Mistras Group, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Mistras Group, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Mistras Group, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income (loss), comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 45 Table of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of goodwill for the services and European reporting units As discussed in Note 1 to the consolidated financial statements, the Company tests goodwill for impairment annually on October 1 or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company considers the income and market approaches to estimate the fair value of its reporting units. As of December 31, 2021, the Company had goodwill of $205.4 million, of which a portion related to the services and European reporting units. There were no impairment charges recorded during the year ended December 31, 2021. We identified the evaluation of goodwill impairment for the services and European reporting units as a critical audit matter. Auditor judgment was required to evaluate the selection of discount rates and forecasted revenue growth rates, gross margins, and selling, general, and administrative expense used in the income approach as they represented subjective determinations of future market or economic conditions. Additionally, the audit effort associated with the evaluation of goodwill for impairment for the services and European reporting units required specialized skills and knowledge. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s goodwill impairment evaluation process, including controls related to management’s selection of discount rates and forecasted revenue growth rates, gross margins, and selling, general, and administrative expense. We evaluated the reasonableness of management’s forecasted revenue growth rates, gross margins, and selling, general, and administrative expense by comparing the forecasts to historical revenue growth rates, gross margins, and selling, general, and administrative expense and relevant industry reports. We evaluated the Company’s ability to accurately estimate future revenue growth rates, gross margins, and selling, general, and administrative expense by comparing the historical projected revenue growth rates, gross margins, and selling, general, and administrative expense to actual results for the same period. In addition, we involved valuation professionals with specialized skills and knowledge who assisted in: • evaluating the Company’s methodology used to estimate the discount rates • evaluating the Company’s discount rates by comparing them against discount rate ranges that were independently developed using publicly available market data for comparable entities • testing the estimate of fair values of the services and European reporting units by using the Company’s projected cash flows as well as our independently developed discount rate ranges and comparing the results to the Company’s fair values. /s/ KPMG LLP We have served as the Company’s auditor since 2013 Short Hills, New Jersey March 14, 2022 46 Table of Contents Mistras Group, Inc. and Subsidiaries Consolidated Balance Sheets ( in thousands, except share and per share data ) December 31, 2021 2020 ASSETS Current Assets Cash and cash equivalents $ 24,110 $ 25,760 Accounts receivable, net 109,511 107,628 Inventories 12,686 13,134 Prepaid expenses and other current assets 15,031 16,066 Total current assets 161,338 162,588 Property, plant and equipment, net 86,578 92,681 Intangible assets, net 59,381 68,642 Goodwill 205,439 206,008 Deferred income taxes 2,174 2,069 Other assets 47,285 51,325 Total Assets $ 562,195 $ 583,313 LIABILITIES AND EQUITY Current Liabilities Accounts payable $ 12,870 $ 14,240 Accrued expenses and other current liabilities 83,863 78,500 Current portion of long-term debt 20,162 10,678 Current portion of finance lease obligations 3,765 3,765 Income taxes payable 755 2,664 Total current liabilities 121,415 109,847 Long-term debt, net of current portion 182,403 209,538 Obligations under finance leases, net of current portion 9,752 11,115 Deferred income taxes 8,385 8,236 Other long-term liabilities 39,328 47,358 Total Liabilities $ 361,283 $ 386,094 Commitments and contingencies Equity Preferred stock, 10,000,000 shares authorized — — Common stock, $ 0.01 par value, 200,000,000 shares authorized, 29,546,263 and 29,234,143 shares issued 295 292 Additional paid-in capital 238,687 234,638 Accumulated Deficit ( 17,988 ) ( 21,848 ) Accumulated other comprehensive loss ( 20,311 ) ( 16,061 ) Total Mistras Group, Inc. stockholders’ equity 200,683 197,021 Non-controlling interests 229 198 Total Equity 200,912 197,219 Total Liabilities and Equity $ 562,195 $ 583,313 The accompanying notes are an integral part of these consolidated financial statements. 47 Table of Contents Mistras Group, Inc. and Subsidiaries Consolidated Statements of Income (Loss) ( in thousands, except per share data ) For the year ended December 31, 2021 2020 2019 Revenue $ 677,131 $ 592,571 $ 748,586 Cost of revenue 457,013 391,855 509,489 Depreciation 22,971 22,185 21,800 Gross profit 197,147 178,531 217,297 Selling, general and administrative expenses 161,334 157,157 168,621 Bad debt provision for troubled customers, net of recoveries — — 3,038 Impairment charges — 106,062 — Legal settlement and litigation charges (benefit), net 2,042 ( 220 ) — Pension withdrawal expense — — 848 Research and engineering 2,518 2,892 3,045 Depreciation and amortization 11,950 13,520 16,733 Acquisition-related expense, net 1,133 337 875 Income (loss) from operations 18,170 ( 101,217 ) 24,137 Interest expense 10,882 12,955 13,698 Income (loss) before provision for income taxes 7,288 ( 114,172 ) 10,439 Provision (benefit) for income taxes 3,395 ( 14,706 ) 4,359 Net income (loss) 3,893 ( 99,466 ) 6,080 Less: net income (loss) attributable to noncontrolling interests, net of taxes 33 ( 5 ) 20 Net income (loss) attributable to Mistras Group, Inc. $ 3,860 $ ( 99,461 ) $ 6,060 Earnings (loss) per common share Basic $ 0.13 $ ( 3.41 ) $ 0.21 Diluted $ 0.13 $ ( 3.41 ) $ 0.21 Weighted average common shares outstanding: Basic 29,572 29,147 28,740 Diluted 30,130 29,147 29,046 The accompanying notes are an integral part of these consolidated financial statements. 48 Table of Contents Mistras Group, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (in thousands) For the year ended December 31, 2021 2020 2019 Net income (loss) $ 3,893 $ ( 99,466 ) $ 6,080 Other comprehensive income (loss): Foreign currency translation adjustments ( 4,252 ) 5,227 6,275 Comprehensive income (loss) ( 359 ) ( 94,239 ) 12,355 Less: net income (loss) attributable to noncontrolling interests, net of taxes 33 ( 5 ) 20 Less: Foreign currency translation adjustments attributable to noncontrolling interests ( 2 ) 3 3 Comprehensive income (loss) attributable to Mistras Group, Inc. $ ( 390 ) $ ( 94,237 ) $ 12,332 The accompanying notes are an integral part of these consolidated financial statements. 49 Table of Contents Mistras Group, Inc. and Subsidiaries Consolidated Statements of Equity (in thousands) 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 December 31, 2018 28,563 $ 285 $ 226,616 $ 71,553 $ ( 27,557 ) $ 270,897 $ 177 $ 271,074 Net income — — — 6,060 — 6,060 20 6,080 Other comprehensive income, net of tax — — — — 6,272 6,272 3 6,275 Share-based payments 30 — 5,759 — — 5,759 — 5,759 Net settlement on vesting of restricted stock units 349 4 ( 3,202 ) — — ( 3,198 ) — ( 3,198 ) Exercise of stock options 3 — 32 — — 32 — 32 Balance at December 31, 2019 28,945 $ 289 $ 229,205 $ 77,613 $ ( 21,285 ) $ 285,822 $ 200 $ 286,022 Net loss — — — ( 99,461 ) — ( 99,461 ) ( 5 ) ( 99,466 ) Other comprehensive income, net of tax — — — — 5,224 5,224 3 5,227 Share-based payments — — 5,930 — — 5,930 — 5,930 Net settlement of restricted stock units 289 3 ( 497 ) — — ( 494 ) — ( 494 ) Balance at December 31, 2020 29,234 $ 292 $ 234,638 $ ( 21,848 ) $ ( 16,061 ) $ 197,021 $ 198 $ 197,219 Net income — — — 3,860 — 3,860 33 3,893 Other comprehensive income, net of tax — — — — ( 4,250 ) ( 4,250 ) ( 2 ) ( 4,252 ) Share-based payments — — 5,421 — — 5,421 — 5,421 Net settlement of restricted stock units 312 3 ( 1,372 ) — — ( 1,369 ) — ( 1,369 ) Balance at December 31, 2021 29,546 $ 295 $ 238,687 $ ( 17,988 ) $ ( 20,311 ) $ 200,683 $ 229 $ 200,912 The accompanying notes are an integral part of these consolidated financial statements. 50 Table of Contents Mistras Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands) For the year ended December 31, 2021 2020 2019 Cash flows from operating activities Net income (loss) $ 3,893 $ ( 99,466 ) $ 6,080 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization 34,921 35,705 38,533 Deferred income taxes 87 ( 13,409 ) ( 3,599 ) Share-based compensation expense 5,421 5,851 5,766 Impairment charges — 106,062 — Bad debt provision for troubled customers, net of recoveries — — 3,038 Foreign currency (gain) loss 417 3,010 ( 535 ) Fair value adjustments to contingent consideration 949 337 511 Other 119 2,398 1,804 Changes in operating assets and liabilities, net of effect of acquisitions and dispositions Accounts receivable ( 3,979 ) 27,313 8,298 Inventories 278 84 ( 302 ) Prepaid expenses and other assets 943 ( 1,288 ) 3,289 Accounts payable ( 1,139 ) ( 1,020 ) 1,138 Accrued expenses and other liabilities 2,268 1,841 ( 5,042 ) Income taxes payable ( 1,917 ) 384 131 Net cash provided by operating activities 42,261 67,802 59,110 Cash flows from investing activities Purchase of property, plant and equipment ( 18,161 ) ( 15,396 ) ( 22,047 ) Purchase of intangible assets ( 1,115 ) ( 376 ) ( 873 ) Acquisition of businesses, net of cash acquired ( 440 ) — ( 4,228 ) Proceeds from sale of equipment 1,165 803 1,868 Net cash used in investing activities ( 18,551 ) ( 14,969 ) ( 25,280 ) Cash flows from financing activities Repayment of finance lease obligations ( 4,060 ) ( 4,095 ) ( 4,545 ) Proceeds from borrowings of long-term debt — 2,284 983 Repayment of long-term debt ( 16,262 ) ( 5,976 ) ( 6,857 ) Proceeds from revolver 89,000 35,750 32,000 Repayments of revolver ( 89,065 ) ( 68,050 ) ( 61,700 ) Payments of debt issuance costs ( 550 ) ( 1,497 ) — Payment of contingent consideration for business acquisitions ( 938 ) ( 2,091 ) ( 852 ) Taxes paid related to net share settlement of share-based awards ( 1,370 ) ( 494 ) ( 3,198 ) Proceeds from the exercise of stock options — — 32 Net cash used in financing activities ( 23,245 ) ( 44,169 ) ( 44,137 ) Effect of exchange rate changes on cash and cash equivalents ( 2,115 ) 2,080 ( 221 ) Net change in cash and cash equivalents ( 1,650 ) 10,744 ( 10,528 ) Cash and cash equivalents: Beginning of period 25,760 15,016 25,544 End of period $ 24,110 $ 25,760 $ 15,016 Supplemental disclosure of cash paid Interest, net $ 10,078 $ 12,465 $ 14,158 Income taxes, net $ 4,707 $ ( 543 ) $ 6,096 Noncash investing and financing Equipment acquired through finance lease obligations $ 2,923 $ 2,849 $ 9,502 The accompanying notes are an integral part of these consolidated financial statements. 51 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (tabular dollars in thousands, except per share data) 1. Summary of Significant Accounting Policies and Practices Description of Business Mistras Group, Inc. and subsidiaries (the Company) is a leading “OneSource” multinational provider of integrated technology-enabled asset protection solutions helping to maximize the safety and operational uptime for civilization's most critical industrial and civil assets. Backed by an innovative, data-driven asset protection portfolio, proprietary technologies, and decades-long legacy of industry leadership, the Company 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 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 continued to cause disruption and volatility in domestic and international markets however conditions continued to improve throughout 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, 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 where crude oil prices have exceeded pre-pandemic levels. 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 17 - Leases for additional information. The Company has eliminated substantially all of the temporary cost reduction initiatives undertaken in 2020, including re-installment of the savings plan employer match and increasing wages back to pre-pandemic amounts. The Company is currently unable to predict with certainty the overall impact that the factors discussed above and the effect of the Russian-Ukrainian conflict 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 December 31, 2021, the cash balance was approximately $ 24.1 million. 52 Table of Contents Principles of Consolidation The Company follows guidance on the consolidation of variable interest entities (VIEs) that requires companies to utilize a qualitative approach to determine whether it is the primary beneficiary of a VIE. The process for identifying the primary beneficiary of a VIE requires consideration of the factors that indicate a party has the power to direct the activities that most significantly impact the VIE’s economic performance, including powers granted to the VIE’s program manager, powers contained in the VIE governing board and, to a certain extent, a company’s economic interest in the VIE. The Company analyzes its joint ventures and classifies them as either: • a VIE that must be consolidated because the Company is the primary beneficiary, or the joint venture is not a VIE and the Company holds the majority voting interest with no significant participative rights available to the other partners; or • a VIE that does not require consolidation and is treated as an equity method investment because the Company is not the primary beneficiary or the joint venture is not a VIE and the Company does not hold the majority voting interest. As part of the above analysis, if it is determined that the Company has the power to direct the activities that most significantly impact the joint venture’s economic performance, the Company considers whether or not it has the obligation to absorb losses or rights to receive benefits of the VIE that could potentially be significant to the VIE. The Company became the primary beneficiary in July 2020 of a VIE in which the Company has a 49 % interest in a limited partnership, and a 49 % shareholder in the corporate general partner of the limited partnership. The Company consolidated the financial statements of the VIE with the financial statements of the Company. As of and for the year ended December 31, 2021, the VIE had immaterial assets and had approximately $ 2.1 million revenue. The Company is the primary sub-contractor of the VIE. The accompanying audited consolidated financial statements include the accounts of Mistras Group, Inc. as well as its wholly-owned subsidiaries, majority-owned subsidiaries and consolidated 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 consolidated balance sheets. The non-controlling interests in net results, net of tax, is classified separately in the accompanying 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. Reclassifications 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. Use of Estimates The preparation of financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires that the Company make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date of financial statements. The Company bases its estimates and assumptions on historical experience, known or expected trends and various other assumptions that it believes to be reasonable. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates, which may cause the Company’s future results to be significantly affected. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Accounts Receivable and Allowance for Credit Losses (formerly Allowance for Doubtful Accounts) The Company maintains an allowance for credit losses on its accounts receivable balances, which represents its best estimate of current expected credit losses over the contractual life of the accounts receivable. Beginning January 1, 2020, when evaluating the adequacy of its allowance for credit losses each reporting period, the Company analyzes accounts receivable balances with similar risk characteristics on a collective basis, considering factors such as the aging of receivable balances, payment terms 53 Table of Contents (primarily with 30 day terms), geographic location, historical loss experience, current information, and future expectations (generally considered one year which is consistent with expected collectability of the Company's trade receivables). The Company monitors and considers whether historical loss rates are consistent with expectation of supportable forward-looking estimates for its trade receivables noting no current or future economic considerations that would require adjusting the Company’s historical loss experience. Each reporting period, the Company reassesses whether any accounts receivable no longer share similar risk characteristics and should instead be evaluated as part of another pool or on an individual basis. Changes to the allowance for credit losses are adjusted through credit loss expense, which is presented within Selling, general and administrative expenses in the Consolidated Statements of Income (Loss). Concentration of Credit Risk For each of the years ended December 31, 2021 and 2020, no customer represented 10% or more of the Company's revenue. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At times, cash deposits may exceed the limits insured by the Federal Deposit Insurance Corporation. The Company believes it is not exposed to any significant credit risk or risk of nonperformance of financial institutions. Inventories Inventories are stated at the lower of cost or net realizable value, as determined by using the first-in, first-out method, or market. Work in process and finished goods inventory include material, direct labor, variable costs and overhead. Purchased and Internal-Use Software The Company capitalizes certain costs that are incurred to purchase or to create and implement internal-use software, which includes software coding, installation and testing. Capitalized costs are amortized on a straight-line basis over three years , the estimated useful life of the software. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is computed utilizing the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed utilizing the straight-line method over the shorter of the remaining lease term or estimated useful life. Repairs and maintenance costs are expensed as incurred. Goodwill Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets. The Company tests goodwill for impairment at a “reporting unit” level (which for the Company is represented by (i) our Services segment, (ii) our Products and Systems segment, and (iii) the European component of our International segment and (iv) the Brazilian component of our International segment). Our annual impairment test is conducted on the first day of our fourth quarter, which is October 1. Goodwill is also tested for impairment whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative impairment test is not necessary. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test. If the fair value of a reporting unit is less than its carrying value, this is an indicator that the goodwill assigned to that reporting unit may be impaired. As a result of the Company adopting Accounting Standards Update ("ASU") No. 2017-04, Intangibles-Goodwill and Other (Topic 350) , impairment will be recorded in the amount that fair value is less than carrying value, as the ASU eliminated step two of the goodwill impairment process. The Company considers the income and market approaches to 54 Table of Contents estimating the fair value of our reporting units, which requires significant judgment in evaluation of economic and industry trends, estimated future cash flows, discount rates and other factors. See Note 8- Goodwill for additional information related to the Company's goodwill impairment test during 2021. Impairment of Long-lived Assets The Company reviews the recoverability of its long-lived assets (or asset groups) whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset (group) might not be recoverable. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future undiscounted cash flows. If the total expected future undiscounted cash flows are less than the carrying amount of the assets, a loss is recognized for the difference between fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets. Acquisitions The Company allocates the purchase price of acquired businesses to their identifiable tangible assets and liabilities as well as identifiable intangible assets, such as customer relationships, technology, non-compete agreements and trade names. Certain estimates and judgments are required in the application of the fair value techniques, including estimates of the respective acquisition's future performance and related cash flows, selection of a discount rate and economic lives, and use of Level 3 measurements as defined in ASC No. 820, Fair Value Measurements and Disclosure. Deferred taxes are recorded for any differences between the assigned values and tax bases of assets and liabilities. Research and Engineering Research and product development costs are expensed as incurred. Advertising, Promotions and Marketing The costs for advertising, promotion and marketing programs are expensed as incurred and are included in selling, general and administrative expenses. Advertising expense was approximately $ 1.0 million, $ 0.8 million and $ 2.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other financial current assets and liabilities approximate fair value based on the short-term nature of the items. Foreign Currency Translation The financial position and results of operations of the Company’s foreign subsidiaries are measured using their functional currencies, which are their local currencies. Assets and liabilities of foreign subsidiaries are translated into the U.S. Dollar at the exchange rates in effect at the balance sheet date. Income and expenses are translated at the average exchange rate during the period. Translation gains and losses are reported as a component of other comprehensive income (loss) for the period and included in accumulated other comprehensive income (loss) within stockholders’ equity. Foreign currency (gains) and losses arising from transactions denominated in currencies other than the functional currency are included in net income, reported in selling, general and administrative expenses, and were approximately $ 0.4 million, $ 3.1 million, and $( 0.5 ) million for the years ended December 31, 2021, 2020 and 2019, respectively. Self-Insurance The Company is self-insured for certain losses relating to workers’ compensation and health benefit claims. The Company maintains third-party excess insurance coverage for all workers' compensation and health benefit claims in excess of approximately $ 0.3 million per occurrence to reduce its exposure from such claims. Self-insured losses are accrued when it is probable that an uninsured claim has been incurred but not reported and the amount of the loss can be reasonably estimated at the balance sheet date. Share-based Compensation 55 Table of Contents The value of services received from employees and directors in exchange for an award of an equity instrument is measured based on the grant-date fair value of the award. Such value is recognized as a non-cash expense on a straight-line basis over the minimum period the individual provides services, which is typically the vesting period of the award with the exception of awards with graded vesting that contain an internal performance measure where each tranche is recognized on a straight-line basis over its vesting period subject to the probability of meeting the performance requirements and adjusted for the number of shares expected to be earned. Awards to certain employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. As share-based compensation expense is based on awards ultimately expected to vest, the amount of expense is reduced for estimated forfeitures. The cost of these awards is recorded in selling, general and administrative expense in the Company’s consolidated statements of income. Income Taxes Income taxes are accounted for under the asset and liability method. We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred tax assets primarily consist of net operating loss carry forwards, or NOLs. 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. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Recent Accounting Pronouncements On January 1, 2021, the Company adopted new guidance to simplify the accounting for income taxes by, among other things, removing certain exceptions related to intra-period tax allocations, interim calculations and the recognition of deferred tax liabilities for outside basis differences. The guidance did not have a material impact on the Company's consolidated financial statements. In March 2020 and updated in January 2021, the FASB issued ASU 2020-04 and 2021-01, “ 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. 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. 56 Table of Contents 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 customer contracts are short-term in nature. The Company enters into master service agreements (MSAs) with customers that specify an overall framework and contract terms. 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 longer-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. Revenue by Category The following series of tables present the Company's disaggregated revenue: Revenue by industry was as follows: Year ended December 31, 2021 Services International Products & Systems Corp/Elim Total Oil & Gas $ 330,880 $ 35,232 $ 808 $ — $ 366,920 Aerospace & Defense 51,593 16,513 286 — $ 68,392 Industrials 41,873 24,000 1,842 — $ 67,715 Power Generation and Transmission 39,966 9,927 2,853 — $ 52,746 Other Process Industries 38,742 12,593 64 — $ 51,399 Infrastructure, Research & Engineering 16,809 11,496 3,985 — $ 32,290 Petrochemical 19,378 227 — — $ 19,605 Other 16,146 7,257 3,993 ( 9,332 ) $ 18,064 Total $ 555,387 $ 117,245 $ 13,831 $ ( 9,332 ) $ 677,131 57 Table of Contents Year ended December 31, 2020 Services International Products & Systems Corp/Elim Total Oil & Gas $ 279,723 $ 39,383 $ 377 $ — $ 319,483 Aerospace & Defense 50,813 18,166 1,292 — $ 70,271 Industrials 44,919 19,657 1,852 — $ 66,428 Power Generation and Transmission 30,005 7,559 2,323 — $ 39,887 Other Process Industries 24,671 10,029 171 — $ 34,871 Infrastructure, Research & Engineering 17,070 10,353 6,364 — $ 33,787 Petrochemical 18,882 345 53 — 19,280 Other 10,081 2,064 4,017 ( 7,598 ) $ 8,564 Total $ 476,164 $ 107,556 $ 16,449 $ ( 7,598 ) $ 592,571 Year ended December 31, 2019 Services International Products & Systems Corp/Elim Total Oil & Gas $ 364,830 $ 43,855 $ 756 $ — $ 409,441 Aerospace & Defense 51,390 41,224 1,237 — $ 93,851 Industrials 64,622 21,405 3,187 — $ 89,214 Power Generation and Transmission 30,300 10,289 2,726 — $ 43,315 Other Process Industries 28,495 10,196 418 — $ 39,109 Infrastructure, Research & Engineering 14,269 9,520 9,316 — $ 33,105 Petrochemical 25,985 592 — — 26,577 Other 15,239 7,190 943 ( 9,398 ) $ 13,974 Total $ 595,130 $ 144,271 $ 18,583 $ ( 9,398 ) $ 748,586 Revenue per key geographic location was as follows: Year ended December 31, 2021 Services International Products & Systems Corp/Elim Total United States $ 472,125 $ 912 $ 6,469 $ ( 4,284 ) $ 475,222 Other Americas 80,013 5,003 395 ( 1,768 ) 83,643 Europe 1,841 108,411 2,174 ( 2,812 ) 109,614 Asia-Pacific 1,408 2,919 4,793 ( 468 ) 8,652 Total $ 555,387 $ 117,245 $ 13,831 $ ( 9,332 ) $ 677,131 Year ended December 31, 2020 Services International Products & Systems Corp/Elim Total United States $ 406,437 $ 911 $ 7,551 $ ( 3,410 ) $ 411,489 Other Americas 68,150 4,581 550 ( 446 ) 72,835 Europe 904 99,953 3,154 ( 3,470 ) 100,541 Asia-Pacific 673 2,111 5,194 ( 272 ) 7,706 Total $ 476,164 $ 107,556 $ 16,449 $ ( 7,598 ) $ 592,571 Year ended December 31, 2019 Services International Products & Systems Corp/Elim Total United States $ 487,408 $ 631 $ 12,011 $ ( 4,918 ) $ 495,132 Other Americas 104,081 7,659 407 ( 407 ) 111,740 Europe 2,342 127,581 1,940 ( 3,978 ) 127,885 Asia-Pacific 1,299 8,400 4,225 ( 95 ) 13,829 Total $ 595,130 $ 144,271 $ 18,583 $ ( 9,398 ) $ 748,586 58 Table of Contents 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 for 2021 and 2020, that was included in the contract liability balance at the beginning of the year was $ 4.6 million and $ 4.6 million, respectively. Changes in the contract asset and liability balances during the years ended December 31, 2021 and 2020, were not impacted by any other factors. The Company applies the practical expedient to expense incremental costs incurred related to obtaining a contract when the asset that the Company otherwise would have recognized is one year or less. 3. Earnings per Share Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) 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. The following table sets forth the computations of basic and diluted earnings per share: For the year ended December 31, 2021 2020 2019 Basic earnings (loss) per share: Numerator: Net income (loss) attributable to Mistras Group, Inc. $ 3,860 $ ( 99,461 ) $ 6,060 Denominator Weighted average common shares outstanding 29,572 29,147 28,740 Basic earnings (loss) per share $ 0.13 $ ( 3.41 ) $ 0.21 Diluted earnings (loss) per share: Numerator: Net income (loss) attributable to Mistras Group, Inc. $ 3,860 $ ( 99,461 ) $ 6,060 Denominator Weighted average common shares outstanding 29,572 29,147 28,740 Dilutive effect of stock options outstanding 558 — 98 Dilutive effect of restricted stock units outstanding — — 208 30,130 29,147 29,046 Diluted earnings (loss) per share $ 0.13 $ ( 3.41 ) $ 0.21 The following potential common shares were excluded from the computation of diluted earnings per share, as the effect would have been anti- 59 Table of Contents dilutive: For the year ended December 31, 2021 2020 2019 Potential common stock attributable to restricted stock units (RSUs) and performance stock units (PSUs) outstanding (1) 109 790 42 Potential common stock attributable to stock options outstanding 5 5 5 Total 114 795 47 (1) For the year ended December 31, 2020, 254 shares related to RSUs/PSUs, were excluded from the calculation of diluted EPS due to the net loss for the period. 4. Accounts Receivable Accounts receivable consist of the following: December 31, 2021 2020 Trade accounts receivable $ 112,739 $ 115,841 Allowance for credit losses ( 3,228 ) ( 8,213 ) Accounts receivable, net $ 109,511 $ 107,628 The Company had $ 11.9 million and $ 11.9 million of unbilled revenues accrued as of December 31, 2021 and December 31, 2020, respectively, which is included within the trade accounts receivable balance above. Unbilled revenue is generally billed in the subsequent quarter to their revenue recognition. The Company considers unbilled receivables 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 filed a lawsuit to recover the $ 1.4 million and other amounts due to the Company and the customer filed a counterclaim, alleging breach of contract and seeking its damages. The Company recorded a full reserve for this receivable during 2019 and the status of this situation has not changed since 2019. See Note 18-Commitments and Contingencies for additional details. During the fourth quarter of 2021, the Company wrote off approximately $ 5 million of past due receivables related to work performed during 2019. The Company recorded a full reserve for these receivables in the prior years. 5. Inventories Inventories consist of the following: December 31, 2021 2020 Raw materials $ 4,794 $ 5,006 Work in progress 551 770 Finished goods 4,621 4,640 Consumable supplies 2,720 2,718 Inventories $ 12,686 $ 13,134 60 Table of Contents 6. Property, Plant and Equipment Property, plant and equipment consist of the following: December 31, Useful Life 2021 2020 (Years) Land $ 2,762 $ 2,724 Building and improvements 30 - 40 24,787 25,731 Office furniture and equipment 5 - 8 16,620 16,980 Machinery and equipment 5 - 7 250,166 237,253 294,335 282,688 Accumulated depreciation and amortization ( 207,757 ) ( 190,007 ) Property, plant and equipment, net $ 86,578 $ 92,681 Depreciation expense was approximately $ 25.2 million, $ 24.7 million, and $ 24.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. 7. Acquisitions Acquisitions During the year ended December 31, 2021, the Company completed one acquisition for a small NDT services company in Canada. The Company acquired 100 % of the common stock in exchange for approximately $ 0.4 million during the first quarter of 2021. The results of the acquisition's operations are included within the Services segment and are not material to the consolidated financial statements. The Company completed its acquisition accounting for this transaction in accordance with the acquisition method of accounting for business combinations during the year ended December 31, 2021. During September 2019, the Company completed one acquisition that provides pipeline integrity management software and services to energy transportation companies. The Company acquired all the equity interest of the acquired entity in exchange for aggregate consideration of $ 4.4 million in cash, contingent consideration of up to $ 4.3 million to be earned based upon the acquired business achieving specific performance metrics over the initial three years of operations from the acquisition date and working capital adjustments. The goodwill recorded is primarily attributable to expected synergies and is generally deductible for tax purposes. The Company accounted for this transaction in accordance with the acquisition method of accounting for business combinations. The following table summarizes the final fair value of the assets acquired and liabilities assumed and the Company's allocation of purchase price: 2019 Cash paid $ 4,380 Working capital adjustments $ ( 152 ) Fair value of contingent consideration $ 1,342 Total consideration $ 5,570 Current net assets $ 142 Other assets $ 34 Property, plant and equipment $ 65 Intangibles $ 3,594 Goodwill $ 1,735 Net assets acquired $ 5,570 61 Table of Contents Assets and liabilities of the acquired businesses were included in the consolidated balance sheet based on their respective estimated fair value on the date of acquisition as determined in a purchase price allocation, using available information and making assumptions management believes are reasonable. The amortization periods for the intangible assets acquired range from one year to eighteen years . Acquisition-Related expense In the course of its acquisition activities, the Company incurs costs in connection with due diligence, 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 recorded as acquisition-related expense, net, on the consolidated statements of income and were as follows for the years ended December 31, 2021, 2020 and 2019: For the year ended December 31, 2021 2020 2019 Due diligence, professional fees and other transaction costs $ 5 $ — $ 364 Adjustments to fair value of contingent consideration liabilities 1,128 337 511 Acquisition-related expense, net $ 1,133 $ 337 $ 875 The Company’s contingent consideration liabilities are recorded on the consolidated balance sheets in accrued expenses and other current liabilities and other long-term liabilities. 8. Goodwill The changes in the carrying amount of goodwill by segment is shown below: Services International Products and Systems Total Balance at December 31, 2019 $ 247,215 $ 35,195 $ — $ 282,410 Impairment charges ( 57,227 ) ( 19,862 ) — ( 77,089 ) Adjustments to preliminary purchase price allocations 200 — — 200 Foreign currency translation ( 76 ) 563 — 487 Balance at December 31, 2020 $ 190,112 $ 15,896 $ — $ 206,008 Impairment charges — — — — Adjustments to preliminary purchase price allocations 280 — — 280 Foreign currency translation 264 ( 1,113 ) — ( 849 ) Balance at December 31, 2021 $ 190,656 $ 14,783 $ — $ 205,439 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. 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 Consolidated Statements of Income (Loss) for the three months ended March 31, 2020. The Company performed a quantitative annual impairment test as of October 1, 2021 and the Company did not identify any changes in circumstances that would indicate the carrying value of 62 Table of Contents goodwill may not be recoverable. Additionally, through December 31, 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. The Company's cumulative goodwill impairment as of December 31, 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 carrying amount and accumulated amortization of intangible assets were as follows: December 31, 2021 2020 Useful Life (Years) Gross Amount Accumulated Amortization Net Carrying Amount Gross Amount Accumulated Amortization Impairment Net Carrying Amount Customer relationships 5 - 18 $ 112,109 $ ( 80,319 ) $ 31,790 $ 116,101 $ ( 75,649 ) ( 2,206 ) $ 38,246 Software/Technology 3 - 15 52,265 ( 26,415 ) 25,850 77,326 ( 23,519 ) ( 25,874 ) 27,933 Covenants not to compete 2 - 5 12,623 ( 12,390 ) 233 12,833 ( 12,162 ) ( 212 ) 459 Other 2 - 12 10,574 ( 9,066 ) 1,508 11,120 ( 8,614 ) ( 502 ) 2,004 Total $ 187,571 $ ( 128,190 ) $ 59,381 $ 217,380 $ ( 119,944 ) $ ( 28,794 ) $ 68,642 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 17-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 consolidated statements of income (loss) for the year ended December 31, 2020. Amortization expense for the years ended December 31, 2021, 2020 and 2019, was approximately $ 9.7 million, $ 11.0 million, and $ 14.3 million, respectively, including amortization of software/technology for these periods of $ 3.0 million, $ 3.6 million, and $ 5.6 million, respectively. 63 Table of Contents Amortization expense in each of the five years and thereafter subsequent to December 31, 2021 related to the Company’s intangible assets is expected to be as follows: Expected Amortization Expense 2022 $ 9,626 2023 8,786 2024 7,645 2025 5,627 2026 6,189 Thereafter 21,508 Total $ 59,381 10. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: December 31, 2021 2020 Accrued salaries, wages and related employee benefits $ 33,816 $ 30,214 Contingent consideration 1,830 1,300 Accrued workers' compensation and health benefits 3,994 3,948 Deferred revenues 6,202 6,538 Right-of-use liability - Operating 10,040 10,348 Pension accrual 2,519 2,519 Other accrued expenses 25,462 23,633 Total accrued expenses and other current liabilities $ 83,863 $ 78,500 11. Long-Term Debt Long-term debt consisted of the following: December 31, 2021 2020 Senior credit facility $ 119,500 $ 120,312 Senior secured term loan, net of unamortized debt issuance costs of $ 0.2 million and $ 0.3 million 76,673 89,745 Other 6,392 10,159 Total debt 202,565 220,216 Less: Current portion ( 20,162 ) ( 10,678 ) Long-term debt, net of current portion $ 182,403 $ 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. Pursuant to the Amendment described below, the revolving line of credit was reduced from $ 155 million to $ 150 million on December 31, 2021. 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. 64 Table of Contents • 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). • 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. • 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 year ended December 31, 2021, which was included in selling, general and administrative expenses on the 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 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 December 31, 2021, the Company had borrowings of $ 196.1 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 $ 0.9 million as of December 31, 2021, which is included in Other Assets on the consolidated balance sheet. As of December 31, 2021, the Company was in compliance with the terms of the Credit Agreement. The Company continuously monitors its compliance with the covenants contained in its Credit Agreement. The Company believes that it is probable, based on the amended covenants, that the Company will be able to comply with the financial covenants in the Credit Agreement as modified by the Amendment 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 bank financing provided at the local subsidiary level used to support working capital requirements and fund capital expenditures. At December 31, 2021, there was an aggregate of approximately $ 6.4 million outstanding, payable at various times through 2030. Monthly payments ran ge from $ 1 thousand to $ 18 thousand and interest rates range from 0.4 % to 3.5 %. Scheduled principal payments due under all borrowing agreements in each of the five years and thereafter subsequent to December 31, 2021 are as follows: 2022 $ 20,180 2023 178,862 2024 1,184 2025 726 2026 386 Thereafter 1,227 Total $ 202,565 65 Table of Contents 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. The three levels of the hierarchy are defined as follows: Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 — Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data. Level 3 — Unobservable inputs reflecting the Company’s own assumptions about inputs that market participants would use in pricing the asset or liability based on the best information available. 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. The following table represents the changes in the fair value of Level 3 contingent consideration: December 31, 2021 2020 Balance at the beginning of the period: $ 1,640 $ 3,216 Acquisitions — 200 Payments ( 938 ) ( 2,091 ) Accretion of liability — 35 Revaluation 1,128 302 Foreign currency translation — ( 22 ) Balance at the end of the period: $ 1,830 $ 1,640 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. Share-Based Compensation 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 million, for a total of 3.7 million shares that may be issued under the 2016 Plan, of which 1,176,888 shares were available for future grants as of December 31, 2021. As of December 31, 2021, there was an aggregate of approximately 5,000 stock options outstanding under the 2009 Plan. 66 Table of Contents Stock Options For each of the years ended December 31, 2021, 2020 and 2019, 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 awards. Cash proceeds from, and the intrinsic value of, stock options exercised during the years ended December 31, 2021, 2020 and 2019 were as follows (in thousands): For the year ended December 31, 2021 2020 2019 1 Cash proceeds from options exercised $ — $ — $ 32 Aggregate intrinsic value of options exercised $ — $ — $ 4,530 ____________________ 1 During 2019, 2.1 million stock options were net exercised, wherein the option holders surrendered a portion of the underlying stock option awards to pay the exercise price and required minimum tax withholding. The following table sets forth a summary of the stock option activity, weighted-average exercise prices and options outstanding as of December 31, 2021, 2020 and 2019 is as follows (in thousands, except per share amounts and years): For the years ended December 31, 2021 2020 2019 Common Stock Options Weighted Average Exercise Price Common Stock Options Weighted Average Exercise Price Common Stock Options Weighted Average Exercise Price Outstanding at beginning of year: 5 $ 22.35 5 $ 22.35 2,105 $ 13.47 Granted — $ — — $ — — $ — Exercised — $ — — $ — ( 2,093 ) $ 13.45 Expired or forfeited — $ — — $ — ( 7 ) $ 10.00 Outstanding at end of year: 5 $ 22.35 5 $ 22.35 5 $ 22.35 December 31, 2021 Options Outstanding Options Exercisable Exercise Price Total Options Outstanding Weighted Average Remaining Life (Years) Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price 22.35 5 0.2 $ 22.35 5 $ 22.35 Aggregate Intrinsic Value $ — $ — Restricted Stock Unit Awards Restricted Stock Units generally vest ratably on each of the first four anniversary dates of issuance. The Company recognized approximately $ 3.5 million, $ 4.4 million and $ 4.0 million of share-based compensation for the years ended December 31, 2021, 2020 and 2019, respectively, related to restricted stock unit awards. As of December 31, 2021, there were approximately $ 5.8 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which are expected to be recognized over a remaining weighted average period of 2.5 years. Upon vesting, restricted stock units are generally net share-settled to cover the required minimum withholding tax and the remaining amount is converted into an equivalent number of shares of common stock. 67 Table of Contents A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows: For the year ended December 31, 2021 2020 2019 Restricted stock awards vested 317 208 172 Fair value of awards vested $ 3,434 $ 837 $ 2,495 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: For the year ended December 31, 2021 2020 2019 Awards issued 51 68 30 Grant date fair value of awards issued $ 525 $ 326 $ 450 A summary of the Company's outstanding, non-vested restricted share units is as follows: For the year ended December 31, 2021 2020 2019 Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Outstanding at beginning of period: 1,076 $ 7.41 559 $ 16.92 443 $ 20.55 Granted 528 $ 10.07 782 $ 3.79 339 $ 14.04 Released ( 317 ) $ 10.77 ( 208 ) $ 18.71 ( 172 ) $ 20.38 Forfeited ( 79 ) $ 8.82 ( 57 ) $ 9.62 ( 51 ) $ 17.71 Outstanding at end of period: 1,208 $ 7.96 1,076 $ 7.41 559 $ 16.92 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 metrics 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 68 Table of Contents 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 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 presented as follows: For the year ended December 31, 2021 2020 2019 Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Outstanding at beginning of period: 333 $ 8.84 260 $ 16.77 277 $ 17.80 Granted 189 $ 12.59 292 $ 3.68 190 $ 13.63 Performance condition adjustments, net ( 56 ) $ 9.27 ( 99 ) $ 3.82 ( 106 ) $ 13.77 Released ( 78 ) $ 8.15 ( 120 ) $ 17.29 ( 101 ) $ 17.19 Forfeited — $ — — $ — — $ — Outstanding at end of period: 388 $ 10.07 333 $ 8.84 260 $ 16.77 For the year ended December 31, 2021, 189,000 PRSUs were granted. There was a 56,000 net unit reduction to these awards, which represents Company performance against target, during the year ended December 31, 2021. For the year ended December 31, 2020, 292,000 PRSUs were granted. There was a 99,000 unit reduction to these awards, which represents Company performance against target, (including an increase of 1,000 units due to the Compensation Committee approving the final calculation of the award metrics for calendar year 2019), during the year ended December 31, 2020. For the year ended December 31, 2019, 190,000 PRSUs were granted. There was a 103,000 unit reduction to these awards, which represents Company performance below target, during the year ended December 31, 2019. As of December 31, 2019, the aggregate liability related to 29,000 outstanding discretionary PRSUs was less than $ 0.1 million and is classified within Accrued expenses and other liabilities on the consolidated balance sheet. Compensation expense related to all PRSUs described above was $ 1.4 million, $ 1.2 million, and $ 1.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. At December 31, 2021, there was $ 2.0 million of total unrecognized compensation costs related to approximately 388,000 unvested performance restricted stock units. These costs are expected to be recognized over a weighted-average period of approximately 2.2 years. For the years ended December 31, 2021, 2020 and 2019, the income tax benefit recognized on all share based compensation arrangements referenced above was approximately $ 1.4 million, $ 0.6 million, and $ 2.1 million, respectively. 14. Income Taxes Income (loss) before provision for income taxes is as follows: 69 Table of Contents For the year ended December 31, 2021 2020 2019 Income (loss) before provision for income taxes from: U.S. operations $ 1,527 $ ( 54,190 ) $ 7,334 Foreign operations 5,761 ( 59,982 ) 3,105 Income (loss) before income taxes $ 7,288 $ ( 114,172 ) $ 10,439 The provision for income taxes consists of the following: For the year ended December 31, 2021 2020 2019 Current Federal $ ( 182 ) $ ( 6,278 ) $ 2,712 States and local 246 528 519 Foreign 3,641 4,006 4,572 Reserve for uncertain tax positions ( 186 ) ( 28 ) 99 Total current provision (benefit) 3,519 ( 1,772 ) 7,902 Deferred Federal ( 309 ) ( 2,781 ) 315 States and local ( 138 ) ( 1,244 ) ( 32 ) Foreign ( 1,884 ) ( 10,045 ) ( 4,095 ) Reserve for uncertain tax positions 155 — — Total deferred provision (benefit) ( 2,176 ) ( 14,070 ) ( 3,812 ) Net change in valuation allowance 2,052 1,136 269 Net deferred provision (benefit) ( 124 ) ( 12,934 ) ( 3,543 ) Total provision (benefit) for income taxes $ 3,395 $ ( 14,706 ) $ 4,359 The provision (benefit) for income taxes differs from the amount computed by applying the statutory federal tax rate to income tax as follows: For the years ended December 31, 2021 2020 2019 Federal tax at statutory rate $ 1,527 21.0 % $ ( 23,976 ) 21.0 % $ 2,192 21.0 % State taxes, net of federal benefit 75 1.0 % ( 1,175 ) 1.0 % 377 3.6 % Foreign tax 380 5.2 % ( 815 ) 0.7 % 982 9.4 % Goodwill impairment — — % 10,003 ( 8.8 ) % — — % Nondeductible compensation 119 1.6 % 975 ( 0.9 ) % 1,581 15.2 % US taxation of foreign earnings ( 1,041 ) ( 14.3 ) % 56 — % 213 2.0 % Permanent differences 373 5.1 % 944 ( 0.8 ) % 464 4.4 % Federal loss carryback — — % ( 1,938 ) 1.7 % — — % Change in valuation allowance 2,052 28.2 % 1,136 ( 1.0 ) % 269 2.6 % Impact of foreign tax rate changes 49 0.7 % 392 ( 0.3 ) % ( 1,882 ) ( 18.0 ) % Other ( 139 ) ( 1.9 ) % ( 308 ) 0.3 % 163 1.6 % Total provision (benefit) for income taxes $ 3,395 46.6 % $ ( 14,706 ) 12.9 % $ 4,359 41.8 % The permanent differences identified above include normal recurring differences, such as meals, entertainment and parking fringe benefits as well as a portion of the goodwill impairment charge. 70 Table of Contents On December 22, 2017, the United States enacted fundamental changes to the federal tax law following the passage of the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act is complex and significantly changes the U.S. corporate tax system by, among other things, (a) reducing the federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, (b) replacing the prior system of taxing corporations on foreign earnings of their foreign subsidiaries when the earnings are repatriated with a partial territorial tax system that provides a 100% dividends-received deduction (DRD) to domestic corporations for foreign-sourced dividends received from 10%-or-more owned foreign corporations, (c) subjecting certain unrepatriated foreign earnings to a mandatory one-time transition tax on post-1986 earnings and profits ("the transition tax"), and (d) further limiting a public entity's ability to deduct compensation in excess of $1 million for covered employees. On June 28, 2019, the Canadian province of Alberta enacted the Job Creation Tax Cut which reduced the Alberta corporate income tax rate from 12% to 11% starting in 2019 with further annual reductions to 10% in 2020, 9% in 2021, and 8% in 2022. This rate reduction had a favorable impact of approximately $ 1.9 million on the Company’s net deferred tax liabilities in this jurisdiction in 2019. As part of Alberta’s Recovery plan associated with the COVID-19 pandemic, Alberta accelerated the decrease in income tax rates from 10% in 2020 to 8% effective July 1, 2020. The accelerated tax rate reduction did not have a material impact on the Company’s net deferred tax liabilities but did reduce current taxes. On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act is an approximately $2 trillion emergency economic stimulus package in response to the Coronavirus outbreak, which among other things contains numerous income tax provisions. Some of these tax provisions are effective retroactively for years ending before the date of enactment. The CARES Act provides a five-year carryback of net operating losses generated in years 2018 through 2020. As the statutory federal income tax rate applicable to certain years within the carryback period is 35%, carryback to those years of our estimated 2020 annual federal tax loss provides a tax benefit in excess of the current federal statutory rate of 21%, resulting in an increased income tax benefit of $ 1.9 million. The Company expects that the income tax effects of the CARES Act will result in a cash refund of approximately $ 4.9 million in 2021 of taxes paid in prior years. On December 27, 2020, the United States enacted the Consolidated Appropriations Act, 2021, (the "Appropriations Act") an additional stimulus package providing financial relief for individuals and small business. The Appropriations Act contains a variety of tax provisions, including full expensing of business meals in 2021 and 2022, and expansion of the employee retention tax credit. The Company does not currently expect the Appropriations Act to have a material impact on our consolidated financial position, results of operations, and cash flows . In response to the COVID-19 pandemic, the American Rescue Plan Act was signed into law on March 11, 2021. This act, among other things, provides economic relief provisions to individuals and funding to certain businesses and programs. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations, and cash flows, but does not expect it to have a material impact. 71 Table of Contents Deferred income tax attributes resulting from differences between financial accounting amounts and income tax basis of assets and liabilities are as follows: December 31, 2021 2020 Deferred income tax assets Allowance for doubtful accounts $ 677 $ 1,054 Inventory 567 459 Intangible assets 1,733 2,000 Accrued expenses 5,662 6,818 Net operating loss carryforward 6,303 4,190 Finance lease obligations 741 942 Deferred stock based compensation 996 920 Interest carryforward 618 — Right-of-use liability 10,786 11,970 Credits 409 312 Other 1,353 1,507 Deferred income tax assets 29,845 30,172 Valuation allowance ( 6,340 ) ( 4,540 ) Net deferred income tax assets 23,505 25,632 Deferred income tax liabilities Property and equipment ( 8,157 ) ( 9,109 ) Goodwill ( 5,819 ) ( 4,639 ) Intangible assets ( 4,935 ) ( 6,058 ) Right-of-use asset ( 10,738 ) ( 11,924 ) Other ( 67 ) ( 69 ) Deferred income tax liabilities ( 29,716 ) ( 31,799 ) Net deferred income taxes ( 6,211 ) ( 6,167 ) As of December 31, 2021, the Company had federal net operating loss carry forwards (NOLs) of approximately $ 7.7 million expiring in 2032 which may be used subject to limitation under Internal Revenue Code section 382. In addition, as of December 31, 2021, the Company had state and foreign NOLs of $ 17.6 million and $ 12.8 million, respectively. Approximately $ 11.1 million of the state NOLs expire at various times from 2031 to 2040, while the remainder of the Company's state NOLs do not expire. Approximately $ 0.6 million of the foreign NOLs expire at various times from 2023 to 2040, while the remainder of the Company's foreign NOLs do not expire. In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Valuation allowances are provided when management believes the Company's deferred tax assets are not recoverable based on future reversals of existing taxable temporary differences, taxable income in prior carryback year(s) if carryback is permitted under the tax law, and an assessment of estimated future taxable income, exclusive of reversing temporary differences and carryforwards, that incorporates ongoing, prudent and feasible tax planning strategies. At December 31, 2021 and December 31, 2020, the Company has a valuation allowance of approximately $ 6.3 million and $ 4.5 million, respectively, primarily against certain state and foreign NOLs and other specific deferred tax assets. The valuation allowance as of December 31, 2020, also applied against capital losses generated by the disposals of certain foreign subsidiaries. These losses expired in 2020, so no valuation allowance remains as of December 31, 2021. The net increase in the valuation allowance of approximately $ 1.8 million is primarily attributable to state and foreign net operating losses and changes in foreign exchange rates, offset by a reduction of expiring losses. Except for those deferred tax assets subject to the valuation allowance, management believes that it will realize all deferred tax assets as a result of sufficient future taxable income in each tax jurisdiction in which the Company has deferred tax assets. 72 Table of Contents The following table summarizes the changes in the Company’s gross unrecognized tax benefits, excluding interest and penalties: For the year ended December 31, 2021 2020 Balance at beginning of period $ 347 $ 393 Additions for tax positions related to the current fiscal period 155 — Additions for tax positions related to prior years 1 32 Impact of foreign exchange fluctuation — ( 5 ) Reductions related to the expiration of statutes of limitations ( 203 ) ( 73 ) Balance at end of period $ 300 $ 347 The Company has recorded the unrecognized tax benefits in other long-term liabilities in the consolidated balance sheets. As of December 31, 2021 and December 31, 2020, there were approximately $ 0.3 million and $ 0.3 million of unrecognized tax benefits, respectively, including penalties and interest. If the Company recognized these unrecognized tax benefits, approximately $ 0.3 million and $ 0.2 million would favorably affect the effective tax rate for both December 31, 2021 and December 31, 2020, respectively. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense and are not significant for the years ended December 31, 2021, 2020 and 2019. The Company anticipates a decrease to its unrecognized tax benefits of $ 0.1 million excluding interest and penalties within the next 12 months. The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years ending before December 31, 2017 and generally is no longer subject to state, local or foreign income tax examinations by tax authorities for years ending before December 31, 2016. Net income (loss) of foreign subsidiaries was $ 3.7 million, $( 55.7 ) million, and $ 2.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. Generally, it has been the Company's practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations. As previously noted, the Tax Act made significant changes to the taxation of undistributed earnings, requiring that all previously untaxed earnings and profits of the Company's controlled foreign operations be subjected to the transition tax. Since these earnings have now been subjected to U.S. federal tax, they would only be potentially subject to limited other taxes, including foreign withholding and certain state taxes. As of December 31, 2021, the Company has no t recognized a deferred tax liability for foreign withholdings and state taxes on its undistributed international earnings or losses of its foreign subsidiaries since it intends to indefinitely reinvest the earnings outside the United States. The Company has estimated that the amount of the unrecorded deferred tax liability related to undistributed international earnings is approximately $ 1.5 million. 15. Employee Benefit Plans The Company provides a 401(k) savings plan for eligible U.S. based employees. Employee contributions are discretionary up to the IRS limits each year and catch up contributions are allowed for employees 50 years of age or older. Under the 401(k) plan, employees become eligible to participate on the first day of the month after three months of continuous service. Under this plan, the Company matches 50 % of the employee’s contributions up to 4 % of the employee’s annual compensation, as defined by the plan. There is a five-year vesting schedule for the Company match. During the third quarter of 2021, the Company re-installed the employer match which was previously suspended as part of the Company's cost reduction initiatives undertaken in 2020 due to the COVID-19 pandemic. The Company’s contribution to the plan was $ 1.2 million, $ 1.1 million, and $ 4.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. The Company's subsidiary participated with other employers in contributing to the Boilermaker-Blacksmith National Pension Trust (EIN 48-6168020) (“Boilermakers”) and Plumbers and Pipefitters National Pension Fund (EIN 52-6152779) (“Pipefitters”), multi-employer defined benefit pension plans, which covers certain U.S. based union employees. The plans provide multiple plan benefits with corresponding contribution rates that are collectively bargained between participating employers and their affiliated Boilermakers and Pipefitters local unions. Both the Boilermakers and Pipefitters plans are approximately 70 percent funded as of the latest Form 5500 filed, respectively. The Company did no t make any contributions to the Boilermakers during the years ended December 31, 2021 and 2020 while making de minimis contributions to the Pipefitters plan during the same periods. See Note 18-Commitments and Contingencies, Pension Related Contingencies, for additional detail. 73 Table of Contents The Company has other benefit plans covering certain employees throughout the Company. Amounts charged to expense under these plans were not significant in any year. 16. Related Party Transactions The Company leases its headquarters under an operating lease from a shareholder and officer of the Company. On August 1, 2014, the Company extended its lease at its headquarters requiring monthly payments through October 2024. Total rent payments made during the year ended December 31, 2021 were approximately $ 1.3 million. See 17-Leases for further detail. The Company receives benefits consulting services from Capital Management Enterprise (“CME”). Manuel N. Stamatakis, one of the Company's non-employee directors, is the Chief Executive Officer of CME. The Company does no t pay any fees to CME and, any compensation CME receives related to work for the Company is received by commissions paid by the third-party benefit providers. 17. Leases The Company leases certain office and operating facilities, machinery, equipment, and vehicles. Concurrent with the adoption of ASC 842, the Company recognized a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term for each lease agreement. The Company elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less and will continue to recognize lease expense for these leases on a straight-line basis over the lease term. The Company has leases with both lease components and non-lease components, such as common area maintenance, utilities, or other repairs and maintenance. For all asset classes, the Company decided to utilize the practical expedient to include both fixed lease components and fixed non-lease components in calculating the ROU asset and lease liability. The Company identified variable lease payments, such as maintenance payments based on actual activities performed or costs incurred, at lease commencement by assessing the nature of the payment provisions, including whether the payments are subject to a minimum charge. Many of the Company's leases include one or more options to renew. When it is reasonably certain that the Company will exercise the option, the Company will include the impact of the option in the lease term for purposes of determining future lease payments. As the Company is unable to determine the discount rate implicit in its lease agreements, the Company uses its incremental borrowing rate on the commencement date to calculate the present value of future payments. The Company’s Consolidated Balance Sheets include the following related to operating leases as of December 31, 2021 and 2020: Leases Classification 2021 2020 Assets: ROU assets Other Assets $ 42,451 $ 46,728 Liabilities: ROU liability - current Accrued and other current liabilities $ 10,040 $ 10,348 ROU liability - long-term Other liabilities 34,030 37,689 Total ROU liabilities $ 44,070 $ 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 is approximately $ 2.9 million as of December 31, 2021 and $ 3.8 million as of December 31, 2020. Total rent payments for this facility were approximately $ 1.3 million and $ 0.7 million during the years ended December 31, 2021 and 2020. 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 lease concessions. As of December 31, 2021 and 2020, the total ROU assets attributable to finance leases are approximately $ 13.8 million and $ 15.8 million, respectively, which is included in Property, plant, and equipment, net on the 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 74 Table of Contents the Services segment which is included in Impairment charges on the consolidated statements of income (loss) for the year ended December 31, 2020. The components of lease costs for the year ended December 31, 2021 and 2020 are as follows: Classification 2021 2020 Finance lease expense: Amortization of ROU assets Depreciation and amortization $ 4,111 $ 4,544 Interest on lease liabilities Interest expense 721 847 Operating lease expense Cost of revenue; Selling, general & administrative expenses 13,042 13,383 Short-term lease expense Cost of revenue; Selling, general & administrative expenses 27 66 Variable lease expense Cost of revenue; Selling, general & administrative expenses 2,507 838 Total $ 20,408 $ 19,678 Additional information related to leases as of December 31, 2021 and 2020 is as follows: 2021 2020 Cash paid for amounts included in the measurement of lease liabilities for finance and operating leases: Finance - financing cash flows $ 4,060 $ 4,095 Finance - operating cash flows 721 847 Operating - operating cash flows 13,098 13,246 ROU assets obtained in the exchange for lease liabilities: Finance leases $ 2,923 2,849 Operating leases 7,021 9,934 Weighted-average remaining lease term (in years): Finance leases 5.4 5.7 Operating leases 5.3 5.8 Weighted-average discount rate: Finance leases 5.3 % 5.7 % Operating leases 5.7 % 5.7 % Maturities of lease liabilities as of December 31, 2021 is as follows: Finance Operating 2022 $ 5,544 $ 12,078 2023 3,817 10,602 2024 2,887 8,418 2025 1,296 6,049 2026 646 4,926 Thereafter 441 8,580 Total 14,631 50,653 Less: Present value discount 1,114 6,583 Lease liability $ 13,517 $ 44,070 18. Commitments and Contingencies Legal Proceedings and Government Investigations 75 Table of Contents The Company is periodically involved in 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 for possible losses from the matters described below, the Company does not believe that any currently pending or threatened legal proceeding to which the Company is or is likely to become a party will have a material adverse effect on its business, results of operations, cash flows or financial condition. The costs incurred by the Company to defend lawsuits, investigations and claims and amounts the Company pays to other parties because of these matters may be covered by insurance in some circumstances. 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, 2021 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 no t 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. The two cases have been consolidated and 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 of all claims in the cases, which was more formally documented pursuant to a settlement agreement completed October 5, 2021. Pursuant to the settlement, 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 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 December 31, 2021 is approximately $ 2.6 million, $ 2.5 million of which were incurred in 2018 and 2019 and $ 0.1 million of which were incurred in the three months ended December 31, 2021. 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 December 31, 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 $ 0.4 million in payments made and $ 1.0 million in reversals due to employees being transitioned to customer contracts. 76 Table of Contents 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 December 31, 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 twelve months . 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. On August 3, 2021, the parties amended the agreement and extended the period by 12 months . As of December 31, 2021, approximately $ 1.0 million is remaining on the amended purchase commitment. The agreement is based on third party pricing and the Company's planned purchase requirements over the duration of the extension to meet the minimum contractual purchases. 19. 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. Software, digital and data services 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. 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-Summary of Significant Accounting Policies and Practices . 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. 77 Table of Contents Selected consolidated financial information by segment for the periods shown was as follows (with intercompany transactions eliminated in Corporate and eliminations): For the year ended December 31, 2021 2020 2019 Revenue Services $ 555,387 $ 476,164 $ 595,130 International 117,245 107,556 144,271 Products and Systems 13,831 16,449 18,583 Corporate and eliminations ( 9,332 ) ( 7,598 ) ( 9,398 ) $ 677,131 $ 592,571 $ 748,586 For the year ended December 31, 2021 2020 2019 Gross profit Services $ 155,384 $ 141,084 $ 165,513 International 34,282 31,046 43,145 Products and Systems 7,001 6,826 8,639 Corporate and eliminations 480 ( 425 ) — $ 197,147 $ 178,531 $ 217,297 Income (loss) from operations by operating segment includes intercompany transactions, which are eliminated in Corporate and eliminations . For the year ended December 31, 2021 2020 2019 Income (loss) from operations Services $ 48,458 $ ( 44,222 ) $ 49,593 International 1,839 ( 21,855 ) 5,856 Products and Systems ( 117 ) ( 936 ) ( 529 ) Corporate and eliminations ( 32,010 ) ( 34,204 ) ( 30,783 ) $ 18,170 $ ( 101,217 ) $ 24,137 For the year ended December 31, 2021 2020 2019 Depreciation and amortization Services $ 25,259 $ 26,093 $ 28,854 International 8,791 8,659 8,285 Products and Systems 928 998 1,213 Corporate and eliminations ( 57 ) ( 45 ) 181 $ 34,921 $ 35,705 $ 38,533 December 31, 2021 2020 Intangible assets, net Services $ 51,862 $ 58,917 International 6,344 8,664 Products and Systems 1,042 1,012 Corporate and eliminations 133 49 $ 59,381 $ 68,642 78 Table of Contents December 31, 2021 2020 Total assets Services $ 424,058 $ 427,636 International 111,619 129,228 Products and Systems 10,532 10,996 Corporate and eliminations 15,986 15,453 $ 562,195 $ 583,313 December 31, 2021 2020 Long-lived assets United States $ 183,052 $ 187,251 Other Americas 120,012 123,924 Europe 48,334 56,156 $ 351,398 $ 367,331 Refer to Note 2-Revenue , for revenues by segment and by geographic area for the years ended December 31, 2021, 2020, and 2019. 20. Selected Quarterly Financial Information (unaudited) The following is a summary of the quarterly results of operations for calendar years 2021, 2020, and 2019. Quarter ended December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Revenue $ 171,163 $ 174,556 $ 177,677 $ 153,735 Gross Profit 49,594 52,216 55,336 40,001 Income (loss) from operations 2,306 9,236 11,374 ( 4,746 ) Net income (loss) attributable to Mistras Group, Inc. $ ( 94 ) $ 3,380 $ 5,937 $ ( 5,362 ) Earnings (loss) per common share: Basic $ 0.00 $ 0.11 $ 0.20 $ ( 0.18 ) Diluted $ 0.00 $ 0.11 $ 0.20 $ ( 0.18 ) Quarter ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Revenues $ 160,777 $ 147,894 $ 124,435 $ 159,465 Gross Profit 49,345 47,384 41,158 40,644 Income (loss) from operations 4,652 5,742 ( 383 ) ( 111,228 ) Net income (loss) attributable to Mistras Group, Inc. $ 181 $ 1,523 $ ( 2,656 ) $ ( 98,509 ) Earnings (loss) per common share: Basic $ 0.01 $ 0.05 $ ( 0.09 ) $ ( 3.40 ) Diluted $ 0.01 $ 0.05 $ ( 0.09 ) $ ( 3.40 ) 79 Table of Contents Quarter ended December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 Revenues $ 178,991 $ 192,192 $ 200,616 $ 176,787 Gross Profit 50,583 57,769 60,071 48,874 Income (loss) from operations 2,335 10,779 15,419 ( 4,396 ) Net income (loss) attributable to Mistras Group, Inc. $ 829 $ 3,093 $ 7,431 $ ( 5,293 ) Earnings (loss) per common share: Basic $ 0.03 $ 0.11 $ 0.26 $ ( 0.19 ) Diluted $ 0.03 $ 0.11 $ 0.26 $ ( 0.19 ) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.