What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-07 compared with 2022-08-05 · 105 added, 117 removed, 198 unchanged (53% of the section changed)

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

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

While the Company's business and operations were negatively impacted the past several years by the COVID-19 pandemic, at the time of this report, the effects of the COVID-19 pandemic have to a large degree subsided, and the Company has begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas.

The Company is currently unable to predict with certainty the effect that inflationary pressures and the Russian-Ukrainian conflict may have on the Company's 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.

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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, 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

By supporting these organizations that help fuel our vehicles and

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towards achieving and maintaining operational excellence.

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

power our society;

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

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These acquisitions have provided us with additional service lines, technologies, resources and customers which we believe will enhance our advantages over our competition.

We believe long-term growth can be realized in all of our target markets.

We believe long-term growth can be realized in our target markets.

Our level of business and financial results are impacted by world-wide macro- and micro-economic conditions generally, as well as those within our target markets.

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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

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

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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.

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 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.

Centers for Disease Control and Prevention (CDC).

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

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

maintain business continuity and financial strength and stability;

and serve our 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 our workforce and operations, as well as the operations of our customers, suppliers and contractors beginning in 2020.

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

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.

Throughout 2022, conditions have continued to improve related to the COVID-19 coronavirus (COVID-19) pandemic in domestic and international markets and operations are approaching pre-pandemic levels of activity.

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

Our cash position and liquidity remains strong.

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

As of September 30, 2022, the cash balance was approximately $18.1 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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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.

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 are currently unable to predict the overall impact that the 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.

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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

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.

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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.

Results of Operations

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,

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

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

2022 2021 2022 2021

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Income from Operations as a % of Revenue 5.1 % 5.3 % 2.7 % 3.1 %

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.

Income before provision for income taxes 6,379 6,910 7,201 7,170

Net Income 4,394 3,397 3,707 3,983

Net Income attributable to Mistras Group, Inc.

$ 4,373 $ 3,380 $ 3,653 $ 3,955

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,

Revenue was $178.5 million for the three months ended September 30, 2022, an increase of $3.9 million, or 2.2%, compared with the three months ended September 30, 2021.

Revenue for the nine months ended September 30, 2022 was $519.2 million, an increase of $13.2 million, or 2.6%, compared with the nine months ended September 30, 2021.

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

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

2022 2021 2022 2021

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$ 178,462 $ 174,556 $ 519,155 $ 505,968

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.

In the three months ended September 30, 2022, total revenue increased 2.2% versus the prior year comparable period due predominantly to a mid single-digit organic increase.

Services segment revenue increased 5.4% due to single-digit organic growth and International segment revenue decreased (11.7)%, due predominantly to low double-digit unfavorable impact of foreign exchange rates which was partially offset by low single-digit organic growth.

Products and Systems segment revenue decreased by $0.2 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.

Oil and gas customer revenue comprised approximately 54% and 53% of total revenue for the three months ended September 30, 2022 and 2021, respectively.

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

The Company’s top ten customers comprised approximately 32% of total revenue for the three months ended September 30, 2022 and 2021, with no customer accounting for 10% or more of total revenue in either three-month period.

In the nine months ended September 30, 2022, total revenue increased 2.6% versus the comparable prior period, due primarily to organic growth in our core business, partially offset by an unfavorable revenue impact from foreign exchange rates.

Our Services segment revenue increased 5.1% due predominantly to continued recovery in the Oil & Gas and Aerospace & Defense

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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,

International segment revenue decreased (5.9)% due to a low double-digit unfavorable revenue impact from foreign exchange rates which was partially offset by mid single-digit favorable organic growth.

Products and Systems segment revenue decreased by $(0.8) million, due to decreased sales volume as compared to the prior period.

Oil and gas customer revenue comprised approximately 56% and 54% of total revenue for the nine months ended September 30, 2022 and 2021, respectively.

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

The Company’s top ten customers comprised approximately 33% of total revenue for the nine months ended September 30, 2022 and 2021, with no customer accounting for 10% or more of total revenue in either nine-month period.

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

2022 2021 2022 2021

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Total $ 97,031 $ 92,452 $ 292,519 $ 275,239

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:

Oil and gas upstream customer revenue increased approximately $3.5 million, or 11% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 and $14.5 million, or 14%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to continued market share gains and expanded exploration operations for both instances, as compared to the prior period.

Midstream customer revenues decreased $(1.3) million, or (4)% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 due to reduced inspections services and increased approximately $4.3 million, or 5%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, due to increased pipe inspection services performed as compared to the prior year.

Downstream customer revenue increased $2.4 million, or 8% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 primarily due to timing and an increase in turnarounds during the current year, and decreased $(1.5) million, or (2)%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 due to delays in timing associated with customer turnarounds.

Gross profit increased by $1.6 million, or 3.0%, in the three months ended September 30, 2022 versus the prior year comparable period, on an increase in revenue of 2.2%.

Gross profit decreased by $(0.3) million, or (0.2)%, in the nine months ended September 30, 2022 on an increase in revenue of 2.6%.

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

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

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

2022 2021 2022 2021

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% of total revenue 30.1 % 29.9 % 28.4 % 29.2 %

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 1.8% 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.

Gross profit margin was 30.1% and 29.9% for the three-month periods ended September 30, 2022 and 2021, respectively.

Services segment realized a 0.6% increase in gross profit margin to 29.4% during the three months ended September 30, 2022.

This was primarily due to better sales mix as compared to the prior period.

International segment realized a (1.2)% decrease in gross profit margin to 29.9% during the three months ended September 30, 2022 due to inflationary impacts prevalent in the European region, partially offset by favorable sales mix and price increases in response to these inflationary impacts.

Products and Systems segment gross margin decreased (4.4)% to 38.6% during the three months ended September, 2022 due to unfavorable sales mix and higher costs.

Gross profit margin was 28.4% and 29.2% for the nine months ended September 30, 2022 and 2021, respectively.

Gross profit margin decreased primarily due to higher benefit costs, increased costs due to inflation and the end of government wage subsidies received in Canada.

Operating Expenses

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,

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

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

2022 2021 2022 2021

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Acquisition-related expense, net 1 246 63 1,068

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

Total operating expenses increased $1.7 million during the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Selling, general and administrative expenses increased $2.4 million during the three months ended September 30, 2022 compared to the three months ended September 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

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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.

amortization decreased $(0.3) million during the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Operating expenses increased $1.6 million, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Selling, general, and administrative expenses increased $5.7 million during the nine months ended September 30, 2022 compared to the nine months ended September 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 which were not received in 2022.

Legal settlements, net of insurance recoveries for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 decreased $2.0 million due primarily to insurance recoveries received in the first half of 2022.

Depreciation and amortization decreased $(1.0) million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Acquisition-related expense decreased $(1.0) million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 due to remeasurement of acquisition related contingent consideration which occurred in 2021.

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

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

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

2022 2021 2022 2021

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Products and Systems:

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

Loss from operations (GAAP) $ (333) $ (281) $ (1,334) $ (653)

Reorganization and other costs — — — 27

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

Loss from operations before special items (non-GAAP) $ (333) $ (281) $ (1,334) $ (626)

Corporate and Eliminations:

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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.

For the three months ended September 30, 2022, income from operations (GAAP) for the Company in total decreased $(0.1) million, compared with the three months ended September 30, 2021, while income from operations before special items (non-GAAP) for the Company in total increased $0.5 million.

As a percentage of revenue, total Company income from operations before special items increased by 20 basis points to 5.6% in the three months ended September 30, 2022 from 5.4% in the three months ended September 30, 2021.

For the nine months ended September 30, 2022, income from operations (GAAP) for the Company in total decreased $(1.9) million, compared with the nine months ended September 30, 2021, while income from operations before special items (non-GAAP) for the Company in total decreased $(4.4) million.

As a percentage of revenue, total Company income from operations before special items decreased by 100 basis points to 2.7% in the nine months ended September 30, 2022 from 3.7% in the nine months ended September 30, 2021.

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

Interest Expense

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%.

Now the actual LIBOR rate is used to calculate interest, even if LIBOR is below 1.0%.

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

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.

Interest expense was approximately $2.7 million and $2.3 million for the three months ended September 30, 2022 and 2021, respectively.

Interest expense was approximately $6.8 million and $8.7 million for the nine months ended September 30, 2022 and 2021, respectively.

The increase in the three months ended September 30, 2022 was due to an increase in interest rates compared to the prior year quarter.

The decrease in interest expense for the nine months ended September 30, 2022 compared to the prior year period results from the Company having entered into the New Credit Agreement providing for interest to be payable based on SOFR plus a credit spread adjustment and applicable SOFR margin ranging from 1.25% to 2.75%, and removed the previously existing minimum LIBOR floor.

Our effective income tax rate was approximately 31.1% and 50.8% for the three months ended September 30, 2022 and 2021, respectively.

Our effective income tax rate was approximately 48.5% and 44.4% for the nine months ended September 30, 2022 and 2021, respectively.

The effective income tax rate for the three months ended September 30, 2022 was higher than the statutory rate primarily due to various permanent tax adjustments and a $0.1 million valuation allowance recorded on a foreign jurisdiction.

The Company's effective income tax rate for the three months ended September 30, 2021 was higher than the statutory rate primarily due to various permanent tax adjustments and 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.

On the basis of this evaluation, as of September 30, 2022, a valuation allowance of $0.9 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized.

The amount of the deferred tax asset 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 nine months ended September 30, 2022 was higher than the statutory rate due primarily to various permanent tax adjustments and a $0.9 million valuation allowance recorded during the year which was related to a foreign jurisdiction.

The effective income tax rate for the nine months ended September 30, 2021 was higher than the statutory rate due to various permanent tax adjustments and 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.

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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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.

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

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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.

On August 19, 2022, the United States enacted the Inflation Reduction Act, (the "Inflation Act"), a package intended to reduce inflation.

The Inflation Act contains a variety of tax provisions, including a 15% corporate minimum tax, a tax on stock repurchases, and various tax credit opportunities.

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.

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.

Liquidity and Capital Resources

Cash flows are summarized in the table below:

Six months ended June 30,

Nine months ended September 30,

Net cash provided by (used in):

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Cash Flows from Operating Activities

During the six months ended June 30, 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.

During the nine months ended September 30, 2022, cash provided by operating activities was $10.5 million, representing a year-on-year decrease of $(11.9) million, or 53%.

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

Cash Flows from Investing Activities

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.

During the nine months ended September 30, 2022, cash used in investing activities was $8.9 million, representing a year-on-year decrease of $(6.6) million, or 43%.

The decreased usage was 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 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.

Net cash used in financing activities was $4.8 million for the nine months ended September 30, 2022, compared to net cash used in financing activities of $8.9 million for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, net repayments of debt were approximately $3.0 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 $(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 effect of exchange rate changes on our cash and cash equivalents was a decrease of $(2.9) million in the nine months ended September 30, 2022, compared to a decrease of $(1.3) million for the nine months ended September 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 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.

As of September 30, 2022, we had cash and cash equivalents totaling $18.1 million and $105.3 million of unused commitments under our New Credit Agreement with borrowings of $196.7 million and $3.0 million of letters of credit outstanding.

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 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.

As of September 30, 2022, we were in compliance with the terms of the New Credit Agreement and will continuously monitor our compliance with the covenants contained in the New Credit Agreement.

The terms of our New 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 ".

Contractual Obligations

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 .

There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2021 Annual Report, other than the Senior Credit Facility refinancing described in Note 11- Long-Term Debt .

Off-balance Sheet Arrangements

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.

During the nine months ended September 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