What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-07 compared with 2023-05-05 · 148 added, 84 removed, 180 unchanged (56% of the section changed)

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

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

The following Management’s Discussion and Analysis (“MD&A”) provides a discussion of our results of operations and financial position for the three and six months ended June 30, 2023 and 2022.

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, 2022, (“2022 Annual Report”).

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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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(tabular dollars are in thousands)

OneSuite™, which serves as an ecosystem platform, pulling together all of the Company’s software and data services capabilities, for the benefit of its customers.

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

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

Our operations consist of three reportable segments:

North America, 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.

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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 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.

This tool provides additional growth and expansion of our

Mistras Group, Inc.

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(tabular dollars are in thousands)

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.

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 2022 and are not impacting our business in any material manner during 2023.

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 primarily in Europe due to increased energy costs.

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 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.

As of June 30, 2023, the cash balance was approximately $18.0 million and our Credit Agreement provides us with significant liquidity.

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

Any legislation or regulations that may be adopted to implement these measures may negatively impact our customers in the oil and gas market over the long-term, which presently is our largest market, although this initiative will likely benefit the alternative energy market, such as wind energy, for which we provide products and services.

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Results of Operations

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

Three months ended March 31,

Condensed consolidated results of operations for the three and six months ended June 30, 2023 and 2022 were as follows:

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

2023 2022 2023 2022

Revenues $ 176,030 $ 179,031 $ 344,046 $ 340,693

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Gross profit as a % of Revenue 28.2 % 29.9 % 27.8 % 27.4 %

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.

Income from operations 3,893 9,576 2,065 4,877

Income from Operations as a % of Revenue 2.2 % 5.3 % 0.6 % 1.4 %

Income before provision (benefit) for income taxes 35 7,459 (5,862) 822

Net Income (loss) 376 4,666 (4,602) (687)

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

$ 337 $ 4,643 $ (4,649) $ (720)

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,

Revenue was $176.0 million for the three months ended June 30, 2023, a decrease of $3.0 million, or 1.7%, compared with the three months ended June 30, 2022.

Revenue for the six months ended June 30, 2023 was $344.0 million, an increase of $3.4 million, or 1.0%, compared with the six months ended June 30, 2022.

Revenue by segment for the three and six months ended June 30, 2023 and 2022 was as follows:

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

2023 2022 2023 2022

North America $ 145,550 $ 149,528 $ 282,482 $ 282,474

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Corporate and eliminations (3,126) (2,759) (5,188) (5,117)

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.

$ 176,030 $ 179,031 $ 344,046 $ 340,693

In the three months ended June 30, 2023, total revenue decreased (1.7)% versus the prior year comparable period due predominantly to decreased sales volume as compared to the prior period.

North America segment revenue decreased 2.7% due to decreases in sales volume in our oil and gas and aerospace and defense end markets.

International segment revenue increased 2.3%, due predominantly to low single-digit organic growth and low single-digit favorable foreign exchange rates impact.

Products and Systems segment revenue increased 25.5%, due to increased sales volume as compared to the prior period.

Oil and gas customer revenue comprised approximately 60% and 57% of total revenue for the three months ended June 30, 2023 and 2022, respectively.

Aerospace and defense customer revenue comprised approximately 11% and 13% of total revenue for the three months ended June 30, 2023 and 2022, respectively.

The Company’s top ten customers comprised approximately 36% of total revenue for the three months ended June 30, 2023, as compared to 33% for the three months ended June 30, 2022, with no customer accounting for 10% or more of total revenue in either three-month period.

Mistras Group, Inc.

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(tabular dollars are in thousands)

Three months ended March 31,

In the six months ended June 30, 2023, total revenue increased 1.0% versus the comparable prior period.

The increase was due to organic growth in our core business, partially offset by an unfavorable revenue impact from foreign exchange rates.

Our North America segment revenue was flat versus the prior year.

International segment revenue increased 3.4% due to mid single-digit organic growth offset by low single-digit unfavorable revenue impact from foreign exchange rates.

Products and Systems segment revenue increased by 26.5% due to increased sales volume as compared to the prior period.

Oil and gas customer revenue comprised approximately 60% and 57% of total revenue for the six months ended June 30, 2023 and 2022, respectively.

Aerospace and defense customer revenue comprised approximately 11% and 12% of total revenue for the six months ended June 30, 2023 and 2022, respectively.

The Company’s top ten customers comprised approximately 35% of total revenue for the six months ended June 30, 2023, as compared to 33% for the six months ended June 30, 2022, with no customer accounting for 10% or more of total revenue in either six-month period.

The Company has retrospectively reclassified certain Oil and Gas sub-category revenues for each quarterly period in 2022 in order to conform the classification with the current year presentation.

Total Oil and Gas sub-category revenues were unchanged in total in each quarterly period and for the full year ended December 31, 2022.

The table below presents the reclassified balances for each quarterly period in the prior year.

2022 Quarterly Revenues

Three months ended March 31, Three months ended June 30, Three months ended September 30, Three months ended December 31,

Oil and Gas Revenue by sub-category

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Total $ 94,223 $ 101,265 $ 97,031 $ 95,233

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,

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

2023 2022 2023 2022

Oil and Gas Revenue by sub-category

Upstream $ 41,961 $ 38,051 $ 78,900 $ 74,448

Midstream 27,293 27,153 48,524 47,580

Downstream 36,870 36,061 77,365 73,460

Total $ 106,124 $ 101,265 $ 204,789 $ 195,488

Oil and gas upstream customer revenue increased approximately $4.5 million, or 6%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, and $3.9 million, or 10% for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 due to increased exploration operations and market share gains compared to the prior period.

Midstream customer revenues increased approximately $0.9 million, or 2%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, and $0.1 million, or 1% for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 due to comparable pipe inspection services performed in both years.

Downstream customer revenue increased $3.9 million, or 5%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, and $0.8 million, or 2% for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 due to increased sales volume at customer refineries and increased customer turnarounds.

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 June 30, Six months ended June 30,

2023 2022 2023 2022

Revenue by type

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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.

Field Services revenue decreased by $1.1 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, and $5.3 million, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

The decrease in both periods was due to decreased sales volume related to a delayed defense contract and decreased revenues in our power generation end market for our North America and International segments.

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.

Shop revenues increased by $4.4 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, and $4.3 million, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

Shop revenues increased in both periods as compared to the prior year quarter due to increased sales volume related to our commercial aerospace and industrials end markets.

Data Solutions revenues are comprised of revenue derived from data software sales & subscriptions, implementation services and analytics that offer insights and recommendations to improve asset integrity.

Data Solutions revenue is derived from work performed by Mistras employees in our facilities, or at customer locations, using our propriety portfolio of software applications.

Data Solutions revenue increased by $6.3 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, and $1.9 million, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 due primarily 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:

Other revenues decreased by $6.2 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, and $3.9 million, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

Other revenues decreased primarily due to decreased sales within the aerospace and defense sector within the North America and International segments.

Gross profit decreased by $(3.8) million, or (7.2)%, in the three months ended June 30, 2023 versus the prior year comparable period, on a decrease in revenue of (1.7)%.

Gross profit increased by $2.3 million, or 2.5%, in the six months ended June 30, 2023 on an increase in revenue of 1.0%.

Gross profit by segment for the three and six months ended June 30, 2023 and 2022 was as follows:

Mistras Group, Inc.

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(tabular dollars are in thousands)

Three months ended March 31,

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 June 30, Six months ended June 30,

2023 2022 2023 2022

North America $ 39,679 $ 42,954 $ 76,316 $ 73,479

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% of total revenue 28.2 % 29.9 % 27.8 % 27.4 %

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.

Gross profit margin was 28.2% and 29.9% for the three-month periods ended June 30, 2023 and 2022, respectively.

North America segment realized a decline of (1.4)% in gross profit margin to 27.3% during the three months ended June 30, 2023.

This was primarily due to unabsorbed overhead costs associated with lower revenues, as compared to the prior year period.

International segment realized a decline of (4.2)% in gross profit margin to 27.7% during the three months ended June 30, 2023 due primarily to increased inflationary costs as compared to the prior year period.

Products and Systems segment gross margin realized an increase of 4.9% to 48.5% during the three months ended June, 2023 due to favorable sales mix.

Gross profit margin was 27.8% and 27.4% for the six months ended June 30, 2023 and 2022, respectively.

Gross profit margin increased due to favorable sales mix.

Operating Expenses

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

Three months ended March 31,

Operating expenses for the three and six months ended June 30, 2023 and 2022 was as follows:

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

2023 2022 2023 2022

Operating Expenses

Selling, general and administrative expenses $ 41,484 $ 40,856 $ 84,305 $ 82,777

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

Reorganization and other costs 1,240 (180) 3,316 (65)

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Acquisition-related expense, net 1 13 3 63

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.

$ 45,829 $ 43,982 $ 93,734 $ 88,573

% of total revenue 26.0 % 24.6 % 27.2 % 26.0 %

Mistras Group, Inc.

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(tabular dollars are in thousands)

Total operating expenses increased $1.8 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Selling, general and administrative expenses increased $0.6 million during the three months ended June 30, 2023 compared to the three months ended June 30, 2022, due to unfavorable foreign currency exchange.

Depreciation and amortization decreased $(0.2) million during the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

During the three months ended June 30, 2023, $1.2 million of reorganization and other related costs were incurred, compared to the prior period due to the Company's on-going efficiency and productivity initiatives.

Operating expenses increased $5.2 million, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Selling, general, and administrative expenses increased $1.5 million during the six months ended June 30, 2023 compared to the six months ended June 30, 2022 primarily due to unfavorable foreign currency exchange and increased inflationary costs.

Reorganization and other costs for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 increased $3.4 million due to professional fees and restructuring charges associated with changes in the Company's organizational structure.

Depreciation and amortization decreased $(0.5) million during the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

Income (loss) from Operations

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

Three months ended March 31,

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

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

2023 2022 2023 2022

North America:

Income from operations (GAAP) $ 12,338 $ 14,855 $ 21,715 $ 18,615

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

Reorganization and other costs 478 1 539 28

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Reorganization and other costs 88 (187) 195 (99)

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

Income from operations before special items (non-GAAP) $ 595 $ 1,393 $ 134 $ 1,765

Products and Systems:

Income (loss) from operations (GAAP) $ 94 $ (420) $ 478 $ (1,002)

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

Income (loss) from operations (GAAP) $ 94 $ (420) $ 478 $ (1,002)

Corporate and Eliminations:

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Acquisition-related expense, net 1 13 3 18

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

Loss from operations before special items (non-GAAP) $ (8,371) $ (6,573) $ (17,482) $ (14,729)

Total Company:

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

Income from operations (GAAP) $ 3,893 $ 9,576 $ 2,065 $ 4,877

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

Reorganization and other costs 1,240 (180) 3,316 (65)

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Acquisition-related expense, net 1 13 3 63

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

Income from operations before special items (non-GAAP) $ 5,284 $ 9,545 $ 5,534 $ 4,170

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

For the three months ended March 31, 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 $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.

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

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

For the three months ended June 30, 2023, income from operations (GAAP) decreased $(5.7) million, compared with the three months ended June 30, 2022, while income before special items (non-GAAP) decreased $(4.3) million.

As a percentage of revenue, income before special items decreased by 230 basis points to 3.0% in the three months ended June 30, 2023 from 5.3% in the three months ended June 30, 2022.

For the six months ended June 30, 2023, income from operations (GAAP) decreased $(2.8) million, compared with the six months ended June 30, 2022, while income from operations before special items (non-GAAP) increased $1.4 million.

As a percentage of revenue, income from operations before special items increased by 40 basis points to 1.6% in the six months ended June 30, 2023 from 1.2% in the six months ended June 30, 2022.

During the six months ended June 30, 2023, the Company experienced overall organic growth offset by foreign currency headwinds.

Interest Expense

Interest expense was approximately $3.9 million and $2.1 million for the three months ended June 30, 2023 and 2022, respectively.

Interest expense was approximately $7.9 million and $4.1 million for the six months ended June 30, 2023 and 2022, respectively.

The increase in the three months ended June 30, 2023 was due to an increase in interest rates compared to the prior year quarter.

The increase in interest expense for the six months ended June 30, 2023 compared to the prior year period was due to an increase in the interest rates, partially offset by a decrease in outstanding borrowings.

Our effective income tax rate was approximately (974.3)% and 37.4% for the three months ended June 30, 2023 and 2022, respectively.

Our effective income tax rate was approximately 21.5% and 183.6% for the six months ended June 30, 2023 and 2022, respectively.

The effective income tax rate for the three months ended June 30, 2023 was lower than the statutory rate primarily due to the impact of a favorable discrete item related to stock compensation.

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

The effective income tax rate for the six months ended June 30, 2023 was lower than the statutory rate due primarily to an unfavorable discrete item related to stock compensation.

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

Income tax expense varies as a function of pre-tax income and the level of non-deductible expenses, such as certain amounts of meals and entertainment expense, valuation allowances, and other permanent differences.

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

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

Liquidity and Capital Resources

Cash flows are summarized in the table below:

Three months ended March 31,

Six months ended June 30,

Net cash provided by (used in):

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Cash Flows from Operating Activities

During the three months ended March 31, 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.

During the six months ended June 30, 2023, cash provided by operating activities was $18.3 million, representing a year-on-year increase of $10.5 million, or 135%.

The increase was primarily attributable to improved days sales outstanding in the current year period.

Cash Flows from Investing Activities

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.

During the six months ended June 30, 2023, cash used in investing activities was $9.8 million, compared to $6.5 million net cash used in investing activities for the six months ended June 30, 2022.

The change was primarily attributable to capital expenditures related to property, plant and equipment during the current period as compared to the prior period.

Cash Flows from Financing 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.

Net cash used in financing activities was $11.2 million for the six months ended June 30, 2023, compared to net cash used in financing activities of $5.1 million for the six months ended June 30, 2022.

During the six months ended June 30, 2023, net repayments of debt were approximately $6.3 million higher as compared to 2022.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

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.

The effect of exchange rate changes on our cash and cash equivalents was an increase of $0.2 million in the six months ended June 30, 2023, compared to a decrease of $(1.8) million for the six months ended June 30, 2022.

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

Cash Balance and Credit Facility Borrowings

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.

As of June 30, 2023, we had cash and cash equivalents totaling $18.0 million and $124.8 million of unused commitments under our Credit Agreement with borrowings of $179.5 million and $2.9 million of letters of credit outstanding.

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

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

As of March 31, 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.

As of June 30, 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 2022 Annual Report.

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

Off-balance Sheet Arrangements

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.

During the six months ended June 30, 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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What changed 10-Q

Item 2. Management’s Discussion and Analysis