What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-05-06 · 139 added, 89 removed, 176 unchanged (56% of the section changed)

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

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

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

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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,

Backed by an innovative, data-driven asset protection portfolio, proprietary technologies, strong commitment to Environmental, Social, and Governance (ESG) initiatives 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

Mistras Group, Inc.

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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.

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.

and building real-time monitoring systems to help avoid catastrophic incidents, 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 Internet of Things ("IoT")-connected digital software and monitoring solutions, including OneSuite™, which serves as an ecosystem platform, pulling together all of the Company’s software and data services capabilities, for the benefit of its customers.

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

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

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

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

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

OneSuite serves as a single access portal for customers' data activities and provides access to 85 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

Mistras Group, Inc.

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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.

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.

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Our cash position and liquidity remains strong.

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

As of June 30, 2022, the cash balance was approximately $18.6 million.

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

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We are currently unable to predict the overall impact that the COVID-19 pandemic uncertainty, volatility in oil prices and climate change initiatives to reduce the use of fossil fuels may have on our business, results of operations, liquidity or in other ways which we cannot yet determine.

We will continue to monitor market conditions and respond accordingly.

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 Russian-Ukrainian conflict.

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

Refer to Item 1A.

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The acquisition related costs and special items can be a net expense or credit in any given period.

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

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

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

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

expectations and for evaluating actual results against such expectations.

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

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

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

Results of Operations

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

Three months ended March 31,

Condensed consolidated results of operations for the three and six months ended June 30, 2022 and 2021 were as follows:

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

2022 2021 2022 2021

Revenues $ 179,031 $ 177,677 $ 340,693 $ 331,412

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Gross profit as a % of Revenue 29.9 % 31.1 % 27.4 % 28.8 %

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.

Income from operations 9,576 11,374 4,877 6,628

Income from Operations as a % of Revenue 5.3 % 6.4 % 1.4 % 2.0 %

Income before provision (benefit) for income taxes 7,459 8,219 822 260

Net Income (loss) 4,666 5,945 (687) 586

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

$ 4,643 $ 5,937 $ (720) $ 575

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,

Revenue was $179.0 million for the three months ended June 30, 2022, an increase of $1.4 million, or 0.8%, compared with the three months ended June 30, 2021.

Revenue for the six months ended June 30, 2022 was $340.7 million, an increase of $9.3 million, or 2.8%, compared with the six months ended June 30, 2021.

Revenue by segment for the three and six months ended June 30, 2022 and 2021 was as follows:

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

2022 2021 2022 2021

Services $ 149,528 $ 144,977 $ 282,474 $ 269,275

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Corporate and eliminations (2,759) (2,454) (5,117) (3,653)

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.

$ 179,031 $ 177,677 $ 340,693 $ 331,412

In the three months ended June 30, 2022, total revenue increased 0.8% versus the prior year comparable period due predominantly to a low single-digit organic increase.

Services segment revenue increased 3.1% due to single-digit organic growth and International segment revenue decreased (7.3)%, due predominantly to low double-digit unfavorable impact of foreign exchange rates which was offset by low single-digit organic growth.

Products and Systems segment revenue decreased by $0.6 million, due to decreased sales volume as compared to the prior period.

Oil and gas customer revenue comprised approximately 57% and 54% of total revenue for the three months ended June 30, 2022 and 2021, respectively.

Aerospace and defense customer revenue comprised approximately 13% and 10% of total revenue for the three months ended June 30, 2022 and 2021, respectively.

The Company’s top ten customers comprised approximately 33% of total revenue for the three months ended June 30, 2022, as compared to 35% for the three months ended June 30, 2021, with no customer accounting for 10% or more of total revenue in either three-month period.

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Three months ended March 31,

In the six months ended June 30, 2022, total revenue increased 2.8% versus the comparable prior period.

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

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

Our Services segment revenue increased 4.9% due predominantly to organic growth in end-markets.

International segment revenue decreased (3.1)% due to a high single-digit unfavorable revenue impact from foreign exchange rates which was partially offset by mid single-digit favorable organic growth.

Oil and gas customer revenue comprised approximately 57% and 55% of total revenue for the six months ended June 30, 2022 and 2021, respectively.

Aerospace and defense customer revenue comprised approximately 12% and 10% of total revenue for the six months ended June 30, 2022 and 2021, respectively.

The Company’s top ten customers comprised approximately 33% of total revenue for the six months ended June 30, 2022, as compared to 35% for the six months ended June 30, 2021, with no customer accounting for 10% or more of total revenue in either six-month period.

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

2022 2021 2022 2021

Oil and Gas Revenue by sub-category

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Total $ 101,265 $ 95,576 $ 195,488 $ 182,788

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,

Oil and gas upstream customer revenue increased approximately $11.0 million, or 16%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, and $3.2 million, or 9% for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 due to continued market share gains and expanded exploration operations compared to the prior period.

Midstream customer revenues increased approximately $5.6 million, or 11%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, and $3.2 million, or 11% for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 due to increased pipe inspection services performed as compared to the prior year.

Downstream customer revenue decreased $(3.9) million, or (6)%, for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, and $(0.7) million, or (2)% for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 primarily due to delays in timing associated with customer turnarounds.

Gross profit decreased by $(1.8) million, or 3.2%, in the three months ended June 30, 2022 versus the prior year comparable period, on an increase in revenue of 0.8%.

Gross profit decreased by $(1.9) million, or 2.0%, in the six months ended June 30, 2022 on an increase in revenue of 2.8%.

Gross profit by segment for the three and six months ended June 30, 2022 and 2021 was as follows:

Mistras Group, Inc.

and Subsidiaries

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

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Mistras Group, Inc.

and Subsidiaries

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

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

2022 2021 2022 2021

Services $ 42,954 $ 43,761 $ 73,479 $ 74,837

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% of total revenue 29.9 % 31.1 % 27.4 % 28.8 %

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.

Gross profit margin was 29.9% and 31.1% for the three-month periods ended June 30, 2022 and 2021, respectively.

Services segment realized a 1.5% reduction in gross profit margin to 28.7% during the three months ended June 30, 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.

and Subsidiaries

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

(tabular dollars are in thousands)

International segment realized a 1.8% increase in gross profit margin to 31.9% during the three months ended June 30, 2022 due primarily to continued recovery and sales within the aerospace end market.

Products and Systems segment gross margin decreased 17.3% to 43.6% during the three months ended June, 2022 due to unfavorable sales mix.

Gross profit margin was 27.4% and 28.8% for the six months ended June 30, 2022 and 2021, respectively.

Gross profit margin decreased primarily due to higher benefit costs and the end of government wage subsidies received in Canada within the Services segment, partially offset by continued recovery and sales within the aerospace end market within the International segment.

Operating Expenses

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

Three months ended March 31,

Operating expenses for the three and six months ended June 30, 2022 and 2021 was as follows:

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

2022 2021 2022 2021

Operating Expenses

Selling, general and administrative expenses $ 40,676 $ 39,719 $ 82,712 $ 79,358

Bad debt provision for troubled customers, net of recoveries 289 — 289 —

Research and engineering 522 620 1,073 1,347

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Acquisition-related expense, net 13 545 63 822

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.

Total operating expenses were flat for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Selling, general and administrative expenses increased $1.0 million during the three months ended June 30, 2022 compared to the three months ended June 30, 2021, due to the reversal of remaining COVID-19 temporary cost reductions in August 2021, which had been initially implemented in 2020.

Depreciation and amortization decreased $(0.4) million during the

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three months ended June 30, 2022 compared to the three months ended June 30, 2021.

During the three months ended June 30, 2022 a $0.2 million insurance recovery was recorded.

Operating expenses decreased $(0.1) million, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Selling, general, and administrative expenses increased $3.4 million during the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to the reversal of remaining COVID-19 temporary cost reductions in August 2021, which had been initially implemented in 2020, and wage subsidies received in 2021.

Legal settlements, net of insurance recoveries for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 decreased $2.6 million due primarily to insurance recoveries received in the first quarter of 2022.

Depreciation and amortization decreased $(0.7) million during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Acquisition-related expense decreased $(0.8) million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 due to remeasurement of acquisition related contingent consideration which occurred in 2021.

Mistras Group, Inc.

and Subsidiaries

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

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Income (loss) from Operations

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,

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

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

2022 2021 2022 2021

Income from operations (GAAP) $ 14,855 $ 18,358 $ 18,615 $ 22,906

Bad debt provision for troubled customers, net of recoveries 289 — 289 —

Reorganization and other costs 1 26 28 97

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Acquisition-related expense, net — 545 45 788

Income before special items (non-GAAP) $ 2,991 $ 6,512

Income from operations before special items (non-GAAP) $ 15,145 $ 18,929 $ 18,136 $ 25,441

International:

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

Income from operations (GAAP) $ 1,580 $ 1,809 $ 1,864 $ 989

Reorganization and other costs (187) 30 (99) 126

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

Income from operations before special items (non-GAAP) $ 1,393 $ 1,839 $ 1,765 $ 1,115

Products and Systems:

Loss from operations (GAAP) $ (582) $ (581)

Income (loss) from operations (GAAP) $ (420) $ 209 $ (1,002) $ (372)

Reorganization and other costs — — — 27

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

Income (loss) from operations (GAAP) $ (420) $ 209 $ (1,002) $ (345)

Corporate and Eliminations:

Loss from operations (GAAP) $ (6,439) $ (9,002) $ (14,600) $ (16,895)

Legal settlement and insurance recoveries, net — (620)

Loss on debt modification — 277 — 277

Reorganization and other costs 6 — 6 —

Acquisition-related expense, net 13 — 18 34

Legal settlement and insurance recoveries, net (153) — (153) (620)

Loss from operations before special items (non-GAAP) $ (6,573) $ (8,725) $ (14,729) $ (17,204)

Total Company:

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

Income from operations (GAAP) $ 9,576 $ 11,374 $ 4,877 $ 6,628

Bad debt provision for troubled customers, net of recoveries 289 — 289 —

Reorganization and other costs (180) 56 (65) 250

Loss on debt modification — 277 — 277

Legal settlement and insurance recoveries, net (153) — (994) 1,030

Acquisition-related expense, net 13 545 63 822

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

Income from operations before special items (non-GAAP) $ 9,545 $ 12,252 $ 4,170 $ 9,007

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.

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For the three months ended June 30, 2022, income from operations (GAAP) decreased $(1.8) million, compared with the three months ended June 30, 2021, while income before special items (non-GAAP) decreased $(2.7) million.

As a percentage of revenue, income before special items decreased by 160 basis points to 5.3% in the three months ended June 30, 2022 from 6.9% in the three months ended June 30, 2021.

For the six months ended June 30, 2022, income (loss) from operations (GAAP) decreased $(1.8) million, compared with the six months ended June 30, 2021, while income (loss) from operations before special items (non-GAAP) decreased $(4.8) million.

As a percentage of revenue, income (loss) from operations before special items decreased by 150 basis points to 1.2% in the six months ended June 30, 2022 from 2.7% in the six months ended June 30, 2021.

During the six months ended June 30, 2022, the Company experienced overall organic growth offset by foreign currency headwinds.

Interest Expense

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.

Interest expense was approximately $2.1 million and $3.2 million for the three months ended June 30, 2022 and 2021, respectively.

Interest expense was approximately $4.1 million and $6.4 million for the six months ended June 30, 2022 and 2021, respectively.

The decrease for both periods 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 in the May 2021 amendment to our credit agreement.

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

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

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.

Our effective income tax rate was approximately 37.4% and 27.7% for the three months ended June 30, 2022 and 2021, respectively.

Our effective income tax rate was approximately 183.6% and (125.4)% for the six months ended June 30, 2022 and 2021, respectively.

The effective income tax rate for the three months ended June 30, 2022 was higher than the statutory rate primarily due to a $0.7 million valuation allowance recorded on a foreign jurisdiction.

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

The valuation allowance of $0.7 million has been recorded to recognize only the portion of the deferred tax assets that are more likely than not to be realized.

The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.

The effective income tax rate for the six months ended June 30, 2022 was higher than the statutory rate due primarily to a $0.7 million valuation allowance recorded during the period which was related to a foreign jurisdiction.

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

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

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It is also affected by discrete items that may occur in any given year but are not consistent from year to year.

Our effective income tax rate may fluctuate over the next few years due to many variables including the amount and future geographic distribution of our pre-tax income, changes resulting from our acquisition strategy, and increases or decreases in our permanent differences.

Our effective income tax rate may fluctuate over the

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

next few years due to many variables including the amount and future geographic distribution of our pre-tax income, changes resulting from our acquisition strategy, and increases or decreases in our permanent differences.

Liquidity and Capital Resources

Cash flows are summarized in the table below:

Three months ended March 31,

Six months ended June 30,

Net cash provided by (used in):

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Cash Flows from Operating Activities

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.

During the six months ended June 30, 2022, cash provided by operating activities was $7.8 million, representing a year-on-year decrease of $(10.3) million, or 57%.

The decrease was primarily attributable to a net working capital increase in the course of normal operations.

Cash Flows from Investing Activities

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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.

During the six months ended June 30, 2022, cash used in investing activities was $6.5 million primarily attributable to a reduction in capital expenditures during the current period as compared to the prior period.

Cash Flows from Financing 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.

Net cash used in financing activities was $5.1 million for the six months ended June 30, 2022, compared to net cash used in financing activities of $13.0 million for the six months ended June 30, 2021.

During the six months ended June 30, 2022, net repayments of debt were approximately $6.6 million lower as compared to 2021 as cash flows were used to support operating activities.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

The effect of exchange rate changes on our cash and cash equivalents was a decrease of $0.4 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.

The effect of exchange rate changes on our cash and cash equivalents was a decrease of $(1.8) million in the six months ended June 30, 2022, compared to a decrease of $(0.7) million for the six months ended June 30, 2021.

The primary driver of the change was foreign currency fluctuations during the quarter related to the Euro and the US Dollar.

Cash Balance and Credit Facility Borrowings

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.

As of June 30, 2022, we had cash and cash equivalents totaling $18.6 million and $11.7 million of unused commitments under our Credit Agreement with borrowings of $195.3 million and $3.0 million of letters of credit outstanding.

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

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

As of March 31, 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 ".

As of June 30, 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 $5.0 million for each quarterly payment after March 31, 2022, with a final balloon payment at maturity.

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 " and in Note 16 Subsequent Events of the Notes.

Contractual Obligations

There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2021 Annual Report.

There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2021 Annual Report except as noted in Note 16 Subsequent Events .

Off-balance Sheet Arrangements

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.

During the six months ended June 30, 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

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What changed 10-Q

Item 2. Management’s Discussion and Analysis