDA not to exceed 3.50 to 1.00, with Senior Debt being Total Consolidated Debt, less permitted subordinated debt. • The Company must repay loans under the Credit Agreement with the net proceeds from certain dispositions of assets under certain circumstances and limits investments in non-guarantor subsidiaries under certain circumstances if the Company’s Total Consolidated Leverage Ratio is above 3.5 to 1.0. • Borrowing capacity was reduced on the revolving loan line of credit under the Credit Agreement to $ 165 million, and will be further reduced to $ 155 million on September 30, 2021, then to $ 150 million on December 31, 2021. • Quarterly payments on the term loan increased to $ 3.75 million through March 31, 2022, then to $ 5.0 million for each quarterly payment thereafter and a final balloon payment at maturity. As a result of the borrowing capacity reduction on the revolving loan line of credit, the Company expensed $ 0.1 million in unamortized capitalized debt issuance costs during the three months ended June 30, 2021, which was included in Selling, general and administrative expenses on the Unaudited Condensed Consolidated Statements of Income (Loss). The Company incurred $ 0.5 million in financing costs for the Amendment of which $ 0.2 million of third party costs were expensed and included in Selling, general and administrative expenses on the Unaudited Condensed Consolidated Statements of Income (Loss). Under the Credit Agreement, the Company may borrow up to $ 100 million in non-U.S. Dollar currencies and use up to $ 20 million of the credit limit for the issuance of letters of credit. As of June 30, 2021, the Company had borrowings of $ 203.9 million and a total of $ 4.3 million of letters of credit outstanding under the Credit Agreement. The Company has capitalized costs associated with debt modifications of $ 1.1 million as of June 30, 2021, which is included in Other Assets on the Condensed Consolidated Balance Sheets and will be amortized into interest expense over the remaining term of the Credit Agreement through December 12, 2023. As of June 30, 2021, the Company was in compliance with the terms of the Credit Agreement. The Company will continuously monitor its compliance with the covenants contained in its Credit Agreement. The Company believes that it is probable that the Company will be able to comply with the financial covenants in the Credit Agreement and that sufficient credit remains available under the Credit Agreement to meet the Company's liquidity needs. However, due to the uncertainties being caused by the COVID-19 pandemic, the significant volatility in oil prices, and volatility in the aerospace production, such matters cannot be predicted with certainty. Other debt The Company's other debt includes local bank financing provided at the local subsidiary level used to support working capital requirements and fund capital expenditures. At June 30, 2021, there was an aggregate of approximately $ 7.5 million outstanding, payable at various times through 2030. Monthly payments range from $ 1.0 thousand to $ 19.0 thousand and interest rates range from 0.4 % to 3.5 %. 12. Fair Value Measurements The Company performs fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a three level hierarchy that prioritizes the inputs used to measure fair value. Financial instruments measured at fair value on a recurring basis The fair value of contingent consideration liabilities was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the applicable acquisition agreements. 20 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) The following table represents the changes in the fair value of Level 3 contingent consideration: Six months ended June 30, 2021 2020 Beginning balance $ 1,640 $ 3,216 Acquisitions — — Payments ( 938 ) ( 1,303 ) Accretion of liability — 30 Revaluation 788 ( 553 ) Foreign currency translation — ( 34 ) Ending balance $ 1,490 $ 1,356 Financial instruments not measured at fair value on a recurring basis The Company has evaluated current market conditions and borrower credit quality and has determined that the carrying value of its long-term debt approximates fair value. The fair value of the Company’s notes payable and finance lease obligations approximates their carrying amounts based on anticipated interest rates which management believes would currently be available to the Company for similar issuances of debt. 13. Leases The Company’s Condensed Consolidated Balance Sheets include the following related to operating leases: Leases Classification June 30, 2021 December 31, 2020 Assets ROU assets Other Assets $ 43,879 $ 46,728 Liabilities ROU - current Accrued expenses and other current liabilities $ 10,212 $ 10,348 ROU liability - long-term Other long-term liabilities 35,156 37,689 Total ROU liabilities $ 45,368 $ 48,037 Included within the balance of operating leases is a lease for the Company’s headquarters which is with a related party. The ROU liability for this facility was approximately $ 3.3 million and $ 3.8 million as of June 30, 2021 and December 31, 2020, respectively. Total rent payments for this facility were approximately $ 0.3 million and $ 0.2 million for the three months ended June 30, 2021 and June 30, 2020, respectively. Total rent payments for this facility were approximately $ 0.7 million and $ 0.4 million for the six months ended June 30, 2021 and June 30, 2020, respectively. An agreement was reached with the related party to reduce rental payments by 20 % and defer payments for 90 days for the lease of the Company’s headquarters, starting in June 2020 through December 2020 as part of COVID-19 related vendor concessions. The total ROU assets attributable to finance leases were approximately $ 15.0 million and $ 15.8 million as of June 30, 2021 and December 31, 2020, respectively, which is included in Property, plant, and equipment, net on the Condensed Consolidated Balance Sheets. As described in Note 9- Intangible Assets , the Company performed an analysis to determine whether there was any impairment of long-lived assets, which included the ROU assets, within the Services, International, and Products and Systems operating segments as well as Corporate. The result of the analysis was a $ 0.2 million impairment of a ROU asset in an asset group within the Services segment which is included in Impairment charges on the Unaudited Condensed Consolidated Statements of Loss for the three months ended March 31, 2020. 21 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) The components of lease costs were as follows: Three months ended June 30, Six months ended June 30, Classification 2021 2020 2021 2020 Finance lease expense Amortization of ROU assets Depreciation and amortization $ 1,029 $ 1,133 $ 2,091 $ 2,375 Interest on lease liabilities Interest expense 181 216 373 437 Operating lease expense Cost of revenue; Selling, general & administrative expenses 3,274 3,317 6,577 6,664 Short-term lease expense Cost of revenue; Selling, general & administrative expenses 8 1 14 2 Variable lease expense Cost of revenue; Selling, general & administrative expenses 551 114 1,418 437 Total $ 5,043 $ 4,781 $ 10,473 $ 9,915 Additional information related to leases was as follows: Six months ended June 30, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities for finance and operating leases Finance - financing cash flows $ 2,050 $ 2,132 Finance - operating cash flows $ 373 $ 437 Operating - operating cash flows $ 6,620 $ 6,562 ROU assets obtained in the exchange for lease liabilities Finance leases $ 1,623 $ 1,266 Operating leases $ 2,828 $ 2,451 Weighted-average remaining lease term (in years) Finance leases 5.6 5.9 Operating leases 5.5 6.0 Weighted-average discount rate Finance leases 5.4 % 5.9 % Operating leases 5.8 % 5.8 % 22 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Maturities of lease liabilities as of June 30, 2021 were as follows: Finance Operating Remainder of 2021 $ 3,201 $ 6,411 2022 4,445 11,435 2023 3,547 9,824 2024 2,610 7,532 2025 1,004 5,358 Thereafter 834 12,409 Total 15,641 52,969 Less: Present value discount 1,238 7,601 Lease liability $ 14,403 $ 45,368 14. Commitments and Contingencies Legal Proceedings and Government Investigations The Company is subject to periodic lawsuits, investigations and claims that arise in the ordinary course of business. The Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it. Except possible losses from the matters described below, the Company does not believe that any currently pending legal proceeding to which the Company is a party will have a material adverse effect on its business, results of operations, cash flows or financial condition. The costs of defense and amounts that may be recovered against the Company may be covered by insurance for certain matters. Litigation and Commercial Claims The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of December 31, 2019, approximately $ 1.4 million of past due receivables were outstanding from this customer. The customer provided the Company with notice in December 2019, alleging that the Company’s inspection of 66 welds (out of approximately 16,000 welds inspected) were not in compliance with the contract, claimed approximately $ 7.6 million in damages, and requested that the Company pay these damages and any other damages incurred. The Company filed a lawsuit in the District Court of Bexar County, Texas, 37th Judicial District, in an action captioned Mistras Group, Inc. v. Epic Y-Grade Pipeline LP, to recover the $ 1.4 million and other amounts due to the Company. The customer filed a counterclaim, alleging breach of contract and seeking recovery of its alleged damages. The Company believes that any successful claim by the customer regarding the Company’s workmanship will be covered by insurance, subject to payment of a deductible. At this time, the Company is unable to determine whether it has any liability in connection with this matter and if so, the amount or range of any such liability, and accordingly, has not established any accruals for this matter. Accordingly, the Company recorded a reserve in the amount of $ 1.4 million during the twelve months ended December 31, 2019 for these past due receivables. Two proceedings have been filed in California Superior Court for the County of Los Angeles regarding alleged violations of the California Labor Code. Both cases are captioned Justin Price v. Mistras Group, Inc. , one being a purported class action lawsuit on behalf of current and former Mistras employees in California and the other was filed on behalf of the State of California under the California Private Attorney General Act on the basis of the same alleged violations. Both cases are requesting payment of all damages, including unpaid wages, and various fines and penalties available under California law. On May 4, 2021, the Company agreed to a settlement whereby the Company will pay $ 2.3 million to resolve the allegations in these proceedings and will be responsible for the employer portion of payroll taxes on the amount of the settlement allocated to wages. The settlement is subject to court approval and will cover claims for the period from June 2016 through July 31, 2021. The Company recorded expense of approximately $ 1.6 million during the three months ended March 31, 2021 related to this settlement, which is in addition to expense of $ 0.8 million the Company recorded during the three months ended December 31, 2020. Pension Related Contingencies 23 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Certain of Company’s subsidiaries had significant reductions in their unionized workers in 2018. The collective bargaining agreements for these employees required contributions for these employees to national multi-employer pension funds. The reduction in employees resulted in a subsidiary incurring a complete withdrawal to one of the pension funds under the Employee Retirement Income Security Act of 1974 ("ERISA"), which was fully satisfied in 2019. The Company has determined that the subsidiary is likely to incur partial or complete withdrawal liability to the other pension fund. The balance of the estimated total amount of this potential liability as of June 30, 2021 is approximately $ 2.5 million, and the charges related to this liability were incurred in 2018 and 2019. Severance and labor disputes During December 2019, the Company executed an agreement to sell the rights of certain customer "staff leasing" contracts related to its German subsidiary 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 June 30, 2021, the Company has approximately $ 0.1 million of accrued 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 $ 0.1 million of estimated obligations is net of $ 0.5 million in payments made and $ 1.0 million in reversals due to employees being transitioned to customer contracts. The Company was entitled to indemnification on certain labor claims from the sellers of a company acquired by its Brazilian subsidiary. The Company and the sellers entered into a settlement agreement for approximately $ 1.0 million, which provided for payment in two installments, the first for approximately 31 % of the settlement and the second for the remaining 69 %. The first installment in the amount of approximately $ 0.3 million was paid by the sellers in December 2020 and the Company recognized that amount as a gain in selling, general and administrative expenses in the same period. The remaining payment for $ 0.6 million was received in the first quarter of 2021 and the Company recognized that amount as a gain in selling, general and administrative expenses in the same period. Acquisition and disposition related contingencies The Company is liable for contingent consideration in connection with certain of its acquisitions. As of June 30, 2021, total potential acquisition-related contingent consideration ranged from zero to approximately $ 2.8 million and would be payable upon the achievement of specific performance metrics by certain of the acquired companies over the next 1.3 years. During 2018, the Company sold a subsidiary in the Products and Systems segment. As part of the sale, the Company entered into a three-year agreement to purchase products from the buyer, with a cumulative commitment of $ 2.3 million, of which $ 1.0 million is remaining as of June 30, 2021. The agreement is based on third-party pricing and the Company's planned purchase requirements over the three-year purchase period to meet the minimum contractual purchases. On August 3, 2021, the Company entered into an agreement and extended the period by twelve months . 15. Segment Disclosure The Company’s three operating segments are: • Services. This segment provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of NDT, inspection, mechanical and engineering services that are used to evaluate the safety, structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components. PCMS software and pipeline related software and data analysis solutions are included in this segment. • International. This segment offers services, products and systems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment. • Products and Systems. This segment designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States. 24 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Costs incurred for general corporate services, including finance, legal, and certain other costs that are provided to the segments are reported within Corporate and eliminations. Sales to the International segment from the Products and Systems segment and subsequent sales by the International segment of the same items are recorded and reflected in the operating performance of both segments. Additionally, engineering charges and royalty fees charged to the Services and International segments by the Products and Systems segment are reflected in the operating performance of each segment. The accounting policies of the reportable segments are the same as those described in Note 1 - Description of Business and Basis of Presentation . Segment income from operations is one of the primary performance measures used by the chief operating decision maker, to assess the performance of each segment and make resource allocation decisions. Certain general and administrative costs such as human resources, information technology and training are allocated to the segments. Segment income from operations excludes interest and other financial charges and income taxes. Corporate and other assets are comprised principally of cash, deposits, property, plant and equipment, domestic deferred taxes, deferred charges and other assets. Corporate loss from operations consists of administrative charges related to corporate personnel and other charges that cannot be readily identified for allocation to a particular segment. Selected consolidated financial information by segment for the periods shown was as follows: (with intercompany transactions eliminated in Corporate and eliminations) Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 Revenue Services $ 144,977 $ 100,677 $ 269,275 $ 229,550 International 31,951 21,343 59,599 50,410 Products and Systems 3,203 4,002 6,191 6,814 Corporate and eliminations ( 2,454 ) ( 1,587 ) ( 3,653 ) ( 2,874 ) $ 177,677 $ 124,435 $ 331,412 $ 283,900 Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 Gross profit Services $ 43,761 $ 33,940 $ 74,837 $ 66,177 International 9,615 5,392 17,240 13,415 Products and Systems 1,952 1,838 3,233 2,206 Corporate and eliminations 8 ( 12 ) 27 4 $ 55,336 $ 41,158 $ 95,337 $ 81,802 Income (loss) from operations by operating segment includes intercompany transactions, which are eliminated in Corporate and eliminations. Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 Income (loss) from operations Services $ 18,358 $ 10,837 $ 22,906 $ ( 70,657 ) International 1,809 ( 1,937 ) 989 ( 22,356 ) Products and Systems 209 ( 96 ) ( 372 ) ( 1,776 ) Corporate and eliminations ( 9,002 ) ( 9,187 ) ( 16,895 ) ( 16,822 ) $ 11,374 $ ( 383 ) $ 6,628 $ ( 111,611 ) 25 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 Depreciation and amortization Services $ 6,211 $ 6,211 $ 12,325 $ 13,286 International 2,175 2,077 4,385 4,217 Products and Systems 215 255 443 508 Corporate and eliminations 31 ( 13 ) 44 ( 14 ) $ 8,632 $ 8,530 $ 17,197 $ 17,997 June 30, 2021 December 31, 2020 Intangible assets, net Services $ 56,063 $ 58,917 International 7,546 8,664 Products and Systems 1,045 1,012 Corporate and eliminations ( 46 ) 49 $ 64,608 $ 68,642 June 30, 2021 December 31, 2020 Total assets Services $ 431,829 $ 427,636 International 119,412 129,228 Products and Systems 11,636 10,996 Corporate and eliminations 24,504 15,453 $ 587,381 $ 583,313 Refer to Note 2 – Revenue , for revenue by geographic area for the three and six months ended June 30, 2021 and 2020. 26 Table of Contents Mistras Group, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (tabular dollars are in thousands)