Mistras Group, Inc. 10-Q

ITEM 1. Financial Statements Mistras Group, Inc. and Subsidiaries Condensed Consolidated Balance Sheets ( in thousands, except share and per share data ) September 30, 2022 December 31, 2021 ASSETS (unaudited) Current Assets Cash and cash equivalents $ 18,084 $ 24,110 Accounts receivable, net 131,396 109,511 Inventories 13,260 12,686 Prepaid expenses and other current assets 11,693 15,031 Total current assets 174,433 161,338 Property, plant and equipment, net 76,133 86,578 Intangible assets, net 50,337 59,381 Goodwill 197,433 205,439 Deferred income taxes 589 2,174 Other assets 41,521 47,285 Total assets $ 540,446 $ 562,195 LIABILITIES AND EQUITY Current Liabilities Accounts payable $ 12,805 $ 12,870 Accrued expenses and other current liabilities 83,070 83,863 Current portion of long-term debt 7,365 20,162 Current portion of finance lease obligations 3,967 3,765 Income taxes payable 305 755 Total current liabilities 107,512 121,415 Long-term debt, net of current portion 193,847 182,403 Obligations under finance leases, net of current portion 9,380 9,752 Deferred income taxes 8,786 8,385 Other long-term liabilities 33,865 39,328 Total liabilities 353,390 361,283 Commitments and contingencies Equity Preferred stock, 10,000,000 shares authorized — — Common stock, $ 0.01 par value, 200,000,000 shares authorized, 29,842,496 and 29,546,263 shares issued and outstanding 297 295 Additional paid-in capital 242,093 238,687 Accumulated deficit ( 14,335 ) ( 17,988 ) Accumulated other comprehensive loss ( 41,282 ) ( 20,311 ) Total Mistras Group, Inc. stockholders’ equity 186,773 200,683 Non-controlling interests 283 229 Total equity 187,056 200,912 Total liabilities and equity $ 540,446 $ 562,195 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 1 Table of Contents Mistras Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Income ( in thousands, except per share data ) Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Revenue $ 178,462 $ 174,556 $ 519,155 $ 505,968 Cost of revenue 119,110 116,750 354,848 341,780 Depreciation 5,568 5,590 17,074 16,635 Gross profit 53,784 52,216 147,233 147,553 Selling, general and administrative expenses 41,590 39,221 124,303 118,579 Bad debt provision for troubled customers, net of recoveries — — 289 — Legal settlement and insurance recoveries, net — — ( 994 ) 1,030 Research and engineering 450 595 1,523 1,942 Depreciation and amortization 2,629 2,918 8,058 9,070 Acquisition-related expense, net 1 246 63 1,068 Income from operations 9,114 9,236 13,991 15,864 Interest expense 2,735 2,326 6,790 8,694 Income before provision for income taxes 6,379 6,910 7,201 7,170 Provision for income taxes 1,985 3,513 3,494 3,187 Net Income 4,394 3,397 3,707 3,983 Less: net income attributable to noncontrolling interests, net of taxes 21 17 54 28 Net Income attributable to Mistras Group, Inc. $ 4,373 $ 3,380 $ 3,653 $ 3,955 Earnings per common share Basic $ 0.15 $ 0.11 $ 0.12 $ 0.13 Diluted $ 0.14 $ 0.11 $ 0.12 $ 0.13 Weighted-average common shares outstanding: Basic 29,965 29,619 29,879 29,550 Diluted 30,245 30,127 30,209 30,093 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 2 Table of Contents Mistras Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands ) Three months ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net Income $ 4,394 $ 3,397 $ 3,707 $ 3,983 Other comprehensive income (loss): Foreign currency translation adjustments ( 12,995 ) ( 5,472 ) ( 20,971 ) ( 3,117 ) Comprehensive Income (Loss) ( 8,601 ) ( 2,075 ) ( 17,264 ) 866 Less: net income attributable to noncontrolling interest 21 17 54 28 Less: Foreign currency translation adjustments attributable to noncontrolling interests — ( 3 ) — ( 2 ) Comprehensive income (loss) attributable to Mistras Group, Inc $ ( 8,622 ) $ ( 2,089 ) $ ( 17,318 ) $ 840 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 3 Table of Contents Mistras Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Equity ( in thousands ) Three months ended Common Stock Additional paid-in capital Retained earnings (deficit) Accumulated other comprehensive (loss) Total Mistras Group, Inc. Stockholders’ Equity Noncontrolling Interest Shares Amount Total Equity Balance at June 30, 2022 29,807 $ 297 $ 240,697 $ ( 18,708 ) $ ( 28,287 ) $ 193,999 $ 262 $ 194,261 Net income — — — 4,373 — 4,373 21 4,394 Other comprehensive loss, net of tax — — — — ( 12,995 ) ( 12,995 ) — ( 12,995 ) Share-based compensation — — 1,396 — — 1,396 — 1,396 Net settlement of restricted stock units 35 — — — — — — — Balance at September 30, 2022 29,842 $ 297 $ 242,093 $ ( 14,335 ) $ ( 41,282 ) $ 186,773 $ 283 $ 187,056 Balance at June 30, 2021 29,432 $ 294 $ 236,125 $ ( 21,273 ) $ ( 13,707 ) $ 201,439 $ 210 $ 201,649 Net income — — — 3,380 — 3,380 17 3,397 Other comprehensive loss, net of tax — — — — ( 5,469 ) ( 5,469 ) ( 3 ) ( 5,472 ) Share-based payments — — 1,452 — — 1,452 — 1,452 Net settlement of restricted stock units 26 — — — — — — — Balance at September 30, 2021 29,458 $ 294 $ 237,577 $ ( 17,893 ) $ ( 19,176 ) $ 200,802 $ 224 $ 201,026 Nine months ended Common Stock Additional paid-in capital Retained earnings (deficit) Accumulated other comprehensive (loss) Total Mistras Group, Inc. Stockholders’ Equity Noncontrolling Interest Shares Amount Total Equity Balance at December 31, 2021 29,546 $ 295 $ 238,687 $ ( 17,988 ) $ ( 20,311 ) $ 200,683 $ 229 $ 200,912 Net income — — — 3,653 — 3,653 54 3,707 Other comprehensive loss, net of tax — — — — ( 20,971 ) ( 20,971 ) — ( 20,971 ) Share-based compensation — — 4,166 — — 4,166 — 4,166 Net settlement of restricted stock units 296 2 ( 760 ) — — ( 758 ) — ( 758 ) Balance at September 30, 2022 29,842 $ 297 $ 242,093 $ ( 14,335 ) $ ( 41,282 ) $ 186,773 $ 283 $ 187,056 Balance at December 31, 2020 29,234 $ 292 $ 234,638 $ ( 21,848 ) $ ( 16,061 ) $ 197,021 $ 198 $ 197,219 Net income — — — 3,955 — 3,955 28 3,983 Other comprehensive loss, net of tax — — — — ( 3,115 ) ( 3,115 ) ( 2 ) ( 3,117 ) Share-based compensation — — 3,916 — — 3,916 — 3,916 Net settlement of restricted stock units 224 2 ( 977 ) — — ( 975 ) — ( 975 ) Balance at September 30, 2021 29,458 $ 294 $ 237,577 $ ( 17,893 ) $ ( 19,176 ) $ 200,802 $ 224 $ 201,026 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 4 Table of Contents Mistras Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows (in thousands ) Nine months ended September 30, 2022 2021 Cash flows from operating activities Net income $ 3,707 $ 3,983 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 25,132 25,705 Deferred income taxes 1,790 1,055 Share-based compensation expense 4,166 3,916 Bad debt provision for troubled customers, net of recoveries 289 — Fair value adjustments to contingent consideration 45 1,034 Foreign currency (gain) loss ( 924 ) 366 Payment of finance costs ( 448 ) — Other 969 265 Changes in operating assets and liabilities, net of effect of acquisitions Accounts receivable ( 27,692 ) ( 21,907 ) Inventories ( 1,146 ) 868 Prepaid expenses and other assets 2,105 ( 2,324 ) Accounts payable 578 ( 751 ) Accrued expenses and other liabilities 2,539 11,247 Income taxes payable ( 46 ) ( 988 ) Payment of contingent consideration liability in excess of acquisition-date fair value ( 533 ) — Net cash provided by operating activities 10,531 22,469 Cash flows from investing activities Purchase of property, plant and equipment ( 9,050 ) ( 15,130 ) Purchase of intangible assets ( 580 ) ( 887 ) Acquisition of business, net of cash acquired — ( 441 ) Proceeds from sale of equipment 753 964 Net cash used in investing activities ( 8,877 ) ( 15,494 ) Cash flows from financing activities Repayment of finance lease obligations ( 3,173 ) ( 3,032 ) Proceeds from borrowings of long-term debt 125,000 — Repayment of long-term debt ( 79,519 ) ( 12,121 ) Proceeds from revolver 168,000 71,000 Repayment of revolver ( 213,750 ) ( 62,250 ) Payment of financing costs ( 148 ) ( 550 ) Payment of contingent consideration for business acquisitions ( 405 ) ( 938 ) Taxes paid related to net share settlement of share-based awards ( 758 ) ( 975 ) Net cash used in financing activities ( 4,753 ) ( 8,866 ) Effect of exchange rate changes on cash and cash equivalents ( 2,927 ) ( 1,272 ) Net change in cash and cash equivalents ( 6,026 ) ( 3,163 ) Cash and cash equivalents at beginning of period 24,110 25,760 Cash and cash equivalents at end of period $ 18,084 $ 22,597 Supplemental disclosure of cash paid Interest, net $ 5,354 $ 8,119 Income taxes, net of refunds $ ( 3,764 ) $ 3,816 Noncash investing and financing Equipment acquired through finance lease obligations $ 3,373 $ 2,445 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. 5 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 1. Description of Business and Basis of Presentation Description of Business Mistras Group, Inc. and subsidiaries (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 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 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. Recent Developments Issues related to the COVID-19 coronavirus (COVID-19) pandemic have subsided significantly during 2022 as compared to 2021. The Russian-Ukrainian conflict is creating disruption in the oil & gas market and the supply chain in general, which is resulting in some disruption to our business operations. With oil prices high, refineries are working at full capacity and are deferring maintenance and inspection work as much as possible, which is impacting our business as well. Overall, the Company has taken actions to help ensure the health and safety of Company employees and those of its customers and suppliers; maintain business continuity and financial strength and stability; and serve customers as they provide essential products and services to the world. Earlier in 2022, the Company 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. The Company is currently unable to predict with certainty the overall impact that the factors discussed above and the effect of inflationary pressures and the Russian-Ukrainian conflict may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine. The Company’s European operations are currently experiencing 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. Basis of Presentation The Unaudited Condensed Consolidated Financial Statements contained in this report have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") and Securities and Exchange Commission ("SEC") guidance allowing for reduced disclosure for interim periods. In the opinion of management, the Unaudited Condensed Consolidated Financial Statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the years ending December 31, 2022 and December 31, 2021. 6 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the notes to the Audited Consolidated Financial Statements contained in the Company’s 2021 Annual Report on Form 10-K ("2021 Annual Report"). Principles of Consolidation The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of Mistras Group, Inc. as well as its wholly-owned subsidiaries, majority-owned subsidiaries and consolidated variable interest entities (VIE). For subsidiaries in which the Company’s ownership interest is less than 100%, the non-controlling interests are reported in stockholders’ equity in the accompanying Condensed Consolidated Balance Sheets. The non-controlling interests in net results, net of tax, is classified separately in the accompanying Unaudited Condensed Consolidated Statements of Income. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations of companies acquired are included from the date of acquisition. Reclassification Certain amounts in prior periods have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the Company’s financial condition or results of operations as previously reported. Customers For each of the three and nine months ended September 30, 2022 and 2021, no customer represented 10% or more of the Company’s revenue. Significant Accounting Policies The Company’s significant accounting policies are disclosed in Note 1– Summary of Significant Accounting Policies and Practices in the 2021 Annual Report. On an ongoing basis, the Company evaluates its estimates and assumptions, including among other things, those related to revenue recognition, long-lived assets, goodwill and acquisitions. Since the date of the 2021 Annual Report, there have been no material changes to the Company’s significant accounting policies. Income Taxes Income taxes are accounted for under the asset and liability method. We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred tax assets primarily consist of net operating loss carry forwards, or NOLs. A valuation allowance is provided if it is more likely than not that some or all of a deferred income tax asset will not be realized. A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current and prior years. As of September 30, 2022, management concluded that it is more likely than not that a substantial portion of the Company’s deferred tax assets will be realized. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company’s effective income tax rate was approximately 31.1 % and 50.8 % for the three months ended September 30, 2022 and 2021, respectively. The Company’s 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 primary due to 7 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 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. As of September 30, 2022, a valuation 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 period 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. Recent Accounting Pronouncements In March 2020 and updated in January 2021, the FASB issued ASU 2020-04 and 2021-01, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2024. The Company is currently evaluating applicable contracts and the available expedients provided by the new guidance. 2. Revenue The Company derives the majority of its revenue by providing services on a time and material basis, and are short-term in nature. The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers . Performance Obligations The Company provides highly integrated and bundled inspection services to its customers. The majority of the Company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the Company’s best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is a relative selling price based on price lists. Contract modifications are not routine in the performance of the Company’s contracts. Generally, when contracts are modified, the modification is to account for changes in scope to the goods and services that are provided. In most instances, contract modifications are for goods or services that are distinct, and, therefore, are accounted for as a separate contract. The Company’s performance obligations are satisfied over time as work progresses or at a point in time. The majority of the Company’s revenue is recognized over time as work progresses for the Company’s service deliverables, which includes providing testing, inspection and mechanical services to our customers. Revenue is recognized over time, based on time and material incurred to date which best portrays the transfer of control to the customer. The Company also utilizes an available practical expedient that provides for revenue to be recognized in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. Fixed fee arrangements are determined based on expected labor, material, and overhead to be consumed on fulfillment of such services. For these arrangements, revenue is recognized on a cost-to-cost method tracked on an input basis. The majority of our revenue recognized at a point in time is related to product sales when the customer obtains control of the asset, which is generally upon shipment to the customer. Contract costs include labor, material and overhead. 8 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) The Company expects any significant remaining performance obligations to be satisfied within one year . Contract Estimates The majority of the Company’s revenues are short-term in nature. The Company enters into master service agreements (MSAs) with customers that specify an overall framework and contract terms. The actual contracting to provide services or furnish products are triggered by a work order, purchase order, or some similar document issued pursuant to a MSA which sets forth the scope of services and/or identifies the products to be provided. From time-to-time, the Company may enter into longer-term contracts, which can range from several months to several years. Revenue on certain contracts is recognized as work is performed based on total costs incurred to date in relation to the total estimated costs for the performance of the contract at completion. This includes contract estimates of costs to be incurred for the performance of the contract. Cost estimation is based upon the professional knowledge and experience of the Company’s project managers, engineers and financial professionals. Factors that are considered in estimating the work to be completed include the availability of materials, the effect of any delays in the Company’s project performance and the recoverability of any claims. Whenever revisions of estimates, contract costs and/or contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period. Revenue by Category The following series of tables present the Company’s disaggregated revenue: Revenue by industry was as follows: Three Months Ended September 30, 2022 Services International Products Corp/Elim Total Oil & Gas $ 90,578 $ 6,418 $ 35 $ — $ 97,031 Aerospace & Defense 16,784 4,397 112 — 21,293 Industrials 9,728 5,834 436 — 15,998 Power generation & Transmission 10,378 1,946 456 — 12,780 Other Process Industries 10,283 3,033 8 — 13,324 Infrastructure, Research & Engineering 4,936 1,784 1,150 — 7,870 Petrochemical 3,427 280 — — 3,707 Other 6,664 2,001 881 ( 3,087 ) 6,459 Total $ 152,778 $ 25,693 $ 3,078 $ ( 3,087 ) $ 178,462 Three Months Ended September 30, 2021 Services International Products Corp/Elim Total Oil & Gas $ 83,534 $ 8,548 $ 370 $ — $ 92,452 Aerospace & Defense 12,717 3,897 101 — 16,715 Industrials 10,560 6,693 336 — 17,589 Power generation & Transmission 11,412 2,615 660 — 14,687 Other Process Industries 8,819 3,035 32 — 11,886 Infrastructure, Research & Engineering 7,136 2,467 808 — 10,411 Petrochemical 4,974 72 — — 5,046 Other 5,824 1,773 1,001 ( 2,828 ) 5,770 Total $ 144,976 $ 29,100 $ 3,308 $ ( 2,828 ) $ 174,556 9 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Nine Months Ended September 30, 2022 Services International Products Corp/Elim Total Oil & Gas $ 270,289 $ 22,018 $ 212 $ — $ 292,519 Aerospace & Defense 49,106 14,455 246 — 63,807 Industrials 28,529 17,868 1,271 — 47,668 Power generation & Transmission 22,578 6,505 1,979 — 31,062 Other Process Industries 32,217 10,305 23 — 42,545 Infrastructure, Research & Engineering 10,625 6,016 2,489 — 19,130 Petrochemical 10,056 413 — — 10,469 Other 11,851 5,861 2,446 ( 8,203 ) 11,955 Total $ 435,251 $ 83,441 $ 8,666 $ ( 8,203 ) $ 519,155 Nine Months Ended September 30, 2021 Services International Products Corp/Elim Total Oil & Gas $ 248,584 $ 26,017 $ 638 $ — $ 275,239 Aerospace & Defense 37,319 12,341 165 — 49,825 Industrials 30,621 17,736 1,081 — 49,438 Power generation & Transmission 27,019 7,776 2,249 — 37,044 Other Process Industries 27,031 9,574 76 — 36,681 Infrastructure, Research & Engineering 15,479 9,477 2,777 — 27,733 Petrochemical 16,375 191 — — 16,566 Other 11,823 5,587 2,513 ( 6,481 ) 13,442 Total $ 414,251 $ 88,699 $ 9,499 $ ( 6,481 ) $ 505,968 Revenue per key geographic location was as follows: Three Months Ended September 30, 2022 Services International Products Corp/Elim Total United States $ 130,206 $ 240 $ 1,523 $ ( 1,098 ) $ 130,871 Other Americas 21,649 2,064 154 ( 1,274 ) 22,593 Europe 631 22,648 362 ( 622 ) 23,019 Asia-Pacific 292 741 1,039 ( 93 ) 1,979 Total $ 152,778 $ 25,693 $ 3,078 $ ( 3,087 ) $ 178,462 Three Months Ended September 30, 2021 Services International Products Corp/Elim Total United States $ 122,506 $ 221 $ 1,562 $ ( 1,341 ) $ 122,948 Other Americas 21,681 1,446 133 ( 610 ) 22,650 Europe 491 26,378 499 ( 748 ) 26,620 Asia-Pacific 298 1,055 1,114 ( 129 ) 2,338 Total $ 144,976 $ 29,100 $ 3,308 $ ( 2,828 ) $ 174,556 10 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Nine Months Ended September 30, 2022 Services International Products Corp/Elim Total United States $ 370,426 $ 747 $ 4,366 $ ( 2,319 ) $ 373,220 Other Americas 62,254 4,781 338 ( 2,988 ) 64,385 Europe 1,790 75,921 1,456 ( 2,501 ) 76,666 Asia-Pacific 781 1,992 2,506 ( 395 ) 4,884 Total $ 435,251 $ 83,441 $ 8,666 $ ( 8,203 ) $ 519,155 Nine Months Ended September 30, 2021 Services International Products Corp/Elim Total United States $ 349,814 $ 670 $ 4,690 $ ( 2,627 ) $ 352,547 Other Americas 61,847 3,772 301 ( 1,482 ) 64,438 Europe 1,381 82,356 1,462 ( 2,105 ) 83,094 Asia-Pacific 1,209 1,901 3,046 ( 267 ) 5,889 Total $ 414,251 $ 88,699 $ 9,499 $ ( 6,481 ) $ 505,968 Contract Balances The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets. Amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, generally at periodic intervals (e.g., weekly, bi-weekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities. These assets and liabilities are aggregated on an individual contract basis and reported on the Consolidated Balance Sheets at the end of each reporting period within accounts receivable, net or accrued expenses and other current liabilities. Revenue recognized during the nine months ended September 30, 2022 and 2021 that was included in the contract liability balance at the beginning of such year was $ 4.0 million and $ 4.4 million, respectively. Changes in the contract asset and liability balances during these periods were not materially impacted by any other factors. The Company applies a practical expedient to expense incremental costs incurred related to obtaining a contract when the asset that the Company otherwise would have recognized is one year or less. 3. Share-Based Compensation The Company grants share-based incentive awards to its eligible employees and non-employee directors under two equity incentive plans: (i) the 2009 Long-Term Incentive Plan (the "2009 Plan") and (ii) the 2016 Long-Term Incentive Plan (the "2016 Plan"). No further awards may be granted under the 2009 Plan, and the remaining stock option award granted under the 2009 Plan expired during the three months ended March 31, 2022. Awards granted under the 2016 Plan may be in the form of stock options, restricted stock units and other forms of share-based incentives, including performance restricted stock units, stock appreciation rights and deferred stock rights. At the annual shareholders meeting on May 23, 2022, the Company’s shareholders approved an amendment to increase the total number of shares that may be issued under the 2016 Plan by 1.2 million, for a total of 4.9 million shares that are authorized for issuance under the 2016 Plan, of which approximately 1,600,000 shares were available for future grants as of September 30, 2022. Stock Options For each of the three and nine months ended September 30, 2022 and 2021, the Company did no t recognize any share-based compensation expense related to the stock option award, as the one outstanding stock option award was already fully vested. No unrecognized compensation costs remained related to the stock option award as of September 30, 2022. 11 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) The following table sets forth a summary of the stock option activity, weighted-average exercise prices and options outstanding as of September 30, 2022 and 2021: Nine months ended September 30, 2022 2021 Common Stock Options Weighted Average Exercise Price Common Stock Options Weighted Average Exercise Price Outstanding at beginning of period: 5 $ 22.35 5 $ 22.35 Granted — $ — — $ — Exercised — $ — — $ — Expired or forfeited ( 5 ) $ 22.35 — $ — Outstanding at end of period: — $ — 5 $ 22.35 Restricted Stock Unit Awards For each of the three months ended September 30, 2022 and September 30, 2021, the Company recognized share-based compensation expense related to restricted stock unit awards of $ 0.9 million. For the nine months ended September 30, 2022 and 2021, the Company recognized share-based compensation expense related to restricted stock unit awards of $ 2.8 million and $ 2.7 million, respectively. As of September 30, 2022, there was $ 7.6 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which is expected to be recognized over a remaining weighted-average period of 2.7 years. Upon vesting, restricted stock units are generally net share-settled to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock. A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows: Nine months ended September 30, 2022 2021 Restricted stock awards vested 326 238 Fair value of awards vested $ 2,164 $ 2,670 A summary of the fully-vested common stock the Company issued to its six non-employee directors, in connection with its non-employee director compensation plan, is as follows: Nine months ended September 30, 2022 2021 Awards issued 70 51 Grant date fair value of awards issued $ 450 $ 525 A summary of the Company’s outstanding, non-vested restricted share units is as follows: Nine months ended September 30, 2022 2021 Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Outstanding at beginning of period: 1,208 $ 7.96 1,076 $ 7.41 Granted 675 $ 7.65 528 $ 10.07 Released ( 326 ) $ 10.03 ( 238 ) $ 10.98 Forfeited ( 42 ) $ 8.19 ( 53 ) $ 8.90 Outstanding at end of period: 1,515 $ 7.37 1,313 $ 7.75 12 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Performance Restricted Stock Units The Company maintains Performance Restricted Stock Units (PRSUs) that have been granted to select executives and senior officers whose ultimate payout is based on the Company’s performance over a one-year period based on specific metrics approved by the Compensation Committee of the Board of Directors of the Company. For 2021, the Compensation Committee made changes to the Company’s equity incentive compensation plan for its executive officers and approved the new target awards for 2021. For 2021, the three metrics were: 1. Free Cash Flow net cash provided by operating activities less purchases of property, plant, equipment and intangible assets and is subject to adjustments approved by the Compensation Committee. 2. Adjusted EBITDA defined as net income attributable to the Company plus: interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense and certain acquisition related costs (including transaction due diligence costs and adjustments to the fair value of contingent consideration), foreign exchange (gain) loss and, if applicable, certain special items which are noted). 3. Total Shareholder Return (TSR) measures the total return to shareholders of the Company during 2021 versus the total return to the shareholders of a predefined peer group of companies that provide inspection, testing, certification or similar industrial services. The return will be measured by the year over year percent change in share price. The share prices used to calculate the return are the average share price during the 20 -trading day period ending on the initial measurement date (the last 20 trading days of 2020), compared to the average share price during the 20 -trading day period ending on the final measurement date (the last 20 trading days of 2021). Any cash dividends or distributions paid in 2021 will be added to calculate the return to shareholders during the year. TSR is considered a market condition for which the fair value of PRSUs with this condition is determined using a Monte Carlo valuation model. Key assumptions in the Monte Carlo valuation model included: a. Expected Volatility. Expected volatility of the Company’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate 1-year performance period. b. Dividend Yield . The dividend yield assumption was based on historical and anticipated dividend payouts (assumed at zero ). c. Risk-Free Interest Rate . The risk-free interest rate assumption was based on observed interest rates consistent with the approximate 1-year performance measurement period. For 2022, the Compensation Committee retained the Company’s prior year equity incentive compensation plan for its executive officers including utilizing the same metrics, as defined above, and approved the new target awards for 2022. PRSUs are equity-classified and compensation costs are initially measured using the fair value of the underlying stock at the date of grant. Compensation costs related to the PRSUs are subsequently adjusted for changes in the expected outcomes of the performance conditions. Compensation cost related to the PRSUs with a market condition is not reversed if the market condition is not achieved, provided the employee requisite service has been rendered. PRSUs generally vest ratably on each of the first four anniversary dates upon completion of the performance period, for a total requisite service period of up to five years and have no dividend rights. A summary of the Company’s PRSU activity is as follows: Nine months ended September 30, 2022 2021 Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Outstanding at beginning of period: 388 $ 10.07 333 $ 8.84 Granted 341 $ 6.55 189 $ 12.59 Performance condition adjustments ( 269 ) $ 7.71 ( 195 ) $ 7.83 Released ( 17 ) $ 6.85 ( 22 ) $ 13.63 Forfeited — $ — — $ — Outstanding at end of period: 443 $ 9.74 305 $ 12.56 13 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) During the nine months ended September 30, 2022 and September 30, 2021, the Compensation Committee approved the final calculation of the award metrics for calendar year 2021 and calendar year 2020, respectively. The calendar year 2022 PRSUs decreased by approximately 157,000 units during the nine months ended September 30, 2022 as a result of the final calculation of the 2021 award and based on forecasted results for 2022 as compared to performance metrics determined by the Compensation Committee. For each of the three months ended September 30, 2022 and September 30, 2021, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $ 0.3 million. For the nine months ended September 30, 2022 and September 30, 2021, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $ 0.9 million and $ 0.7 million, respectively. At September 30, 2022, there was $ 1.5 million of total unrecognized compensation costs related to approximately 443,000 non-vested PRSUs, which is expected to be recognized over a remaining weighted-average period of 1.8 years. 4. Earnings per Share Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, and (2) the dilutive effect of assumed conversion of equity awards using the treasury stock method. With respect to the number of weighted-average shares outstanding (denominator), diluted shares reflects: (i) the exercise of options to acquire common stock to the extent that the options’ exercise prices are less than the average market price of common shares during the period and (ii) the pro forma vesting of restricted stock units. The following table sets forth the computations of basic and diluted earnings per share: Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Basic earnings per share Numerator: Net income attributable to Mistras Group, Inc. $ 4,373 $ 3,380 $ 3,653 $ 3,955 Denominator: Weighted average common shares outstanding 29,965 29,619 29,879 29,550 Basic earnings per share $ 0.15 $ 0.11 $ 0.12 $ 0.13 Diluted earnings per share: Numerator: Net income attributable to Mistras Group, Inc. $ 4,373 $ 3,380 $ 3,653 $ 3,955 Denominator: Weighted average common shares outstanding 29,965 29,619 29,879 29,550 Dilutive effect of stock options outstanding — — — — Dilutive effect of restricted stock units outstanding 280 508 330 543 30,245 30,127 30,209 30,093 Diluted earnings per share $ 0.14 $ 0.11 $ 0.12 $ 0.13 5. Acquisitions 14 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Acquisition-Related Expense In the course of its acquisition activities, the Company incurs costs in connection with due diligence, such as professional fees, and other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a quarterly basis. These amounts are reported as Acquisition-related expense, net on the Unaudited Condensed Consolidated Statements of Income and were as follows for the three and nine months ended September 30, 2022 and 2021: Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Due diligence, professional fees and other transaction costs $ 1 $ — $ 18 $ 34 Adjustments to fair value of contingent consideration liabilities — 246 45 1,034 Acquisition-related expense, net $ 1 $ 246 $ 63 $ 1,068 As of September 30, 2022, the Company’s contingent consideration liabilities are included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. 6. Accounts Receivable, net Accounts receivable consisted of the following: September 30, 2022 December 31, 2021 Trade accounts receivable $ 135,694 $ 112,739 Allowance for credit losses ( 4,298 ) ( 3,228 ) Accounts receivable, net $ 131,396 $ 109,511 The Company had $ 22.9 million and $ 11.9 million of unbilled revenue accrued as of September 30, 2022 and December 31, 2021, respectively. These amounts are included in the trade accounts receivable balances above. Unbilled revenue is generally billed in the subsequent quarter to their revenue recognition. The Company considers unbilled receivables as short-term in nature as they are normally converted to trade receivables within 90 days, thus future changes in economic conditions will not have a significant effect on the credit loss estimate. The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of December 31, 2019, approximately $ 1.4 million of past due receivables were outstanding from this customer. The Company received notice from the customer in December 2019, alleging that the work performed was not in compliance with the contract. The Company recorded a full reserve for this receivable during 2019 and the status of this situation has not changed since 2019. See Note 14- Commitments and Contingencies for additional details. 7. Property, Plant and Equipment, net 15 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Property, plant and equipment consisted of the following: Useful Life (Years) September 30, 2022 December 31, 2021 Land $ 2,499 $ 2,762 Buildings and improvements 30 - 40 23,790 24,787 Office furniture and equipment 5 - 8 19,219 16,620 Machinery and equipment 5 - 7 240,741 250,166 286,249 294,335 Accumulated depreciation and amortization ( 210,116 ) ( 207,757 ) Property, plant and equipment, net $ 76,133 $ 86,578 Depreciation expense for the three months ended September 30, 2022 and 2021 was approximately $ 5.9 million and $ 6.1 million, respectively. Depreciation expense for the nine months ended September 30, 2022 and 2021 was $ 18.3 million and $ 18.4 million, respectively. 8. Goodwill Changes in the carrying amount of goodwill by segment are shown below: Services International Products and Systems Total Balance at December 31, 2021 $ 190,656 $ 14,783 $ — $ 205,439 Foreign currency translation ( 5,996 ) ( 2,010 ) — ( 8,006 ) Balance at September 30, 2022 $ 184,660 $ 12,773 $ — $ 197,433 The Company reviews goodwill for impairment on a reporting unit basis on October 1 of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The Company performed a quantitative annual impairment test as of October 1, 2021 and the Company did not identify any changes in circumstances that would indicate the carrying value of goodwill may not be recoverable. Additionally, through September 30, 2022, the Company did not identify any changes in circumstances that would indicate the carrying value of goodwill may not be recoverable. Significant adverse changes in future periods could negatively affect the Company’s key assumptions and may result in future goodwill impairment charges which could be material. 16 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 9. Intangible Assets The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows: September 30, 2022 December 31, 2021 Useful Life (Years) Gross Amount Accumulated Amortization Net Carrying Amount Gross Amount Accumulated Amortization Net Carrying Amount Customer relationships 5 - 18 $ 107,525 $ ( 80,938 ) $ 26,587 $ 112,109 $ ( 80,319 ) $ 31,790 Software/Technology 3 - 15 50,093 ( 27,554 ) 22,539 52,265 ( 26,415 ) 25,850 Covenants not to compete 2 - 5 12,441 ( 12,336 ) 105 12,623 ( 12,390 ) 233 Other 2 - 12 10,294 ( 9,188 ) 1,106 10,574 ( 9,066 ) 1,508 Total $ 180,353 $ ( 130,016 ) $ 50,337 $ 187,571 $ ( 128,190 ) $ 59,381 Amortization expense for the three months ended September 30, 2022 and 2021 was $ 2.3 million and $ 2.4 million, respectively. Amortization expense for the nine months ended September 30, 2022 and September 30, 2021 was $ 6.9 million and $ 7.3 million, respectively. 10. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following: September 30, 2022 December 31, 2021 Accrued salaries, wages and related employee benefits $ 31,600 $ 33,816 Contingent consideration, current portion 938 1,830 Accrued workers’ compensation and health benefits 3,957 3,994 Deferred revenue 6,921 6,202 Pension accrual 2,519 2,519 Right-of-use liability - Operating 9,976 10,040 Other accrued expenses 27,159 25,462 Total $ 83,070 $ 83,863 17 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 11. Long-Term Debt Long-term debt consisted of the following: September 30, 2022 December 31, 2021 Senior credit facility $ 73,750 $ 119,500 Senior secured term loan, net of unamortized debt issuance costs of $ 0.5 million and $ 0.2 million, respectively 122,936 76,673 Other 4,526 6,392 Total debt 201,212 202,565 Less: Current portion ( 7,365 ) ( 20,162 ) Long-term debt, net of current portion $ 193,847 $ 182,403 Senior Credit Facility Prior to entering into the new Credit Agreement described below, the Company had a credit agreement with its banking group (the "Credit Agreement") which provided the Company with a $ 150 million revolving credit facility and a $ 100 million term loan. The Credit Agreement was most recently amended on May 19, 2021 and had a maturity date of December 12, 2023. On August 1, 2022, the Company entered into a new credit agreement (the “New Credit Agreement”) which replaced the prior Credit Agreement and provides the Company with a $ 190 million 5 -year committed revolving credit facility and a $ 125 million term loan with a balance of $ 122.9 million as of September 30, 2022. The New Credit Agreement permits the Company to borrow up to $ 100 million in non-US dollar currencies and to use up to $ 20 million of the credit limit for the issuance of letters of credit. Both the revolving line of credit and the term loan under the New Credit Agreement have a maturity date of July 30, 2027. The New Credit Agreement has the following key terms, conditions and financial covenants: • Borrowings bear interest at Secured Overnight Financing Rate ("SOFR") plus a credit spread adjustment and applicable SOFR margin ranging from 1.25 % to 2.75 %, based upon our Total Consolidated Debt Leverage Ratio (defined below); under the Credit Agreement, the margin was based upon the LIBOR margin. ◦ Total Consolidated Debt Leverage Ratio means the ratio of (a) Total Consolidated Debt to (b) EBITDA (as defined in the New Credit Agreement) for the trailing four consecutive fiscal quarters. ◦ Total Consolidated Debt means all indebtedness (including subordinated debt) of the Company on a consolidated basis. • The Company has the benefit of the lowest SOFR margin if its Total Consolidated Debt Leverage Ratio is equal to or less than 1.25 to 1.0, and the margin increases as the ratio increases, to the maximum margin if the ratio is greater than 3.75 to 1.0. The New Credit Agreement is secured by liens on substantially all the assets of the Company and certain of its U.S subsidiaries and is guaranteed by those U.S subsidiaries. • The Company has to maintain a Total Consolidated Debt Leverage Ratio of no more than 4.0 to 1.0 at the end of each quarter through June 30, 2023 and stepping down to a maximum permitted ratio of no more than 3.75 to 1.0 for the remainder of the term. • The Company has to maintain a Fixed Charge Coverage Ratio of 1.25 to 1.0 for the duration of the New Credit Agreement, as defined in the New Credit Agreement. • The New Credit Agreement limits the Company’s ability to, among other things, create liens, make investments, incur more indebtedness, merge or consolidate, make dispositions of property, pay dividends, make distributions to stockholders or repurchase our stock, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements. • The New Credit Agreement does not limit the Company’s ability to acquire other businesses or companies except that the acquired business or company must be in the Company's line of business, the Company must be in compliance with the financial covenants on a pro forma basis after taking into account the acquisition, and the Company must provide written notice at least five business days prior to the date of an acquisition of $ 10 million or more. 18 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) • Quarterly payments on the term loan of $ 1.56 million through June 30, 2024, then increasing to $ 2.34 million through June 30, 2025, and to $ 3.12 million for each quarterly payment thereafter through maturity. The New Credit Agreement was accounted for as a modification and the Company expensed $ 0.8 million in unamortized capitalized debt issuance costs and fees during the three months ended September 30, 2022, which was included in selling, general and administrative expenses on the Consolidated Statements of Income. The Company incurred $ 1.6 million in financing costs for the New Credit Agreement, of which $ 0.2 million of third party costs were expensed and included in selling, general and administrative expenses on the Consolidated Statements of Income. As of September 30, 2022, the Company had borrowings of $ 196.7 million and a total of $ 3.0 million of letters of credit outstanding under the New Credit Agreement. The Company has capitalized costs associated with debt modifications of $ 1.4 million as of September 30, 2022, which is included in Other assets on the Condensed Consolidated Balance Sheets and will be amortized into interest expense over the remaining term of the Credit Agreement through July 30, 2027. As of September 30, 2022, the Company was in compliance with the terms of the New Credit Agreement. The Company continuously monitors compliance with the covenants contained in its New Credit Agreement. The Company believes that it is probable that the Company will be able to comply with the financial covenants in the New Credit Agreement and that sufficient credit remains available under the New Credit Agreement to meet the Company’s liquidity needs. However, due to the uncertainties of the global economy, including significant volatility in oil prices, and volatility in the aerospace production, such matters cannot be predicted with certainty. Other debt The Company’s other debt includes bank financing provided at the local subsidiary level used to support working capital requirements and fund capital expenditures. At September 30, 2022, there was an aggregate of approximately $ 4.5 million outstanding, payable at various times through 2030. Monthly payments range from $ 1.0 thousand to $ 15.0 thousand and interest rates range from 0.4 % to 3.5 %. 12. Fair Value Measurements The Company performs fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a three level hierarchy that prioritizes the inputs used to measure fair value. Financial instruments measured at fair value on a recurring basis The fair value of contingent consideration liabilities was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the applicable acquisition agreements. 19 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) The following table represents the changes in the fair value of Level 3 contingent consideration: Nine months ended September 30, 2022 2021 Beginning balance $ 1,831 $ 1,640 Acquisitions — — Payments ( 938 ) ( 938 ) Accretion of liability — — Revaluation 45 1,034 Foreign currency translation — — Ending balance $ 938 $ 1,736 Financial instruments not measured at fair value on a recurring basis The Company has evaluated current market conditions and borrower credit quality and has determined that the carrying value of its long-term debt approximates fair value. The fair value of the Company’s notes payable and finance lease obligations approximates their carrying amounts based on anticipated interest rates which management believes would currently be available to the Company for similar issuances of debt. 13. Leases The Company’s Condensed Consolidated Balance Sheets include the following related to right-of-use ("ROU") Leases Classification September 30, 2022 December 31, 2021 Assets ROU assets Other assets $ 37,777 $ 42,451 Liabilities ROU - current Accrued expenses and other current liabilities $ 9,976 $ 10,040 ROU liability - long-term Other long-term liabilities 29,205 34,030 Total ROU liabilities $ 39,181 $ 44,070 Included within the balance of operating leases is a lease for the Company’s headquarters which is with a related party. The ROU liability for this facility was approximately $ 2.0 million and $ 2.9 million as of September 30, 2022 and December 31, 2021, respectively. Total rent payments for this facility were approximately $ 0.2 million and $ 0.3 million for the three months ended September 30, 2022 and September 30, 2021, respectively. Total rent payments for this facility were approximately $ 0.7 million and $ 1.0 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. An agreement was reached with the related party to reduce rental payments by 12.5 % for the lease of the Company’s headquarters, effective February 2022 as part of a voluntary reduction. The total ROU assets attributable to finance leases were approximately $ 12.7 million and $ 13.8 million as of September 30, 2022 and December 31, 2021, respectively, which is included in Property, plant, and equipment , net on the Condensed Consolidated Balance Sheets. 20 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) The components of lease costs were as follows: Three months ended September 30, Nine months ended September 30, Classification 2022 2021 2022 2021 Finance lease expense Amortization of ROU assets Depreciation and amortization $ 1,002 $ 1,002 $ 3,039 $ 3,094 Interest on lease liabilities Interest expense 149 177 463 550 Operating lease expense Cost of revenue; Selling, general & administrative expenses 3,194 3,239 9,595 9,808 Short-term lease expense Cost of revenue; Selling, general & administrative expenses 26 7 35 22 Variable lease expense Cost of revenue; Selling, general & administrative expenses 530 532 1,619 1,956 Total $ 4,901 $ 4,957 $ 14,751 $ 15,430 Additional information related to leases was as follows: Nine months ended September 30, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities for finance and operating leases Finance - financing cash flows $ 3,173 $ 3,032 Finance - operating cash flows $ 463 $ 550 Operating - operating cash flows $ 9,394 $ 9,870 ROU assets obtained in the exchange for lease liabilities Finance leases $ 3,373 $ 2,445 Operating leases $ 5,367 $ 4,212 Weighted-average remaining lease term (in years) Finance leases 5.3 5.5 Operating leases 4.8 5.3 Weighted-average discount rate Finance leases 5.2 % 5.4 % Operating leases 5.5 % 5.8 % 21 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Maturities of lease liabilities as of September 30, 2022 were as follows: Finance Operating Remainder of 2022 $ 2,316 $ 3,044 2023 4,408 11,577 2024 3,507 9,432 2025 1,958 6,941 2026 1,318 5,031 Thereafter 793 8,941 Total 14,300 44,966 Less: Present value discount 953 5,785 Lease liability $ 13,347 $ 39,181 14. Commitments and Contingencies Legal Proceedings and Government Investigations The Company is periodically involved in lawsuits, investigations and claims that arise in the ordinary course of business. The Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it. Except for possible losses from the matters described below, the Company does not believe that any currently pending or threatened legal proceeding to which the Company is or is likely to become a party will have a material adverse effect on its business, results of operations, cash flows or financial condition. The costs incurred by the Company to defend lawsuits, investigations and claims and amounts the Company pays to other parties because of these matters may be covered by insurance in some circumstances. Litigation and Commercial Claims The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of September 30, 2022, approximately $ 1.4 million of past due receivables were outstanding from this customer. The customer provided the Company with notice in December 2019, alleging that the Company’s inspection of 66 welds (out of approximately 16,000 welds inspected) were not in compliance with the contract, claimed approximately $ 7.6 million in damages, and requested that the Company pay these damages and any other damages incurred. The Company filed a lawsuit in the District Court of Bexar County, Texas, 37th Judicial District, in an action captioned Mistras Group, Inc. v. Epic Y-Grade Pipeline LP, to recover the $ 1.4 million and other amounts due to the Company. The customer filed a counterclaim, alleging breach of contract and seeking recovery of its alleged damages. The Company believes that any successful claim by the customer regarding the Company’s workmanship will be covered by insurance, subject to payment of a deductible. At this time, the Company is unable to determine whether it has any liability in connection with this matter and if so, the amount or range of any such liability. In the nine months ended September 30, 2022, the Company recorded a charge of $ 0.1 million for a potential loss from this matter. The Company recorded a reserve in the amount of $ 1.4 million during the twelve months ended December 31, 2019 for the past due receivables. 22 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Two proceedings have been filed in California Superior Court for the County of Los Angeles regarding alleged violations of the California Labor Code. Both cases are captioned Justin Price v. Mistras Group, Inc. , one being a purported class action lawsuit on behalf of current and former Mistras employees in California and the other was filed on behalf of the State of California under the California Private Attorney General Act on the basis of the same alleged violations. The two cases were consolidated and requested payment of all damages, including unpaid wages, and various fines and penalties available under California law. On May 4, 2021, the Company agreed to a settlement of all claims in the cases, which was more formally documented pursuant to a settlement agreement completed October 5, 2021, as amended as of May 3, 2022. Pursuant to the settlement, the Company agreed to pay $ 2.3 million to resolve the allegations in these proceedings and to be responsible for the employer portion of payroll taxes on the amount of the settlement allocated to wages. The settlement as agreed upon by the parties received final court approval on September 26, 2022, and the Company paid the settlement proceeds and related payroll taxes to the claims administrator in the fourth quarter of 2022. The Company recorded expense of approximately $ 1.6 million during the three months ended March 31, 2021 related to this settlement, which is in addition to expense of $ 0.8 million the Company recorded during the three months ended December 31, 2020. Pension Related Contingencies A subsidiary of the Company had a significant reduction in its unionized workers in 2018. The collective bargaining agreements for the employees of this subsidiary required contributions for these employees to two national multi-employer pension funds. The reduction in employees resulted in the subsidiary incurring a complete withdrawal to one of the pension funds under the Employee Retirement Income Security Act of 1974 ("ERISA"), which was fully satisfied in 2019. The Company has determined that the subsidiary is likely to incur partial or complete withdrawal liability to the other pension fund. The balance of the estimated total amount of this potential liability as of September 30, 2022 is approximately $ 2.5 million, which was incurred in 2018 and 2019. Severance and labor disputes During December 2019, the Company executed an agreement to sell the rights of certain customer "staff leasing" contracts related to its German subsidiary for total consideration of approximately $ 0.1 million, effective January 1, 2020. No other assets or liabilities other than those employee benefits related to employees working on the customer contracts were included in the sale. As of September 30, 2022, the Company has approximately $ 0.1 million of accrued estimated severance payment obligations, which takes into account the Company’s estimate with respect to the employees that have been or will be transitioned to the German subsidiaries' other customers. The $ 0.1 million of estimated obligations is net of $ 0.4 million in payments made and $ 1.0 million in reversals due to employees being transitioned to customer contracts. The Company was entitled to indemnification on certain labor claims from the sellers of a company acquired by its Brazilian subsidiary. The Company and the sellers entered into a settlement agreement for approximately $ 1.0 million, which provided for payment in two installments, the first for approximately 31 % of the settlement and the second for the remaining 69 %. The first installment in the amount of approximately $ 0.3 million was paid by the sellers in December 2020 and the Company recognized that amount as a gain in selling, general and administrative expenses in the same period. The remaining payment for $ 0.6 million was received in the first quarter of 2021 and the Company recognized that amount as a gain in selling, general and administrative expenses in the same period. Acquisition and disposition related contingencies The Company is liable for contingent consideration in connection with certain of its acquisitions. As of September 30, 2022, total potential acquisition-related contingent consideration ranged from zero to approximately $ 1.9 million. During 2018, the Company sold a subsidiary in the Products and Systems segment. As part of the sale, the Company entered into a three-year agreement to purchase products from the buyer, with a cumulative commitment of $ 2.3 million. On August 3, 2021, the Company entered into an agreement and extended the period by twelve months . As of September 30, 2022, the commitment was fully satisfied. 15. Segment Disclosure The Company’s three operating segments are: 23 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) • Services. This segment provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of NDT, inspection, mechanical and engineering services that are used to evaluate the safety, structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components. Software, digital and data services are included in this segment. • International. This segment offers services, products and systems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment. • Products and Systems. This segment designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States. Costs incurred for general corporate services, including finance, legal, and certain other costs that are provided to the segments are reported within Corporate and eliminations. During the first quarter of 2022 the Company finalized a transfer pricing study which resulted in additional costs being allocated from Corporate to the operating segments with the majority of the costs allocated to the Services segment. These costs are reflected in operating income (loss) of each segment. Sales to the International segment from the Products and Systems segment and subsequent sales by the International segment of the same items are recorded and reflected in the operating performance of both segments. Additionally, engineering charges and royalty fees charged to the Services and International segments by the Products and Systems segment are reflected in the operating performance of each segment The accounting policies of the reportable segments are the same as those described in Note 1 - Description of Business and Basis of Presentation . Segment income from operations is one of the primary performance measures used by the chief operating decision maker, to assess the performance of each segment and make resource allocation decisions. Certain general and administrative costs such as human resources, information technology and training are allocated to the segments. Segment income from operations excludes interest and other financial charges and income taxes. Corporate and other assets are comprised principally of cash, deposits, property, plant and equipment, domestic deferred taxes, deferred charges and other assets. Corporate loss from operations consists of administrative charges related to corporate personnel and other charges that cannot be readily identified for allocation to a particular segment. Selected consolidated financial information by segment for the periods shown was as follows: (with intercompany transactions eliminated in Corporate and eliminations) Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Revenue Services $ 152,778 $ 144,976 $ 435,251 $ 414,251 International 25,693 29,100 83,441 88,699 Products and Systems 3,078 3,308 8,666 9,499 Corporate and eliminations ( 3,087 ) ( 2,828 ) ( 8,203 ) ( 6,481 ) $ 178,462 $ 174,556 $ 519,155 $ 505,968 Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Gross profit Services $ 44,869 $ 41,749 $ 118,348 $ 116,587 International 7,694 9,038 25,324 26,278 Products and Systems 1,189 1,422 3,514 4,655 Corporate and eliminations 32 7 47 33 $ 53,784 $ 52,216 $ 147,233 $ 147,553 24 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Income (loss) from operations by operating segment includes intercompany transactions, which are eliminated in Corporate and eliminations. Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Income (loss) from operations Services $ 16,700 $ 16,085 $ 35,315 $ 38,991 International 814 1,169 2,678 2,158 Products and Systems ( 333 ) ( 281 ) ( 1,334 ) ( 653 ) Corporate and eliminations ( 8,067 ) ( 7,737 ) ( 22,668 ) ( 24,632 ) $ 9,114 $ 9,236 $ 13,991 $ 15,864 Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Depreciation and amortization Services $ 6,168 $ 6,192 $ 18,927 $ 18,517 International 1,858 2,167 5,835 6,552 Products and Systems 221 221 559 664 Corporate and eliminations ( 50 ) ( 72 ) ( 189 ) ( 28 ) $ 8,197 $ 8,508 $ 25,132 $ 25,705 September 30, 2022 December 31, 2021 Intangible assets, net Services $ 44,631 $ 51,862 International 4,390 6,344 Products and Systems 1,184 1,042 Corporate and eliminations 132 133 $ 50,337 $ 59,381 September 30, 2022 December 31, 2021 Total assets Services $ 415,090 $ 424,058 International 94,153 111,619 Products and Systems 11,947 10,532 Corporate and eliminations 19,256 15,986 $ 540,446 $ 562,195 Refer to Note 2 – Revenue , for revenue by geographic area for the three and nine months ended September 30, 2022 and 2021. 25 Table of Contents Mistras Group, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (tabular dollars are in thousands)