What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-07 · 108 added, 147 removed, 156 unchanged (62% of the section changed)

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

The following Management’s Discussion and Analysis (“MD&A”) provides a discussion of our results of operations and financial position for the three and nine months ended September 30, 2022 and 2021.

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

The following Management’s Discussion and Analysis (“MD&A”) provides a discussion of our results of operations and financial position for the three months ended March 31, 2023 and 2022.

Unless otherwise specified or the context otherwise requires, “Mistras,” “the Company,” “we,” “us” and “our” refer to Mistras Group, Inc.

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Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those discussed in the “Business—Forward-Looking Statements,” and “Risk Factors” sections of our 2022 Annual Report as well as those discussed in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

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

The Company is currently unable to predict with certainty the effect that inflationary pressures and the Russian-Ukrainian conflict may have on the Company's business, results of operations or liquidity or in other ways which the Company cannot yet determine.

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

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

In addition, there are various developments discussed below which could create risks and uncertainty about our business, results of operations or liquidity.

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

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

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

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

and building real-time monitoring 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.

Mistras Group, Inc.

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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’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.

Our operations consist of three reportable segments:

Services, International, and Products and Systems.

• Services 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 structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components.

North America (which we previously referred to as our Services segment), International, and Products and Systems.

• North America 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 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.

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

This tool provides additional growth and expansion of our

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

Recent Developments

Issues related to the COVID-19 coronavirus (COVID-19) pandemic have subsided significantly during 2023 as compared to 2022.

The Russian-Ukrainian war is creating disruption 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.

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

Recent Developments

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

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

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 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.

Our cash position and liquidity remains strong.

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

As of March 31, 2023, the cash balance was approximately $16.7 million, and with our Credit Agreement, provides us with significant liquidity.

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

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

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

The Company is currently unable to predict with certainty the overall impact that the factors discussed above and the effect of the Russian-Ukrainian conflict may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine.

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

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

The Company will continue to monitor market conditions and respond accordingly

Refer to Item 1A.

Risk Factors in Part I of our 2021 Annual Report.

Note About Non-GAAP Measures

The Company prepares its consolidated financial statements in accordance with U.S.

In this MD&A under the heading "Income (loss) from Operations", the non-GAAP financial performance measure "Income (loss) before special items” is used for each of our three operating segments, the Corporate segment and the "Total Company", with tables reconciling the measure to a financial measure under GAAP.

In this MD&A under the heading "Income (loss) from Operations", the non-GAAP financial performance measure "Income (loss) from operations before special items” is used for each of our three operating segments, the Corporate segment and the "Total Company", with tables reconciling the measure to a financial measure under GAAP.

This presentation excludes from "Income (loss) from Operations" (a) transaction expenses related to acquisitions, such as professional fees and due diligence costs, (b) the net changes in the fair value of acquisition-related contingent consideration liabilities, (c) impairment charges, (d) reorganization and other costs, which includes items such as severance, labor relations matters and asset and lease termination costs and (e) other special items.

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Results of Operations

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

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

2022 2021 2022 2021

Condensed consolidated results of operations for the three months ended March 31, 2023 and 2022 were as follows:

Three months ended March 31,

Revenues $ 168,016 $ 161,662

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Gross profit as a % of Revenue 27.4 % 24.7 %

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

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

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

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

Net Income attributable to Mistras Group, Inc.

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

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

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

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

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

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

Loss from Operations as a % of Revenue (1.1) % (2.9) %

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

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

Net Loss attributable to Mistras Group, Inc.

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

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

Revenue was $168.0 million for the three months ended March 31, 2023, an increase of $6.4 million, or 3.9%, compared with the three months ended March 31, 2022.

Revenue by segment for the three months ended March 31, 2023 and 2022 were as follows:

Three months ended March 31,

North America $ 136,932 $ 132,946

International 29,407 28,138

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Corporate and eliminations (2,062) (2,358)

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

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

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

Products and Systems segment revenue decreased by $0.2 million, due to decreased sales volume as compared to the prior period.

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

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

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

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

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

Total $ 168,016 $ 161,662

In the three months ended March 31, 2023, total revenue increased 3.9% versus the prior year comparable period due predominantly to a single-digit organic increase.

North America segment revenue increased 3.0%, driven predominantly by a single-digit organic increase and increased turnarounds in the current year, minimally offset by low single-digit unfavorable impact of foreign exchange rates.

International segment revenue increased 4.6%, due predominantly to high single-digit organic growth mostly offset by mid single-digit unfavorable impact of foreign exchange rates.

Products and Systems segment revenue increased by 27.3%, due to increased sales volume and shipments as compared to the prior period.

Oil and gas customer revenue comprised approximately 59% and 58% of total revenue for the three months ended March 31, 2023 and 2022, respectively.

Aerospace and defense customer revenue comprised approximately 11% and 12% of total revenue for the three months ended March 31, 2023 and 2022, respectively.

The Company’s top ten customers comprised approximately 36% of total revenue for the three months ended March 31, 2023, as compared to 34% for the three months ended March 31, 2022, with no customer accounting for 10% or more of total revenue in either three-month period.

Mistras Group, Inc.

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

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

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

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

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

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

2022 2021 2022 2021

Three months ended March 31,

Oil and Gas Revenue by sub-category

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Total $ 98,665 $ 94,223

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

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

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

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

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

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

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

For the three months ended March 31, 2022, the Company reclassified $9.4 million from Upstream to Downstream in order to reflect the proper classification in the current period.

Oil and gas upstream customer revenue increased approximately $4.7 million, or 14%, due primarily to market share gains and increased exploration activity as compared to the prior period.

Midstream customer revenues decreased approximately $(3.7) million, or (15)%, due to decreased pipe inspection services performed as compared to the prior year quarter.

Downstream customer revenues increased $3.4 million or, 9%, primarily due to increased customer turnarounds in the current year that were delayed in the prior period.

Three months ended March 31,

Revenue by type

Field Services $ 109,680 $ 105,495

Shop Laboratories 13,132 13,089

Data Solutions 16,812 12,399

Other 28,392 30,679

Total $ 168,016 $ 161,662

Field Services revenues are comprised of revenue derived primarily by technicians performing asset inspections and maintenance services for our customers at locations other than Mistras properties.

Field Services revenue increased by $4.2 million as compared to the prior year primarily due to increases in sales volume in our oil and gas and petrochemical end markets for our North America and International segments and increased sales volumes within our the power generation and infrastructure end markets for our Products segment.

Shop Laboratory revenues are comprised of quality assurance inspections of components and materials at our Mistras in house laboratory facilities.

Shop revenues were flat as compared to the prior year quarter due to similar sales volumes related to our aerospace end market in both periods.

Data Solutions revenues are comprised of revenue derived from data software sales & subscriptions, implementation services and analytics which offer insights and generate value from asset protection.

Data Solutions revenue is derived from work performed by Mistras employees in our facilities, or at customer locations.

Data Solutions revenue increased by $4.4 million due to increased sales volume within PCMS, Onstream and other Data Solutions offerings within our North America segment.

Other revenues are comprised of locations that perform both asset inspection services and testing of components and materials at in house Mistras laboratories.

Other revenues decreased approximately $2.3 million as compared to the prior year primarily due to decreased sales within the defense sector within the North America segment offset by increased private space shop related activities during the quarter.

Gross profit increased by $6.2 million, or 15.5%, in the three months ended March 31, 2023 versus the prior year comparable period, on a increase in revenue of 3.9%.

Gross profit by segment for the three months ended March 31, 2023 and 2022 was as follows:

Mistras Group, Inc.

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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

% of segment revenue 26.8 % 23.0 %

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% of total revenue 27.4 % 24.7 %

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

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

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

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

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

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

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

Gross profit margin was 27.4% and 24.7% for the three-month periods ended March 31, 2023 and 2022, respectively.

North America segment realized an increase of 3.8% in gross profit margin to 26.8% during the three months ended March 31, 2023.

This was primarily due to better sales mix in the period and increased rebates received for insurance claims as compared to the prior year period.

International segment realized a 4.0% decrease in gross profit margin to 25.1% during the three months ended March 31, 2023 due primarily to sales mix and increased energy costs in the current period.

Products and Systems segment gross margin had a increase of 15.4% to 55.2% during the three months ended March 31, 2023 due to increased sales volume and better sales mix, as compared to the prior period.

Operating Expenses

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

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

2022 2021 2022 2021

Operating expenses for the three months ended March 31, 2023 and 2022 was as follows:

Three months ended March 31,

Operating Expenses

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

Research and engineering 480 551

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Acquisition-related expense, net 3 49

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

Selling, general and administrative expenses increased $2.4 million during the three months ended September 30, 2022 compared to the three months ended September 30, 2021, due to the reversal of remaining COVID-19 temporary cost reductions in August 2021, which had been initially implemented in 2020.

Depreciation and

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

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

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

Selling, general, and administrative expenses increased $5.7 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily due to the reversal of remaining COVID-19 temporary cost reductions in August 2021, which had been initially implemented in 2020, and wage subsidies received in 2021 which were not received in 2022.

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

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

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

Operating expenses increased $3.3 million, or 7.4%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Selling, general and administrative expenses increased $0.9 million during the three months ended March 31, 2023 compared to the three months ended March 31, 2022, due to increased costs and unfavorable foreign exchange impact as compared to the prior period.

Reorganization and other costs increased by approximately $2.0 million as compared to the prior year due primarily to an increase in severance costs during the period, including separation of the former COO, as well as other restructuring costs.

Depreciation and amortization decreased $0.3 million during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Mistras Group, Inc.

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Income (loss) from Operations

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

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

2022 2021 2022 2021

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

Three months ended March 31,

North America:

Income from operations (GAAP) $ 9,378 $ 3,761

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

Reorganization and other costs 61 27

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International:

Income from operations (GAAP) $ 814 $ 1,169 $ 2,678 $ 2,158

Income (Loss) from operations (GAAP) $ (568) $ 284

Reorganization and other costs 107 87

Income from operations before special items (non-GAAP) $ 799 $ 1,167 $ 2,564 $ 2,282

Income (Loss) from operations before special items (non-GAAP) $ (461) $ 371

Products and Systems:

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

Reorganization and other costs — — — 27

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

Income (Loss) from operations (GAAP) $ 384 $ (582)

Income (Loss) from operations before special items (non-GAAP) $ 384 $ (582)

Corporate and Eliminations:

Loss from operations (GAAP) $ (11,024) $ (8,161)

Loss on debt modification 693 — 693 278

Reorganization and other costs 1,908 —

Acquisition-related expense, net 3 5

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

Loss from operations before special items (non-GAAP) $ (9,113) $ (8,156)

Total Company:

Income from operations (GAAP) $ 9,114 $ 9,236 $ 13,991 $ 15,864

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

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

Reorganization and other costs 2,076 114

Loss on debt modification 693 — 693 278

Legal settlement and insurance recoveries, net — (841)

Acquisition-related expense, net 3 49

Income from operations before special items (non-GAAP) $ 9,938 $ 9,480 $ 14,108 $ 18,488

Income (Loss) from operations before special items (non-GAAP) $ 249 $ (5,376)

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

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

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

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

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

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

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

For the three months ended March 31, 2023, the loss from operations (GAAP) decreased $2.9 million or 61.0%, compared with the three months ended March 31, 2022, while the income (loss) before special items (non-GAAP) improved by $5.6 million, or 104.6%.

As a percentage of revenue, the income (loss) before special items improved by 340 basis points to 0.1% in the three months ended March 31, 2023 from (3.3)% in the three months ended March 31, 2022.

Interest Expense

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Interest expense was approximately $4.1 million and $1.9 million for the three months ended March 31, 2023 and 2022, respectively.

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

Mistras Group, Inc.

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(tabular dollars are in thousands)

Our 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.

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

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

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Cash flows are summarized in the table below:

Nine months ended September 30,

Three months ended March 31,

Net cash provided by (used in):

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Cash Flows from Operating Activities

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

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

During the three months ended March 31, 2023, cash provided by operating activities was $4.4 million, representing a year-on-year increase of $9.8 million, or 182%.

The increase was primarily attributable to an improved days sales outstanding and movements in working capital, as compared to the prior year quarter.

Cash Flows from Investing Activities

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

The decreased usage was primarily attributable to a reduction in capital expenditures during the current period as compared to the prior period.

During the three months ended March 31, 2023 and 2022, cash used in investing activities was $4.5 million primarily attributable to increased expenditures for vehicles leased related to customer projects that will be occurring in the remaining quarters of 2023 which did not exist in the prior period.

Cash Flows from Financing Activities

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

During the nine months ended September 30, 2022, net repayments of debt were approximately $3.0 million lower as compared to 2021 as cash flows were used to support operating activities.

Net cash used by financing activities was $4.0 million for the three months ended March 31, 2023, compared to net cash provided by financing activities of $4.3 million for the three months ended March 31, 2022.

During the three months ended March 31, 2023, net borrowings of debt were approximately $8.4 million higher as compared to 2022 resulting in debt paydown during the period.

In addition, $0.2 million more taxes were paid related to net share settlement of share-based awards during the three months ended March 31, 2023.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

The effect of exchange rate changes on our cash and cash equivalents was a decrease of $(2.9) million in the nine months ended September 30, 2022, compared to a decrease of $(1.3) million for the nine months ended September 30, 2021.

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

The effect of exchange rate changes on our cash and cash equivalents was an increase of $0.2 million in the three months ended March 31, 2023, compared to a decrease of $0.4 million for the three months ended March 31, 2022.

Cash Balance and Credit Facility Borrowings

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

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

As of March 31, 2023, we had cash and cash equivalents totaling $16.7 million and $122.2 million of unused commitments under our Credit Agreement with borrowings of $185.0 million and $2.6 million of letters of credit outstanding.

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

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

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

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

As of March 31, 2023, we were in compliance with the terms of the Credit Agreement and will continuously monitor our compliance with the covenants contained in the Credit Agreement.

The terms of our Credit Agreement are described in Note 12 - Long-Term Debt of the Notes to the Unaudited Condensed Consolidated Financial Statements, under the heading " Senior Credit Facility ".

Contractual Obligations

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

There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2022 Annual Report.

Off-balance Sheet Arrangements

During the nine months ended September 30, 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

During the three months ended March 31, 2023, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis