What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-03 · 96 added, 136 removed, 169 unchanged (58% of the section changed)

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

The following Management’s Discussion and Analysis (“MD&A”) provides a discussion of our results of operations and financial position for the three and nine months ended September 30, 2021 and 2020.

The following Management’s Discussion and Analysis (“MD&A”) provides a discussion of our results of operations and financial position for the three months ended March 31, 2022 and 2021.

The MD&A should be read together with our Unaudited Condensed Consolidated Financial Statements and related notes included in Item 1 in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 14, 2022 (“2021 Annual Report”).

14 unchanged sentences

Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those discussed in the “Business—Forward-Looking Statements,” and “Risk Factors” sections of our 2021 Annual Report as well as those discussed in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

At the time of this report, the COVID-19 pandemic is continuing to have a negative impact on us and our key markets and is causing ongoing economic disruption worldwide, although the Company has nevertheless begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas.

At the time of this report, the COVID-19 pandemic is continuing to have a negative impact on us and our key markets and is causing significant economic disruption worldwide, although the Company has nevertheless begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas.

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

The Company is 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.

To date, the Company's European operations have begun to see increased costs associated with higher energy costs, among others, due in part to the on-going conflict.

The Company will continue to monitor market conditions and respond accordingly.

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

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

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

inspecting components that are trusted for commercial, defense, and space craft;

and building real-time monitoring equipment to enable safe travel across bridges, the Company helps the world at large.

Mistras Group, Inc.

2 unchanged sentences

(tabular dollars are in thousands)

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.

22 unchanged sentences

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

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

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

This tool provides additional growth and expansion of our

Mistras Group, Inc.

2 unchanged sentences

(tabular dollars are in thousands)

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

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

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

This tool provides additional growth and expansion of our capabilities to serve both new and existing wind turbines and greatly enhances our product offerings within the renewable energy industry.

Recent Developments

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

The COVID-19 coronavirus (COVID-19) pandemic has continued to cause disruption and volatility in domestic and international markets although conditions continue to improve during 2022 as compared to 2021.

The Company's businesses have been classified as non-healthcare critical infrastructure as defined by the U.S.

6 unchanged sentences

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

While we cannot fully assess the impact that the COVID-19 pandemic or the significant volatility in oil prices will continue to have on our operations at this time, there are certain impacts that we have identified resulting in impairment charges in 2020.

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

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

Our cash position and liquidity remains strong.

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

As of March 31, 2022, the cash balance was approximately $19.9 million.

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

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

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

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

10 unchanged sentences

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

We believe investors and other users of our financial

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

Income (loss) before special items excludes the identified adjustments, which provides additional tools to compare our core business operating

Mistras Group, Inc.

2 unchanged sentences

(tabular dollars are in thousands)

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

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

performance on a consistent basis and measure underlying trends and results in our business.

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

Results of Operations

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

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

2021 2020 2021 2020

Condensed consolidated results of operations for the three months ended March 31, 2022 and 2021 were as follows:

Three months ended March 31,

Revenues $ 161,662 $ 153,735

1 unchanged sentence

Gross profit as a % of Revenue 24.7 % 26.0 %

Income (loss) from operations 9,236 5,742 15,864 (105,869)

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

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

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

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

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

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

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

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

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

Loss from operations (4,698) (4,746)

Loss from Operations as a % of Revenue (2.9) % (3.1) %

Loss before benefit for income taxes (6,636) (7,959)

Net Loss (5,353) (5,359)

Net Loss attributable to Mistras Group, Inc.

$ (5,363) $ (5,362)

Revenue was $161.7 million for the three months ended March 31, 2022, an increase of $7.9 million, or 5.2%, compared with the three months ended March 31, 2021.

Revenue by segment for the three months ended March 31, 2022 and 2021 were as follows:

Three months ended March 31,

Services $ 132,946 $ 124,298

2 unchanged sentences

Corporate and eliminations (2,358) (1,199)

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

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

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

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

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

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

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

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

Total $ 161,662 $ 153,735

In the three months ended March 31, 2022, total revenue increased 5.2% versus the prior year comparable period due predominantly to a single-digit organic increase.

Services segment revenue increased 7.0%, driven predominantly by a single-digit organic increase, minimally offset by low single-digit unfavorable impact of foreign exchange rates.

International segment revenue increased 1.8%, due predominantly to high single-digit organic growth mostly offset by high single-digit unfavorable impact of foreign exchange rates.

Products and Systems segment revenue decreased by 1.7%, due to reduced sales volume as compared to the prior period.

Oil and gas customer revenue comprised approximately 58% and 57% of total revenue for the three months ended March 31, 2022 and 2021, respectively.

Aerospace and defense customer revenue comprised approximately 12% and 11% of total revenue for the three months ended March 31, 2022 and 2021, respectively.

The Company’s top ten customers comprised approximately 34% of total revenue for the three months ended March 31, 2022, as compared to 35% for the three months ended March 31, 2021, with no customer accounting for 10% or more of total revenue in either three-month period.

Mistras Group, Inc.

2 unchanged sentences

(tabular dollars are in thousands)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2021 2020 2021 2020

Three months ended March 31,

Oil and Gas Revenue by sub-category

Upstream $ 41,665 $ 33,926

Midstream 24,907 22,438

Downstream 27,651 30,848

Total $ 94,223 $ 87,212

Oil and gas upstream customer revenue increased approximately $7.7 million, or 23%, due primarily to market share gains and expanded exploration operations compared to the prior period.

Midstream customer revenues increased approximately $2.5 million, or 11%, due to increased pipe inspection services performed as compared to the prior year quarter.

Downstream customer revenues decreased $3.2 million or, 10%, primarily due to delays in timing associated with customer turnarounds.

Gross profit decreased by $0.1 million, or 0.3%, in the three months ended March 31, 2022 versus the prior year comparable period, on a increase in revenue of 5.2%.

Gross profit by segment for the three months ended March 31, 2022 and 2021 was as follows:

Three months ended March 31,

Services $ 30,526 $ 31,076

7 unchanged sentences

% of total revenue 24.7 % 26.0 %

Gross profit margin was 29.9% and 32.0% for the three-month periods ended September 30, 2021 and 2020, respectively.

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

Gross profit margin was 29.2% and 29.9% for the nine months ended September 30, 2021 and 2020, respectively.

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

Gross profit margin was 24.7% and 26.0% for the three-month periods ended March 31, 2022 and 2021, respectively.

Services segment realized a 2.0% reduction in gross profit margin to 23.0% during the three months ended March 31, 2022.

This was primarily due to higher benefit costs in the US and the end of government wage subsidies received in Canada, both as compared to the prior year period.

International segment realized a 1.5% increase in gross profit margin to 29.1% during the three months ended March 31, 2022 due primarily to continued recovery and sales within the aerospace end market.

Products and Systems segment gross margin had a decrease of 310 basis points to 39.8% during the three months ended March 31, 2022 due to unfavorable sales mix, as compared to gross margin of 42.9% during 2021.

Mistras Group, Inc.

3 unchanged sentences

Operating Expenses

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

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

2021 2020 2021 2020

Operating expenses for the three months ended March 31, 2022 and 2021 was as follows:

Three months ended March 31,

Operating Expenses

Selling, general and administrative expenses $ 42,036 $ 39,639

Impairment charges — — — 106,062

Research and engineering 551 727

Depreciation and amortization 2,795 3,074

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

Acquisitions-related expense 246 709 1,068 186

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

Selling, general and administrative expenses increased $1.7 million during the three months ended September 30, 2021 compared to the three months ended September 30, 2020, due to the Company reinstating several of the temporary cost reduction initiatives undertaken during 2020 in response to the COVID-19 pandemic, as further detailed in the Recent Developments section above.

This increase was partially offset by foreign currency exchange losses.

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

Operating expenses decreased $103.4 million, or 44%, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, due predominantly to impairment charges of $106.1 million in 2020 as more fully described in Note 8– Goodwill and Note 9– Intangible Assets included in the Notes to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.

Excluding the 2020 impairment charges, operating expenses increased $2.7 million due to the Company reinstating several of the temporary cost reduction initiatives undertaken during 2020 in response to the COVID-19 pandemic, as further detailed in the Recent Developments section above, as well as a $1.2 million increase in net legal settlement and litigation charges primarily related to the Justin Price v.

Mistras Group, Inc.

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

These increases were partially offset by foreign currency exchange losses.

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

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

Legal settlement and insurance recoveries, net (841) 1,030

Acquisition-related expense, net 49 277

Operating expenses decreased $0.2 million, or 0.4%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Selling, general and administrative expenses increased $2.4 million during the three months ended March 31, 2022 compared to the three months ended March 31, 2021, due to increased costs and unfavorable foreign exchange impact as compared to the prior period.

Depreciation and amortization decreased $0.3 million during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

This was partially offset during the three months ended March 31, 2022 by a $0.8 million insurance recovery during the three months ended March 31, 2022.

Mistras Group, Inc.

3 unchanged sentences

Income (loss) from Operations

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

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

2021 2020 2021 2020

Income (loss) from operations (GAAP) $ 16,085 $ 13,599 $ 38,991 $ (57,058)

Impairment charges — — — 86,200

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

Three months ended March 31,

Income from operations (GAAP) $ 3,761 $ 4,548

Reorganization and other costs 27 71

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

Legal settlement and insurance recoveries, net (841) 1,650

Acquisition-related expense, net 44 243

2 unchanged sentences

Income (Loss) from operations (GAAP) $ 284 $ (820)

Impairment charges — — — 19,862

Reorganization and other costs 87 96

Income (loss) before special items (non-GAAP) $ 1,167 $ (45) $ 2,282 $ (2,247)

Income (Loss) from operations before special items (non-GAAP) $ 371 $ (724)

Products and Systems:

1 unchanged sentence

Reorganization and other costs — 27

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

Loss from operations before special items (non-GAAP) $ (582) $ (554)

Corporate and Eliminations:

Loss from operations (GAAP) $ (8,161) $ (7,893)

Loss on debt modification — 278 645

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

Reorganization and other costs — 14 — 137

Legal settlement and insurance recoveries, net — (620)

Acquisition-related expense, net 5 34

Loss before special items (non-GAAP) $ (7,737) $ (7,617) $ (24,940) $ (23,671)

Loss from operations before special items (non-GAAP) $ (8,156) $ (8,479)

Total Company:

Income (loss) from operations (GAAP) $ 9,236 $ 5,742 $ 15,864 $ (105,869)

Impairment charges — — — 106,062

Loss from operations (GAAP) $ (4,698) $ (4,746)

Reorganization and other costs 114 194

Loss on debt modification — — 278 645

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

Legal settlement and insurance recoveries, net (841) 1,030

Acquisition-related expense, net 49 277

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

Loss from operations before special items (non-GAAP) $ (5,376) $ (3,245)

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

For the three months ended March 31, 2022, the loss from operations (GAAP) decreased $0.05 million or 1.0%, compared with the three months ended March 31, 2021, while the loss before special items (non-GAAP) decreased $2.1 million, or 65.7%.

As a percentage of revenue, the loss before special items decreased by 120 basis points to (3.3)% in the three months ended March 31, 2022 from (2.1)% in the three months ended March 31, 2021.

Mistras Group, Inc.

2 unchanged sentences

(tabular dollars are in thousands)

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

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

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

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

During the nine months ended September 30, 2021, the Company experienced overall organic growth.

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

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

Refer to Item 1A.

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

of this Form 10-Q for further discussion.

Interest Expense

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

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

Interest expense was approximately $1.9 million and $3.2 million for the three months ended March 31, 2022 and 2021, respectively.

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

2 unchanged sentences

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

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

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

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

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

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

The income tax rate for the nine months ended September 30, 2021 was higher than the statutory rate due to a $1.2 million valuation allowance recorded during the year related to various state deferred tax assets offset by the capitalization of certain non-US intercompany balances which resulted in a deductible foreign exchange loss in the US.

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

Our effective income tax rate was approximately 19.3% and 32.7% for the three months ended March 31, 2022 and 2021, respectively.

The effective income tax rate benefit for the three months ended March 31, 2022 was lower than the statutory rate primarily due to the impact of an unfavorable discrete item related to stock compensation.

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

On December 27, 2020, the United States enacted the Consolidated Appropriations Act, 2021, (the "Appropriations Act") an additional stimulus package providing financial relief for individuals and small business.

The Appropriations Act contains a variety of tax provisions, including full expensing of business meals in 2021 and 2022, and expansion of the employee retention tax credit.

We are currently evaluating the impact of this guidance on our consolidated financial position, results of operations, and cash flows, but does not expect it to have a material impact.

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

We evaluated the impact of this guidance on our consolidated financial position, results of operations, and cash flows, and it will not have a material impact.

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

3 unchanged sentences

Cash flows are summarized in the table below:

Nine months ended September 30,

Three months ended March 31,

Net cash provided by (used in):

5 unchanged sentences

Cash Flows from Operating Activities

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

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

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

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

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

During the three months ended March 31, 2022, cash used in operating activities was $(5.4) million, representing a year-on-year decrease of $8.5 million, or 272%.

The decrease was primarily attributable to movements in working capital and an increase in the accounts receivable balance.

Cash Flows from Investing Activities

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

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

During the three months ended March 31, 2022 and 2021, cash used in investing activities was $2.7 million primarily attributable to a reduction in capital expenditures and no acquisitions in the three months ended March 31, 2022.

Cash Flows from Financing Activities

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

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

Net cash provided by financing activities was $4.3 million for the three months ended March 31, 2022, compared to net cash provided by financing activities of $0.4 million for the three months ended March 31, 2021.

During the three months ended March 31, 2022, net borrowings of debt were approximately $3.4 million higher as compared to 2021 resulting in debt paydown during the period.

In addition, $0.1 million more taxes were paid related to net share settlement of share-based awards during the three months ended March 31, 2022.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

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

The effect of exchange rate changes on our cash and cash equivalents was a decrease of $0.4 million in the three months ended March 31, 2022, compared to a decrease of $1.0 million for the three months ended March 31, 2021.

Cash Balance and Credit Facility Borrowings

As of September 30, 2021, we had cash and cash equivalents totaling $22.6 million and $22.2 million of unused commitments under our Credit Agreement with borrowings of $209.2 million and $4.3 million of letters of credit outstanding.

As of March 31, 2022, we had cash and cash equivalents totaling $19.9 million and $11.2 million of unused commitments under our Credit Agreement with borrowings of $203.1 million and $3.3 million of letters of credit outstanding.

We finance operations primarily through our existing cash balances, cash collected from operations, bank borrowings and capital lease financing.

We believe these sources are sufficient to fund our operations for the foreseeable future.

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

As of September 30, 2021, we were in compliance with the terms of the Credit Agreement and will continuously monitor our compliance with the covenants contained in the Credit Agreement.

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

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

As of March 31, 2022, we were in compliance with the terms of the Credit Agreement and will continuously monitor our compliance with the covenants contained in the Credit Agreement.

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

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

2 unchanged sentences

Off-balance Sheet Arrangements

During the nine months ended September 30, 2021, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

During the three months ended March 31, 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

3 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis