What changed in this filing

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Item 1. Financial Statements

2023-05-05 compared with 2022-11-07 · 229 added, 362 removed, 483 unchanged (55% of the section changed)

2 unchanged sentences

and Subsidiaries

Condensed Consolidated Balance Sheets

Unaudited Condensed Consolidated Balance Sheets

( in thousands, except share and per share data )

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

ASSETS (unaudited)

24 unchanged sentences

Total liabilities 334,671 336,155

Commitments and contingencies

Commitments and contingencies (Note 14)

Preferred stock, 10,000,000 shares authorized

11 unchanged sentences

and Subsidiaries

Unaudited Condensed Consolidated Statements of Income

Unaudited Condensed Consolidated Statements of Loss

( in thousands, except per share data )

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

2022 2021 2022 2021

Three months ended March 31,

Revenue $ 168,016 $ 161,662

3 unchanged sentences

Selling, general and administrative expenses 42,823 41,922

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

Reorganization and other costs 2,076 114

Legal settlement and insurance recoveries, net — ( 841 )

2 unchanged sentences

Acquisition-related expense, net 3 49

Income from operations 9,114 9,236 13,991 15,864

Loss from operations ( 1,830 ) ( 4,698 )

Interest expense 4,068 1,938

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

Loss before benefit for income taxes ( 5,898 ) ( 6,636 )

Benefit for income taxes ( 920 ) ( 1,283 )

Net Loss ( 4,978 ) ( 5,353 )

net income attributable to noncontrolling interests, net of taxes 8 10

Net Income attributable to Mistras Group, Inc.

Net Loss attributable to Mistras Group, Inc.

$ ( 4,986 ) $ ( 5,363 )

Earnings per common share

Loss per common share

Basic $ ( 0.17 ) $ ( 0.18 )

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and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

Unaudited Condensed Consolidated Statements of Comprehensive 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):

Three months ended March 31,

Net Loss $ ( 4,978 ) $ ( 5,353 )

Other comprehensive loss:

Foreign currency translation adjustments $ 1,273 $ 555

Comprehensive Income (Loss) ( 8,601 ) ( 2,075 ) ( 17,264 ) 866

Comprehensive Loss ( 3,705 ) ( 4,798 )

net income attributable to noncontrolling interest 8 10

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

Comprehensive loss attributable to Mistras Group, Inc.

$ ( 3,713 ) $ ( 4,808 )

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

5 unchanged sentences

Common Stock Additional

paid-in capital Retained

(deficit) Accumulated

comprehensive (loss) Total

Mistras Group,

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

paid-in capital Accumulated

deficit Accumulated

4 unchanged sentences

Balance at December 31, 2022 29,895 $ 298 $ 243,031 $ ( 11,489 ) $ ( 33,390 ) $ 198,450 $ 299 $ 198,749

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 income (loss) — — — ( 4,986 ) — ( 4,986 ) 8 ( 4,978 )

Other comprehensive income (loss), net of tax — — — — 1,273 1,273 — 1,273

Share-based payments — — 1,877 — — 1,877 — 1,877

Net settlement of restricted stock units 335 4 ( 777 ) — — ( 773 ) — ( 773 )

Balance at September 30, 2022 29,842 $ 297 $ 242,093 $ ( 14,335 ) $ ( 41,282 ) $ 186,773 $ 283 $ 187,056

Balance at March 31, 2023 30,230 $ 302 $ 244,131 $ ( 16,475 ) $ ( 32,117 ) $ 195,841 $ 307 $ 196,148

Balance at December 31, 2021 29,546 $ 295 $ 238,687 $ ( 17,988 ) $ ( 20,311 ) $ 200,683 $ 229 $ 200,912

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 income (loss) — — — ( 5,363 ) — ( 5,363 ) 10 ( 5,353 )

Other comprehensive income, net of tax — — — — 555 555 — 555

Share-based payments — — 1,515 — — 1,515 — 1,515

Net settlement of restricted stock units 174 2 ( 546 ) — — ( 544 ) — ( 544 )

Balance at September 30, 2021 29,458 $ 294 $ 237,577 $ ( 17,893 ) $ ( 19,176 ) $ 200,802 $ 224 $ 201,026

Balance at March 31, 2022 29,720 $ 297 $ 239,656 $ ( 23,351 ) $ ( 19,756 ) $ 196,846 $ 239 $ 197,085

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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(In Thousands)

Nine months ended September 30,

Three months ended March 31,

Cash flows from operating activities

Net income $ 3,707 $ 3,983

Adjustments to reconcile net income to net cash provided by operating activities

Net loss $ ( 4,978 ) $ ( 5,353 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities

Depreciation and amortization 8,413 8,807

3 unchanged sentences

Fair value adjustments to contingent consideration — 45

Foreign currency (gain) loss ( 924 ) 366

Payment of finance costs ( 448 ) —

Foreign currency loss 219 686

Other ( 315 ) 86

Changes in operating assets and liabilities, net of effect of acquisitions

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions

Accounts receivable 3,777 ( 17,831 )

5 unchanged sentences

Payment of contingent consideration liability in excess of acquisition-date fair value ( 938 ) ( 533 )

Net cash provided by operating activities 10,531 22,469

Net cash provided by (used in) operating activities 4,433 ( 5,399 )

Cash flows from investing activities

1 unchanged sentence

Purchase of intangible assets ( 361 ) ( 151 )

Acquisition of business, net of cash acquired — ( 441 )

Proceeds from sale of equipment 233 475

2 unchanged sentences

Repayment of finance lease obligations ( 1,174 ) ( 1,076 )

Proceeds from borrowings of long-term debt 125,000 —

Repayment of long-term debt ( 1,904 ) ( 4,152 )

1 unchanged sentence

Repayment of revolver ( 27,100 ) ( 15,500 )

Payment of financing costs ( 148 ) ( 550 )

Payment of contingent consideration for business acquisitions — ( 405 )

Taxes paid related to net share settlement of share-based awards ( 773 ) ( 544 )

Net cash used in financing activities ( 4,753 ) ( 8,866 )

Net cash provided by (used in) financing activities ( 3,951 ) 4,323

Effect of exchange rate changes on cash and cash equivalents 207 ( 376 )

2 unchanged sentences

Cash and cash equivalents at end of period $ 16,717 $ 19,921

Supplemental disclosure of cash paid

Supplemental disclosure of cash paid (received)

Interest, net $ 5,112 $ 1,711

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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.

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

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

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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.

The Company has three operating segments.

During the first quarter of 2023, the Company renamed the Services segment to more closely align to the geographical area in which the Segment operates.

We did not recast the corresponding financial information for the historical periods presented, as there was no change in the manner which our chief operating decision maker reviews the financial results of each Segment and allocates resources.

Our Segments, with the updated naming convention, are as follows:

• North America (Referred to as "Services" in prior filings).

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.

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;

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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.

During 2022, the Company experienced unfavorable foreign currency exchange impacts as it relates to the Company's European operations, which has continued in 2023.

Additionally, the Russian-Ukrainian war continues to create disruptions in the oil and gas market and the supply chain in general, which is resulting in some disruption to our business operations.

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Company’s European operations are currently experiencing increased costs associated with higher energy costs, among others, due in part to the Russian-Ukrainian war.

In 2022, the Company eliminated substantially all of the COVID related 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 may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine.

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

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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, 2023 and December 31, 2022.

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.

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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.

The non-controlling interests in net results, net of tax, is classified separately in the accompanying Unaudited Condensed Consolidated Statements of Loss.

All significant intercompany accounts and transactions have been eliminated in consolidation.

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Such reclassifications did not have a material effect on the Company's financial condition or results of operations as previously reported.

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

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Since the date of the 2022 Annual Report, there have been no material changes to the Company's significant accounting policies.

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.

As of March 31, 2023, 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

Mistras Group, Inc.

2 unchanged sentences

(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.

The Company’s effective income tax rate was approximately 15.6 % and 19.3 % for the three months ended March 31, 2023 and 2022, respectively.

The effective income tax rate benefit for the three months ended March 31, 2023 was lower than the statutory rate primarily due to the impact of an unfavorable discrete item related to stock compensation.

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):

In March 2020 and updated in January 2021, the FASB issued Accounting Standards Update ("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.

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The Company is currently evaluating applicable contracts and the available expedients provided by the new guidance.

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

The Company derives the majority of its revenue by providing services on a time and material basis, and are short-term in nature.

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Contract costs include labor, material and overhead.

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 .

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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

Mistras Group, Inc.

2 unchanged sentences

(tabular dollars and shares in thousands, except per share data)

Nine Months Ended September 30, 2022 Services International Products Corp/Elim Total

Revenue by Category

The following series of tables present the Company's disaggregated revenue:

Revenue by industry was as follows:

Three Months Ended March 31, 2023 North America International Products & Systems Corp/Elim Total

Oil & Gas $ 89,773 $ 8,855 $ 37 $ — $ 98,665

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Total $ 136,932 $ 29,407 $ 3,739 $ ( 2,062 ) $ 168,016

Nine Months Ended September 30, 2021 Services International Products Corp/Elim Total

Three Months Ended March 31, 2022 North America International Products & Systems Corp/Elim Total

Oil & Gas $ 86,613 $ 7,572 $ 38 $ — $ 94,223

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Revenue per key geographic location was as follows:

Three Months Ended September 30, 2022 Services International Products Corp/Elim Total

Three Months Ended March 31, 2023 North America International Products & Systems Corp/Elim Total

United States $ 120,600 $ 309 $ 1,801 $ ( 598 ) $ 122,112

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Total $ 136,932 $ 29,407 $ 3,739 $ ( 2,062 ) $ 168,016

Three Months Ended September 30, 2021 Services International Products Corp/Elim Total

Three Months Ended March 31, 2022 North America International Products & Sytems Corp/Elim Total

United States $ 113,935 $ 173 $ 1,351 $ ( 655 ) $ 114,804

7 unchanged sentences

(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).

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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.

Revenue recognized during the three months ended March 31, 2023 and 2022 that was included in the contract liability balance at the beginning of such year was $ 3.1 million and $ 2.2 million for each period.

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.

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.

The Company applies a practical expedient to expense incremental costs incurred related to obtaining a contract.

The Company applies the practical expedient to expense incremental costs incurred related to obtaining a contract when the amortization period of the asset that the Company otherwise would have recognized is one year or less.

Mistras Group, Inc.

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(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,

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

Share-Based Compensation

The Company has granted 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 awards have been granted under the 2009 Plan since the 2016 Plan was approved by shareholders in 2016, and the remaining stock option award granted under the 2009 Plan expired during the three months ended March 31, 2022.

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 1,100,000 shares were available for future grants as of March 31, 2023.

Stock Options

During the three months ended March 31, 2022, all remaining outstanding stock options expired.

For each of the three months ended March 31, 2023 and 2022, the Company did no t recognize any share-based compensation expense related to the stock option award.

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.

For the three months ended March 31, 2023 and March 31, 2022, the Company recognized share-based compensation expense related to restricted stock unit awards of $ 0.9 million and $ 0.9 million, respectively.

As of March 31, 2023, there was $ 10.0 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 3.1 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,

Three months ended March 31,

Restricted stock awards vested 338 226

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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,

Three months ended March 31,

Awards issued 48 34

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A summary of the Company's outstanding, non-vested restricted share units is as follows:

Nine months ended September 30,

Three months ended March 31,

Units Weighted

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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:

For 2022, the Compensation Committee utilized the same structure for the Company’s equity incentive compensation plan for its executive officers as 2021, and approved the new target awards for 2022.

The three metrics were:

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.

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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.

For 2023, the Compensation Committee made changes to the Company's equity incentive compensation plan for its executive officers including modifying the metrics utilized, and approved the new target awards for 2023.

The three metrics are:

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.

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.

PRSUs are equity-classified and compensation costs are initially measured using the fair value of the underlying stock at the date of grant.

2 unchanged sentences

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.

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

A summary of the Company's PRSU activity is as follows:

Nine months ended September 30,

Three months ended March 31,

Units Weighted

8 unchanged sentences

382 $ 9.12 656 $ 12.18

During the three months ended March 31, 2023 and March 31, 2022, the Compensation Committee approved the final calculation of the award metrics for calendar year 2022 and 2021, respectively.

As a result, the calendar year 2023 PRSUs decreased by approximately 32,000 units as a result of the final calculation of award metrics.

For the three months ended March 31, 2023 and March 31, 2022, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $ 0.7 million and $ 0.3 million, respectively.

At March 31, 2023, there was $ 2.8 million of total unrecognized compensation costs related to approximately 382,000 non-vested PRSUs, which is expected to be recognized over a remaining weighted-average period of 2.0 years.

Earnings (loss) per Share

Basic earnings (loss) per share is computed by dividing net loss by the weighted-average number of shares outstanding during the period.

Diluted earnings per share is computed by dividing net loss by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, and (2) the dilutive effect of assumed conversion of equity awards using the treasury stock method.

With respect to the number of weighted-average shares outstanding (denominator), diluted shares reflects:

(i) the exercise of options to acquire common stock to the extent that the options’ exercise prices are less than the average market price of common shares during the period and (ii) the pro forma vesting of restricted stock units.

Mistras Group, Inc.

2 unchanged sentences

(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.

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:

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

Net income attributable to Mistras Group, Inc.

The following table sets forth the computations of basic and diluted loss per share:

Three months ended March 31,

Basic loss per share

Net loss attributable to Mistras Group, Inc.

$ ( 4,986 ) $ ( 5,363 )

Weighted average common shares outstanding 30,021 29,634

Basic earnings per share $ 0.15 $ 0.11 $ 0.12 $ 0.13

Diluted earnings per share:

Net income attributable to Mistras Group, Inc.

Basic loss per share $ ( 0.17 ) $ ( 0.18 )

Diluted loss per share:

Net loss attributable to Mistras Group, Inc.

$ ( 4,986 ) $ ( 5,363 )

Weighted average common shares outstanding 30,021 29,634

Dilutive effect of stock options outstanding — — — —

Dilutive effect of restricted stock units outstanding (1)

30,021 29,634

Diluted earnings per share $ 0.14 $ 0.11 $ 0.12 $ 0.13

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Diluted loss per share $ ( 0.17 ) $ ( 0.18 )

_______________

(1) For the three months ended March 31, 2023 and 2022, 1,513,000 and 1,212,000 shares, respectively, related to restricted stock were excluded from the calculation of diluted EPS due to the net loss for the period.

Acquisition-Related Expense

1 unchanged sentence

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

These amounts are reported as Acquisition-related expense, net on the Unaudited Condensed Consolidated Statements of Loss and were as follows for the three months ended March 31, 2023 and 2022:

Three months ended March 31,

Due diligence, professional fees and other transaction costs $ 3 $ 4

1 unchanged sentence

Acquisition-related expense, net $ 3 $ 49

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.

The Company's contingent consideration liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheets.

Accounts Receivable, net

Accounts receivable consisted of the following:

September 30, 2022 December 31, 2021

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

March 31, 2023 December 31, 2022

Trade accounts receivable $ 124,066 $ 127,767

1 unchanged sentence

Accounts receivable, net $ 120,425 $ 123,657

The Company had $ 22.9 million and $ 11.9 million of unbilled revenue accrued as of September 30, 2022 and December 31, 2021, respectively.

The Company had $ 21.6 million and $ 13.5 million of unbilled revenue accrued as of March 31, 2023 and December 31, 2022, respectively.

These amounts are included in the trade accounts receivable balances above.

4 unchanged sentences

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.

The Company filed a lawsuit to recover the $ 1.4 million and other amounts due to the Company and the customer filed a counterclaim, alleging breach of contract and seeking its damages.

The Company recorded a full reserve for this receivable during 2019 and the status of this situation has not changed since 2019 through March 31, 2023.

See Note 14- Commitments and Contingencies and Note 16 - Subsequent Events for additional details.

Inventories consist of the following (in thousands):

March 31, 2023 December 31, 2022

Raw materials and consumable supplies $ 8,195 $ 7,745

Work in progress and finished goods 6,568 5,811

Inventories $ 14,763 $ 13,556

Property, Plant and Equipment, net

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:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Land $ 2,447 $ 2,529

8 unchanged sentences

Property, plant and equipment, net $ 78,816 $ 77,561

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.

Changes in the carrying amount of goodwill by segment are shown below:

Services International Products and Systems Total

Depreciation expense for the three months ended March 31, 2023 and 2022 was approximately $ 6.3 million and $ 6.6 million, respectively.

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Changes in the carrying amount of goodwill by segment is shown below:

North America International Products and Systems Total

Balance at December 31, 2022 $ 185,710 $ 13,925 $ — $ 199,635

Foreign currency translation 80 241 321

Balance at September 30, 2022 $ 184,660 $ 12,773 $ — $ 197,433

Balance at March 31, 2023 $ 185,790 $ 14,166 $ — $ 199,956

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, 2022 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.

Additionally, through March 31, 2023, 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.

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Intangible Assets

The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

(Years) Gross

7 unchanged sentences

Total $ 184,565 $ ( 137,205 ) $ 47,360 $ 183,588 $ ( 134,573 ) $ 49,015

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.

Amortization expense for the three months ended March 31, 2023 and 2022 was approximately $ 2.1 million and $ 2.4 million, respectively.

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Accrued salaries, wages and related employee benefits $ 25,855 $ 26,684

6 unchanged sentences

Total $ 77,127 $ 77,844

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Long-Term Debt

Long-term debt consisted of the following:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Senior credit facility $ 65,150 $ 65,250

6 unchanged sentences

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:

Prior to entering into the Credit Agreement (defined and described below), the Company had a credit agreement with its banking group (the "Prior Credit Agreement") which provided the Company with a $ 150 million revolving credit facility and a $ 100 million term loan.

The Prior 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 “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 $ 120 million as of March 31, 2023.

The 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 Credit Agreement have a maturity date of July 30, 2027.

The 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.

under the Prior 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 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.

Mistras Group, Inc.

2 unchanged sentences

(tabular dollars and shares in thousands, except per share data)

The 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 Fixed Charge Coverage Ratio of 1.25 to 1.0 for the duration of the New Credit Agreement, as defined in the Credit Agreement.

• The 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 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.

• 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.

The 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 (Loss).

The Company incurred $ 1.6 million in financing costs for the 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 (Loss) during the three months ended September 30, 2022.

As of March 31, 2023, the Company had borrowings of $ 185.0 million and a total of $ 2.6 million of letters of credit outstanding under the Credit Agreement.

The Company has capitalized costs associated with debt modifications of $ 1.4 million as of March 31, 2023, 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 March 31, 2023, the Company was in compliance with the terms and covenants of the Credit Agreement.

The Company continuously monitors compliance with the covenants contained in the Credit Agreement.

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.

At March 31, 2023, there was an aggregate of approximately $ 4.3 million outstanding, payable at various times through 2030.

Monthly payments range from $ 0.7 thousand to $ 16 thousand and interest rates range from 0.4 % to 3.5 %.

5 unchanged sentences

The fair value of contingent consideration liabilities was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820.

The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the applicable acquisition agreements.

The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected

Mistras Group, Inc.

2 unchanged sentences

(tabular dollars and shares in thousands, except per share data)

future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the applicable acquisition agreements.

The following table represents the changes in the fair value of Level 3 contingent consideration:

Nine months ended September 30,

Three months ended March 31,

Beginning balance $ 938 $ 1,831

Acquisitions — —

Payments ( 938 ) ( 938 )

Accretion of liability — —

Revaluation — 45

Foreign currency translation — —

Ending balance $ — $ 938

2 unchanged sentences

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.

The Company’s Condensed Consolidated Balance Sheets include the following related to right-of-use ("ROU")

Leases Classification September 30, 2022 December 31, 2021

ROU assets Other assets $ 37,777 $ 42,451

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.

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,

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 %

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

Present value discount 953 5,785

Lease liability $ 13,347 $ 39,181

Commitments and Contingencies

6 unchanged sentences

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.

As of March 31, 2023, 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.

The Company filed a lawsuit in the District Court of Bexar County, Texas, 37th Judicial District on December 17, 2019, in an action captioned Mistras Group, Inc.

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 customer filed a counterclaim on March 6, 2020, 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.

In the year ended December 31, 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 these past due receivables.

See Note 16 - Subsequent Events , for updated information on this matter.

Mistras Group, Inc.

4 unchanged sentences

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.

Mistras Group, Inc., one being a purported class action lawsuit on behalf of current and former Mistras employees in California, filed on June 10, 2020, and the other was filed on September 18, 2020, behalf of the State of California under the California Private Attorney General Act on the basis of the same alleged violations.

The two cases was 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.

3 unchanged sentences

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.

Certain of Company’s subsidiaries had significant reductions in their unionized workers in 2018.

The collective bargaining agreements for the employees of these subsidiaries 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.

The balance of the estimated total amount of this potential liability as of March 31, 2023 is approximately $ 2.5 million, which were incurred in 2018 and 2019.

Severance and labor disputes

1 unchanged sentence

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.

As of March 31, 2023, 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 $ 0.2 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.

Segment Disclosure

The Company’s three operating segments are:

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

As noted in Note 1 - Description of Business and Basis of Presentation , the Company updated the naming convention of one of our three operating segments and the updates are reflected below.

Our three operating segments are:

• North America.

5 unchanged sentences

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

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(tabular dollars and shares in thousands, except per share data)

Additionally, engineering charges and royalty fees charged to the North America 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 .

6 unchanged sentences

(with intercompany transactions eliminated in Corporate and eliminations)

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

2022 2021 2022 2021

Services $ 152,778 $ 144,976 $ 435,251 $ 414,251

Three months ended March 31,

North America $ 136,932 $ 132,946

International 29,407 28,138

2 unchanged sentences

$ 168,016 $ 161,662

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

2022 2021 2022 2021

Services $ 44,869 $ 41,749 $ 118,348 $ 116,587

Three months ended March 31,

North America $ 36,637 $ 30,526

International 7,367 8,190

2 unchanged sentences

$ 46,077 $ 39,892

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

Three months ended March 31,

Income (loss) from operations

Services $ 16,700 $ 16,085 $ 35,315 $ 38,991

North America $ 9,378 $ 3,761

International ( 568 ) 284

2 unchanged sentences

$ ( 1,830 ) $ ( 4,698 )

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

2022 2021 2022 2021

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

Three months ended March 31,

Depreciation and amortization

Services $ 6,168 $ 6,192 $ 18,927 $ 18,517

North America $ 6,357 $ 6,593

International 1,859 2,058

2 unchanged sentences

$ 8,413 $ 8,807

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Intangible assets, net

Services $ 44,631 $ 51,862

North America $ 41,746 $ 43,260

International 4,117 4,422

2 unchanged sentences

$ 47,360 $ 49,015

September 30, 2022 December 31, 2021

Services $ 415,090 $ 424,058

March 31, 2023 December 31, 2022

North America $ 394,280 $ 407,779

International 104,782 104,531

2 unchanged sentences

$ 530,819 $ 534,904

Refer to Note 2 – Revenue , for revenue by geographic area for the three and nine months ended September 30, 2022 and 2021.

Refer to Note 2 – Revenue , for revenue by geographic area for the three months ended March 31, 2023 and 2022.

Subsequent Events

On April 25, 2023, the Company settled the outstanding litigation described in Note 14- Commitments and Contingencies, Mistras Group, Inc.

Epic Y-Grade Pipeline LP, pending in Texas state court.

The lawsuit involves a claim against a customer for unpaid receivables and the customer’s counterclaim related to inspection of welds on various pipeline projects in Texas.

The settlement will result in a payment by the Company of $ 0.3 million (which the Company estimates is significantly less than the cost of going to trial) and a release of its claim for $ 1.4 million of associated past due receivables which were fully reserved for in prior periods.

The settlement is contingent on the parties executing a settlement agreement, which will include a release of all claims related to the matter and dismissal of the case with prejudice.

Mistras Group, Inc.

3 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements