What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-03 compared with 2021-08-04 · 94 added, 91 removed, 211 unchanged (47% of the section changed)

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

The following Management’s Discussion and Analysis (“MD&A”) provides a discussion of our results of operations and financial position for the three and six months ended June 30, 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 nine months ended September 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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• Services provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of NDT, inspection, mechanical and engineering services that are used to evaluate the structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components.

PCMS software and pipeline related software and data analysis solutions are included in this segment.

Software, digital and data services are included in this segment.

• International offers services, products and systems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.

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

Recent Developments

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.

Centers for Disease Control and Prevention (CDC).

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

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

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

We have continued providing our customers with innovative asset protection software ecosystem through our MISTRAS OneSuite platform.

The software platform offers functions of MISTRAS' popular software and services brands as integrated apps on a cloud environment.

OneSuite serves as a single access portal for customers' data activities and provides access to 50 plus applications being offered on one centralized platform.

We have continued to develop new technologies to provide monitoring of wind blade integrity through our Sensoria™ tool.

Sensoria helps provide real-time monitoring and damage detection of wind turbine blades and allows our customers to maximize uptime, performance and safety of wind turbine blades.

This tool provides additional growth and expansion of our

Mistras Group, Inc.

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capabilities to serve both new and existing wind turbines and greatly enhances our product offerings within the renewable energy industry.

Recent Developments

The COVID-19 coronavirus (COVID-19) pandemic has continued to cause disruption and volatility in domestic and international markets and conditions continue to improve during 2021 as compared to 2020.

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).

Our facilities, and the Company's customers facilities as well, have remained open with staffing modifications and precautionary procedures taken as necessary.

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

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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, 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.

The Company has eliminated substantially all of the cost reduction initiatives undertaken in 2020, including re-installment of the savings plan employer match and increasing wages back to pre-pandemic amounts.

Our cash position and liquidity remains strong.

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

As of September 30, 2021, the cash balance was approximately $22.6 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.

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

We believe investors and other users of our financial statements benefit from the presentation of this non-GAAP measure in evaluating our performance.

Income (loss) before special items excludes the identified adjustments, which provides additional tools to compare our core business operating performance on a consistent basis and measure underlying trends and results in our business.

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

We believe investors and other users of our financial

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statements benefit from the presentation of this non-GAAP measure in evaluating our performance.

Results of Operations

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,

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

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

2021 2020 2021 2020

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Income (Loss) from Operations as a % of Revenue 5.3 % 3.9 % 3.1 % (24.5) %

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

Income before provision (benefit) for income taxes 6,910 2,097 7,170 (115,279)

Net income (loss) 3,397 1,553 3,983 (99,634)

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$ 3,380 $ 1,523 $ 3,955 $ (99,642)

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,

Revenue was $174.6 million for the three months ended September 30, 2021, an increase of $26.7 million, or 18.0%, compared with the three months ended September 30, 2020.

Revenue for the nine months ended September 30, 2021 was $506.0 million, an increase of $74.2 million, or 17.2%, compared with the nine months ended September 30, 2020.

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

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

2021 2020 2021 2020

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$ 174,556 $ 147,894 $ 505,968 $ 431,794

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 the three months ended September 30, 2021, total revenue increased 18.0% versus the comparable prior period.

The increase was due to organic growth in our core business as our end markets recover from the effect of COVID-19.

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.

Services segment revenue increased 21.1% and International segment revenue increased 9.9%, due predominantly to recovery from the effect of COVID-19 and to single-digit favorable revenue impact from foreign exchange rates.

Oil and gas customer revenue comprised approximately 56% and 55% of total revenue for the three months ended September 30, 2021 and 2020, respectively.

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

The Company’s top ten customers comprised approximately 32% of total revenue for the three months ended September 30, 2021, as compared to 29% for the three months ended September 30, 2020, with no customer accounting for 10% or more of total revenue in either three-month period.

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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.

three months ended September 30, 2021, revenue in all our primary end market industries increased versus the comparable prior period, except for industrials which decreased slightly.

In the nine months ended September 30, 2021, total revenue increased 17.2% versus the comparable prior period.

The increase was due to organic growth in our core business as our end markets recover from the effect of COVID-19.

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,

Our Services segment revenue increased 18.5% due predominantly to recovery from the effect of COVID-19.

International segment revenue increased 15.3% due to mid-single digit organic growth and mid-single digit favorable revenue impact from foreign exchange rates.

Oil and gas customer revenue comprised approximately 58% and 56% of total revenue for the nine months ended September 30, 2021 and 2020, respectively.

Aerospace and defense customer revenue comprised approximately 10% and 13% of total revenue for the nine months ended September 30, 2021 and 2020, respectively.

The Company’s top ten customers comprised approximately 33% of total revenue for the nine months ended September 30, 2021, as compared to 31% for the nine months ended September 30, 2020, with no customer accounting for 10% or more of total revenue in either nine-month period.

For the nine months ended September 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 $4.8 million, or 10.2%, in the three months ended September 30, 2021 versus the prior year comparable period, on an increase in revenue of 18.0%.

Gross profit increased by $18.4 million, or 14.2%, in the nine months ended September 30, 2021 on an increase in revenue of 17.2%.

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

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

2021 2020 2021 2020

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% of total revenue 29.9 % 32.0 % 29.2 % 29.9 %

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

Gross profit margin was 29.9% and 32.0% for the three-month periods ended September 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 was 29.2% and 29.9% for the nine months ended September 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.

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Operating Expenses

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,

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

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

2021 2020 2021 2020

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Acquisitions-related expense 246 709 1,068 186

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.

Operating expenses increased $1.3 million, or 3%, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Selling, general and administrative expenses increased $1.7 million during the three months ended September 30, 2021 compared to the three months ended September 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.

This increase was partially offset by foreign currency exchange losses.

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

Operating expenses decreased $103.4 million, or 44%, for the nine months ended September 30, 2021 compared to the nine months ended September 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 $2.7 million 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.

These increases were partially offset by foreign currency exchange losses.

Depreciation and amortization decreased $1.3 million during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, due to the 2020 impairment charges reducing the net book value on certain of our intangible assets.

Acquisition-related expense increased $0.9 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 due to remeasurement of acquisition related contingent consideration.

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

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

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

2021 2020 2021 2020

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Legal settlement and litigation charges, net — (360) 1,650 (360)

Acquisition-related expense (benefit), net 545 19 788 (523)

Acquisition-related expense, net 246 709 1,034 186

Income before special items (non-GAAP) $ 16,331 $ 14,006 $ 41,772 $ 29,093

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Products and Systems:

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

Loss from operations (GAAP) $ (281) $ (160) $ (653) $ (1,936)

Reorganization and other costs — 5 27 5

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

Loss before special items (non-GAAP) $ (281) $ (155) $ (626) $ (1,931)

Corporate and Eliminations:

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Legal settlement and litigation charges, net — (360) 1,030 (360)

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

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

Acquisition-related expense, net 246 709 1,068 186

Income before special items (non-GAAP) $ 9,480 $ 6,189 $ 18,488 $ 1,244

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

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For the three months ended June 30, 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.

For the three months ended September 30, 2021, the income (loss) from operations (GAAP) increased $3.5 million, compared with the three months ended September 30, 2020, while income before special items (non-GAAP) increased $3.3 million.

As a percentage of revenue, income before special items increased by 120 basis points to 5.4% in the three months ended September 30, 2021 from 4.2% in the three months ended September 30, 2020.

For the nine months ended September 30, 2021, income (loss) from operations (GAAP) increased $121.7 million, compared with the nine months ended September 30, 2020, while income (loss) before special items (non-GAAP) increased $17.2 million.

As a percentage of revenue, income (loss) before special items increased by 340 basis points to 3.7% in the nine months ended September 30, 2021 from 0.3% in the nine months ended September 30, 2020.

During the nine months ended September 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.

During the nine months ended September 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.

Refer to Item 1A.

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Interest Expense

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.

Interest expense was approximately $2.3 million and $3.6 million for the three months ended September 30, 2021 and 2020, respectively.

Interest expense was approximately $8.7 million and $9.4 million for the nine months ended September 30, 2021 and 2020, respectively.

The decrease was a result of a change in the effective interest rate, due to a lower leverage ratio and the elimination of the minimum LIBOR floor.

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%.

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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 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.

Our effective income tax rate was approximately 50.8% and 25.9% for the three months ended September 30, 2021 and 2020, respectively.

Our effective income tax rate was approximately 44.4% and 13.6% for the nine months ended September 30, 2021 and 2020.

The Company's effective income tax rate for the three months ended September 30, 2021 was higher than the statutory rate primarily due to a $1.2 million valuation allowance recorded during the period which was related to various state deferred tax assets and earnings in jurisdictions with higher income tax rates than the United States.

The effective income tax rate for the three months ended September 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 income tax rate for the nine months ended September 30, 2021 was higher than the statutory rate due to a $1.2 million valuation allowance recorded during the year related to various state deferred tax assets offset by 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 nine months ended September 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.

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Cash flows are summarized in the table below:

Six months ended June 30,

Nine months ended September 30,

Net cash provided by (used in):

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Cash Flows from Operating Activities

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.

During the nine months ended September 30, 2021, cash provided by operating activities was $22.5 million, representing a year-on-year decrease of $19.3 million, or 46%.

The decrease was primarily attributable to increased usage of working capital.

Additionally, revenue increased 17.2% versus the prior year comparable period due 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.

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

Cash Flows from Investing Activities

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.

During the nine months ended September 30, 2021, cash used in investing activities was $15.5 million primarily attributable to capital expenditures of $16.0 million compared to $11.0 million of capital expenditures in the prior period driven by increased operating activities.

Cash Flows from Financing Activities

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.

Net cash used in financing activities was $8.9 million for the nine months ended September 30, 2021, compared to net cash used in financing activities of $25.1 million for the nine months ended September 30, 2020.

During the nine months ended September 30, 2021, net borrowings of debt were approximately $15.5 million lower as compared to 2020 resulting in less debt paydown during the period as cash flows were used to support 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 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.

The effect of exchange rate changes on our cash and cash equivalents was a decrease of $1.3 million in the nine months ended September 30, 2021, compared to an increase of $0.9 million for the nine months ended September 30, 2020.

Cash Balance and Credit Facility Borrowings

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.

As of September 30, 2021, we had cash and cash equivalents totaling $22.6 million and $22.2 million of unused commitments under our Credit Agreement with borrowings of $209.2 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.

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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.

As of September 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 $155 million on September 30, 2021 which will be further reduced 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.

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Off-balance Sheet Arrangements

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.

During the nine months ended September 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