Mistras Group, Inc. 10-Q

ITEM 1. Financial Statements Mistras Group, Inc. and Subsidiaries Condensed Consolidated Balance Sheets ( in thousands, except share and per share data ) June 30, 2023 December 31, 2022 ASSETS (unaudited) Current Assets Cash and cash equivalents $ 17,999 $ 20,488 Accounts receivable, net 118,773 123,657 Inventories 16,067 13,556 Prepaid expenses and other current assets 17,991 10,181 Total current assets 170,830 167,882 Property, plant and equipment, net 81,297 77,561 Intangible assets, net 46,145 49,015 Goodwill 201,586 199,635 Deferred income taxes 915 779 Other assets 40,173 40,032 Total assets $ 540,946 $ 534,904 LIABILITIES AND EQUITY Current Liabilities Accounts payable $ 17,014 $ 12,532 Accrued expenses and other current liabilities 78,972 77,844 Current portion of long-term debt 7,550 7,425 Current portion of finance lease obligations 5,188 4,201 Income taxes payable 980 1,726 Total current liabilities 109,704 103,728 Long-term debt, net of current portion 176,121 183,826 Obligations under finance leases, net of current portion 12,441 10,045 Deferred income taxes 10,103 6,283 Other long-term liabilities 32,044 32,273 Total liabilities 340,413 336,155 Commitments and contingencies (Note 14) Equity Preferred stock, 10,000,000 shares authorized — — Common stock, $ 0.01 par value, 200,000,000 shares authorized, 30,301,985 and 29,895,487 shares issued and outstanding 302 298 Additional paid-in capital 245,058 243,031 Accumulated deficit ( 16,138 ) ( 11,489 ) Accumulated other comprehensive loss ( 29,035 ) ( 33,390 ) Total Mistras Group, Inc. stockholders’ equity 200,187 198,450 Non-controlling interests 346 299 Total equity 200,533 198,749 Total liabilities and equity $ 540,946 $ 534,904 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. Table of Contents Mistras Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Income (Loss) ( in thousands, except per share data ) Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Revenue $ 176,030 $ 179,031 $ 344,046 $ 340,693 Cost of revenue 120,442 119,980 236,493 235,738 Depreciation 5,866 5,493 11,754 11,505 Gross profit 49,722 53,558 95,799 93,450 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 ) Legal settlement and insurance recoveries, net 150 ( 153 ) 150 ( 994 ) Research and engineering 511 522 991 1,073 Depreciation and amortization 2,443 2,635 4,969 5,430 Acquisition-related expense, net 1 13 3 63 Income from operations 3,893 9,576 2,065 4,877 Interest expense 3,858 2,117 7,927 4,055 Income before provision (benefit) for income taxes 35 7,459 ( 5,862 ) 822 Provision (benefit) for income taxes ( 341 ) 2,793 ( 1,260 ) 1,509 Net Income (Loss) 376 4,666 ( 4,602 ) ( 687 ) Less: net income attributable to noncontrolling interests, net of taxes 39 23 47 33 Net Income (Loss) attributable to Mistras Group, Inc. $ 337 $ 4,643 $ ( 4,649 ) $ ( 720 ) Earnings (loss) per common share Basic $ 0.01 $ 0.15 $ ( 0.15 ) $ ( 0.02 ) Diluted $ 0.01 $ 0.15 $ ( 0.15 ) $ ( 0.02 ) Weighted-average common shares outstanding: Basic 30,368 29,957 30,214 29,840 Diluted 30,660 30,233 30,214 29,840 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. Table of Contents Mistras Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Comprehensive Loss (in thousands ) Three months ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net Income (loss) $ 376 $ 4,666 $ ( 4,602 ) $ ( 687 ) Other comprehensive loss: Foreign currency translation adjustments 3,082 ( 8,531 ) 4,355 ( 7,976 ) Comprehensive Loss 3,458 ( 3,865 ) ( 247 ) ( 8,663 ) Less: net income attributable to noncontrolling interest 39 23 47 33 Comprehensive loss attributable to Mistras Group, Inc $ 3,419 $ ( 3,888 ) $ ( 294 ) $ ( 8,696 ) The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. Table of Contents Mistras Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Equity ( in thousands ) Three months ended Common Stock Additional paid-in capital Retained earnings (deficit) Accumulated other comprehensive income (loss) Total Mistras Group, Inc. Stockholders’ Equity Noncontrolling Interest Shares Amount Total Equity Balance at March 31, 2023 30,230 $ 302 $ 244,131 $ ( 16,475 ) $ ( 32,117 ) $ 195,841 $ 307 $ 196,148 Net income — — — 337 — 337 39 376 Other comprehensive loss, net of tax — — — — 3,082 3,082 — 3,082 Share-based compensation — — 1,091 — — 1,091 — 1,091 Net settlement of restricted stock units 72 — ( 164 ) — — ( 164 ) — ( 164 ) Balance at June 30, 2023 30,302 $ 302 $ 245,058 $ ( 16,138 ) $ ( 29,035 ) $ 200,187 $ 346 $ 200,533 Balance at March 31, 2022 29,720 $ 297 $ 239,656 $ ( 23,351 ) $ ( 19,756 ) $ 196,846 $ 239 $ 197,085 Net income — — — 4,643 — 4,643 23 4,666 Other comprehensive income, net of tax — — — — ( 8,531 ) ( 8,531 ) — ( 8,531 ) Share-based payments — — 1,255 — — 1,255 — 1,255 Net settlement of restricted stock units 87 — ( 214 ) — — ( 214 ) — ( 214 ) Balance at June 30, 2022 29,807 $ 297 $ 240,697 $ ( 18,708 ) $ ( 28,287 ) $ 193,999 $ 262 $ 194,261 Six months ended Common Stock Additional paid-in capital Retained earnings (deficit) Accumulated other comprehensive income (loss) Total Mistras Group, Inc. Stockholders’ Equity Noncontrolling Interest Shares Amount Total Equity Balance at December 31, 2022 29,895 $ 298 $ 243,031 $ ( 11,489 ) $ ( 33,390 ) $ 198,450 $ 299 $ 198,749 Net income (loss) — — — ( 4,649 ) — ( 4,649 ) 47 ( 4,602 ) Other comprehensive loss, net of tax — — — — 4,355 4,355 — 4,355 Share-based compensation — — 2,968 — — 2,968 — 2,968 Net settlement of restricted stock units 407 4 ( 941 ) — — ( 937 ) — ( 937 ) Balance at June 30, 2023 30,302 $ 302 $ 245,058 $ ( 16,138 ) $ ( 29,035 ) $ 200,187 $ 346 $ 200,533 Balance at December 31, 2021 29,546 $ 295 $ 238,687 $ ( 17,988 ) $ ( 20,311 ) $ 200,683 $ 229 $ 200,912 Net income — — — ( 720 ) — ( 720 ) 33 ( 687 ) Other comprehensive income, net of tax — — — — ( 7,976 ) ( 7,976 ) — ( 7,976 ) Share-based compensation — — 2,770 — — 2,770 — 2,770 Net settlement of restricted stock units 261 2 ( 760 ) — — ( 758 ) — ( 758 ) Balance at June 30, 2022 29,807 $ 297 $ 240,697 $ ( 18,708 ) $ ( 28,287 ) $ 193,999 $ 262 $ 194,261 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. Table of Contents Mistras Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows (in thousands ) Six months ended June 30, 2023 2022 Cash flows from operating activities Net loss $ ( 4,602 ) $ ( 687 ) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 16,722 16,935 Deferred income taxes 3,441 ( 80 ) Share-based compensation expense 2,968 2,770 Fair value adjustments to contingent consideration — 45 Foreign currency loss 875 4 Other ( 513 ) 709 Changes in operating assets and liabilities Accounts receivable 5,856 ( 23,035 ) Inventories ( 2,402 ) ( 430 ) Prepaid expenses and other assets ( 7,420 ) 5,198 Accounts payable 4,261 4,790 Accrued expenses and other liabilities 1,202 2,676 Income taxes payable ( 1,129 ) ( 553 ) Payment of contingent consideration liability in excess of acquisition-date fair value ( 938 ) ( 533 ) Net cash provided by operating activities 18,321 7,809 Cash flows from investing activities Purchase of property, plant and equipment ( 9,801 ) ( 6,692 ) Purchase of intangible assets ( 822 ) ( 399 ) Proceeds from sale of equipment 812 592 Net cash used in investing activities ( 9,811 ) ( 6,499 ) Cash flows from financing activities Repayment of finance lease obligations ( 2,528 ) ( 2,138 ) Repayment of long-term debt ( 3,808 ) ( 9,507 ) Proceeds from revolver 46,194 56,000 Repayment of revolver ( 50,100 ) ( 48,250 ) Payment of contingent consideration for business acquisitions — ( 405 ) Taxes paid related to net share settlement of share-based awards ( 945 ) ( 756 ) Net cash used in financing activities ( 11,187 ) ( 5,056 ) Effect of exchange rate changes on cash and cash equivalents 188 ( 1,755 ) Net change in cash and cash equivalents ( 2,489 ) ( 5,501 ) Cash and cash equivalents at beginning of period 20,488 24,110 Cash and cash equivalents at end of period $ 17,999 $ 18,609 Supplemental disclosure of cash paid Interest, net $ 8,899 $ 3,525 Income taxes, net of refunds $ 3,429 $ ( 3,466 ) Noncash investing and financing Equipment acquired through finance lease obligations $ 5,764 $ 2,039 The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements. Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 1. Description of Business and Basis of Presentation Description of Business Mistras Group, Inc., together with its 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, and decades-long legacy of industry leadership, the Company helps clients with asset-intensive infrastructure in the oil and gas, aerospace and defense, industrials, power generation and transmission (including alternative and renewable energy), other process industries and infrastructure, research and engineering and other industries towards achieving and maintaining operational excellence. By supporting these organizations that help fuel our vehicles and power our society; inspecting components that are trusted for commercial, defense, and space craft; and building real-time monitoring systems to help avoid catastrophic incidents, the Company helps the world at large. The Company enhances value for its clients by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial Internet of Things ("IoT")-connected digital software and monitoring solutions, including OneSuite™, which serves as an ecosystem platform, pulling together all of the Company’s software and data services capabilities, for the benefit of its customers. The Company’s core capabilities also include non-destructive testing (“NDT”) field inspections enhanced by advanced robotics, laboratory quality control and assurance testing, sensing technologies and NDT equipment, asset and mechanical integrity engineering services, and light mechanical maintenance and access services. 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 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. Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) During 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. The 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. Basis of Presentation The Unaudited Condensed Consolidated Financial Statements contained in this report have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") and Securities and Exchange Commission ("SEC") guidance allowing for reduced disclosure for interim periods. In the opinion of management, the Unaudited Condensed Consolidated Financial Statements include all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods of the years ending December 31, 2023 and December 31, 2022. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the notes to the Audited Consolidated Financial Statements contained in the Company’s 2022 Annual Report on Form 10-K ("2022 Annual Report"). Principles of Consolidation The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of Mistras Group, Inc. as well as its wholly-owned subsidiaries, majority-owned subsidiaries and consolidated variable interest entities (VIE). For subsidiaries in which the Company’s ownership interest is less than 100%, the non-controlling interests are reported in stockholders’ equity in the accompanying Condensed Consolidated Balance Sheets. The non-controlling interests in net results, net of tax, is classified separately in the accompanying Unaudited Condensed Consolidated Statements of Income (Loss). All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations of companies acquired are included from the date of acquisition. Reclassification Certain amounts in prior periods have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the Company’s financial condition or results of operations as previously reported. Significant Accounting Policies The Company’s significant accounting policies are disclosed in Note 1– Summary of Significant Accounting Policies and Practices in the 2022 Annual Report. On an ongoing basis, the Company evaluates its estimates and assumptions, including among other things, those related to revenue recognition, long-lived assets, goodwill and acquisitions. Since the date of the 2022 Annual Report, there have been no material changes to the Company’s significant accounting policies. Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Income Taxes Income taxes are accounted for under the asset and liability method. We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred tax assets primarily consist of net operating loss carryforwards, 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 June 30, 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 ( 974.3 )% and 37.4 % for the three months ended June 30, 2023 and 2022, respectively. The Company’s 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 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 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. Recent Accounting Pronouncements 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. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2024. The Company is currently evaluating applicable contracts and the available expedients provided by the new guidance. 2. Revenue The Company derives the majority of its revenue by providing services on a time and material basis, and are short-term in nature. The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers . Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Performance Obligations The Company provides highly integrated and bundled inspection services to its customers. The majority of the Company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the Company’s best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is a relative selling price based on price lists. Contract modifications are not routine in the performance of the Company’s contracts. Generally, when contracts are modified, the modification is to account for changes in scope to the goods and services that are provided. In most instances, contract modifications are for goods or services that are distinct, and, therefore, are accounted for as a separate contract. The Company’s performance obligations are satisfied over time as work progresses or at a point in time. The majority of the Company’s revenue is recognized over time as work progresses for the Company’s service deliverables, which includes providing testing, inspection and mechanical services to our customers. Revenue is recognized over time, based on time and material incurred to date which best portrays the transfer of control to the customer. The Company also utilizes an available practical expedient that provides for revenue to be recognized in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. Fixed fee arrangements are determined based on expected labor, material, and overhead to be consumed on fulfillment of such services. For these arrangements, revenue is recognized on a cost-to-cost method tracked on an input basis. The majority of our revenue recognized at a point in time is related to product sales when the customer obtains control of the asset, which is generally upon shipment to the customer. Contract costs include labor, material and overhead. The Company expects any significant remaining performance obligations to be satisfied within one year . Contract Estimates The majority of the Company's revenues are short-term in nature. The Company enters into master service agreements (MSAs) with customers that specify an overall framework and contract terms. The actual contracting to provide services or furnish products are triggered by a work order, purchase order, or some similar document issued pursuant to a MSA which sets forth the scope of services and/or identifies the products to be provided. From time-to-time, the Company may enter into longer-term contracts, which can range from several months to several years. Revenue on certain contracts is recognized as work is performed based on total costs incurred to date in relation to the total estimated costs for the performance of the contract at completion. This includes contract estimates of costs to be incurred for the performance of the contract. Cost estimation is based upon the professional knowledge and experience of the Company's project managers, engineers and financial professionals. Factors that are considered in estimating the work to be completed include the availability of materials, the effect of any delays in the Company's project performance and the recoverability of any claims. Whenever revisions of estimates, contract costs and/or contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period. Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Revenue by Category The following series of tables present the Company’s disaggregated revenue: Revenue by industry was as follows: Three Months Ended June 30, 2023 North America International Products Corp/Elim Total Oil & Gas $ 97,500 $ 8,609 $ 15 $ — $ 106,124 Aerospace & Defense 13,665 5,136 217 — 19,018 Industrials 11,066 6,203 468 — 17,737 Power generation & Transmission 5,459 1,530 1,167 — 8,156 Other Process Industries 8,864 4,466 51 — 13,381 Infrastructure, Research & Engineering 4,171 2,028 547 — 6,746 Petrochemical 1,577 156 — — 1,733 Other 3,248 2,149 864 ( 3,126 ) 3,135 Total $ 145,550 $ 30,277 $ 3,329 $ ( 3,126 ) $ 176,030 Three Months Ended June 30, 2022 North America International Products Corp/Elim Total Oil & Gas $ 93,098 $ 8,028 $ 139 $ — $ 101,265 Aerospace & Defense 17,300 5,118 26 — 22,444 Industrials 9,794 6,506 333 — 16,633 Power generation & Transmission 8,378 1,997 678 — 11,053 Other Process Industries 11,641 3,754 14 — 15,409 Infrastructure, Research & Engineering 3,183 2,193 442 — 5,818 Petrochemical 3,584 55 — — 3,639 Other 2,550 1,959 1,020 ( 2,759 ) 2,770 Total $ 149,528 $ 29,610 $ 2,652 $ ( 2,759 ) $ 179,031 Six Months Ended June 30, 2023 North America International Products Corp/Elim Total Oil & Gas $ 187,273 $ 17,464 $ 52 $ — $ 204,789 Aerospace & Defense 27,276 10,116 228 — 37,620 Industrials 20,368 12,256 1,026 — 33,650 Power generation & Transmission 10,446 3,187 2,493 — 16,126 Other Process Industries 17,973 7,703 78 — 25,754 Infrastructure, Research & Engineering 6,654 4,164 1,689 — 12,507 Petrochemical 6,714 301 — — 7,015 Other 5,778 4,493 1,502 ( 5,188 ) 6,585 Total $ 282,482 $ 59,684 $ 7,068 $ ( 5,188 ) $ 344,046 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Six Months Ended June 30, 2022 North America International Products Corp/Elim Total Oil & Gas $ 179,711 $ 15,600 $ 177 $ — $ 195,488 Aerospace & Defense 32,322 10,058 134 — 42,514 Industrials 18,801 12,034 835 — 31,670 Power generation & Transmission 12,200 4,559 1,523 — 18,282 Other Process Industries 21,934 7,272 15 — 29,221 Infrastructure, Research & Engineering 5,689 4,232 1,339 — 11,260 Petrochemical 6,629 133 — — 6,762 Other 5,188 3,860 1,565 ( 5,117 ) 5,496 Total $ 282,474 $ 57,748 $ 5,588 $ ( 5,117 ) $ 340,693 Revenue per key geographic location was as follows: Three Months Ended June 30, 2023 North America International Products Corp/Elim Total United States $ 122,972 $ 280 $ 1,645 $ ( 271 ) $ 124,626 Other Americas 21,041 3,821 298 ( 1,474 ) 23,686 Europe 1,282 24,474 504 ( 1,166 ) 25,094 Asia-Pacific 255 1,702 882 ( 215 ) 2,624 Total $ 145,550 $ 30,277 $ 3,329 $ ( 3,126 ) $ 176,030 Three Months Ended June 30, 2022 North America International Products Corp/Elim Total United States $ 126,286 $ 334 $ 1,492 $ ( 567 ) $ 127,545 Other Americas 22,553 1,376 168 ( 1,105 ) 22,992 Europe 415 27,353 514 ( 955 ) 27,327 Asia-Pacific 274 547 478 ( 132 ) 1,167 Total $ 149,528 $ 29,610 $ 2,652 $ ( 2,759 ) $ 179,031 Six Months Ended June 30, 2023 North America International Products Corp/Elim Total United States $ 243,572 $ 589 $ 3,446 $ ( 869 ) $ 246,738 Other Americas 35,311 7,310 624 ( 1,906 ) 41,339 Europe 2,694 48,657 765 ( 1,992 ) 50,124 Asia-Pacific 905 3,128 2,233 ( 421 ) 5,845 Total $ 282,482 $ 59,684 $ 7,068 $ ( 5,188 ) $ 344,046 Six Months Ended June 30, 2022 North America International Products Corp/Elim Total United States $ 240,221 $ 507 $ 2,843 $ ( 1,222 ) $ 242,349 Other Americas 40,605 2,717 184 ( 1,714 ) 41,792 Europe 1,159 53,273 1,094 ( 1,879 ) 53,647 Asia-Pacific 489 1,251 1,467 ( 302 ) 2,905 Total $ 282,474 $ 57,748 $ 5,588 $ ( 5,117 ) $ 340,693 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 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 Consolidated Balance Sheets. Amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, generally at periodic intervals (e.g., weekly, bi-weekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities. These assets and liabilities are aggregated on an individual contract basis and reported on the Consolidated Balance Sheets at the end of each reporting period within accounts receivable, net or accrued expenses and other current liabilities. Revenue recognized during the six months ended June 30, 2023 and 2022 that was included in the contract liability balance at the beginning of such year was $ 4.6 million and $ 1.4 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. The Company applies the practical expedient to expense incremental costs incurred relating to obtaining a contract when the amortization period of the asset that the Company otherwise would have recognized is one year or less. 3. Share-Based Compensation The Company grants share-based incentive awards to its eligible employees and non-employee directors under two equity incentive plans: (i) the 2009 Long-Term Incentive Plan (the "2009 Plan") and (ii) the 2016 Long-Term Incentive Plan (the "2016 Plan"). No 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. 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 1,200,000 shares were available for future grants as of June 30, 2023. Stock Options During the three months ended March 31, 2022, all remaining outstanding stock options expired. For each of the three and six months ended June 30, 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 the three months ended June 30, 2023 and June 30, 2022, the Company recognized share-based compensation expense related to restricted stock unit awards of $ 0.8 million and $ 0.9 million, respectively. For the six months ended June 30, 2023 and 2022, the Company recognized share-based compensation expense related to restricted stock unit awards of $ 1.8 million and $ 1.9 million, respectively. As of June 30, 2023, there was $ 9.2 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 2.9 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: Six months ended June 30, 2023 2022 Restricted stock awards vested 430 326 Fair value of awards vested $ 2,616 $ 2,164 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 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: Six months ended June 30, 2023 2022 Awards issued 48 34 Grant date fair value of awards issued $ 275 $ 225 A summary of the Company’s outstanding, non-vested restricted share units is as follows: Six months ended June 30, 2023 2022 Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Outstanding at beginning of period: 1,415 $ 6.66 1,208 $ 7.96 Granted 581 $ 8.42 675 $ 7.65 Released ( 430 ) $ 6.09 ( 326 ) $ 10.03 Forfeited ( 98 ) $ 7.94 ( 20 ) $ 8.49 Outstanding at end of period: 1,468 $ 7.62 1,537 $ 7.38 Performance Restricted Stock Units The Company maintains Performance Restricted Stock Units (PRSUs) that have been granted to select executives and senior officers whose ultimate payout is based on the Company’s performance over a one-year period based on specific metrics approved by the Compensation Committee of the Board of Directors of the Company. For 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: 1. Free Cash Flow net cash provided by operating activities less purchases of property, plant, equipment and intangible assets and is subject to adjustments approved by the Compensation Committee. 2. Adjusted EBITDA defined as net income attributable to the Company plus: interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense and certain acquisition related costs (including transaction due diligence costs and adjustments to the fair value of contingent consideration), foreign exchange (gain) loss and, if applicable, certain special items which are noted). 3. Total Shareholder Return (TSR) measures the total return to shareholders of the Company during 2021 versus the total return to the shareholders of a predefined peer group of companies that provide inspection, testing, certification or similar industrial services. The return will be measured by the year over year percent change in share price. The share prices used to calculate the return are the average share price during the 20 -trading day period ending on the initial measurement date (the last 20 trading days of 2020), compared to the average share price during the 20 -trading day period ending on the final measurement date (the last 20 trading days of 2021). Any cash dividends or distributions paid in 2021 will be added to calculate the return to shareholders during the year. TSR is considered a market condition for which the fair value of PRSUs with this condition is determined using a Monte Carlo valuation model. Key assumptions in the Monte Carlo valuation model included: a. Expected Volatility. Expected volatility of the Company’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate 1-year performance period. b. Dividend Yield . The dividend yield assumption was based on historical and anticipated dividend payouts (assumed at zero ). c. Risk-Free Interest Rate . The risk-free interest rate assumption was based on observed interest rates consistent with the approximate 1-year performance measurement period. Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 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: 1. Free Cash Flow net cash provided by operating activities less purchases of property, plant, equipment and intangible assets and is subject to adjustments approved by the Compensation Committee. 2. Adjusted EBITDA defined as net income attributable to the Company plus: interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense and certain acquisition related costs (including transaction due diligence costs and adjustments to the fair value of contingent consideration), foreign exchange (gain) loss and, if applicable, certain special items which are noted. 3. Revenue PRSUs are equity-classified and compensation costs are initially measured using the fair value of the underlying stock at the date of grant. Compensation costs related to the PRSUs are subsequently adjusted for changes in the expected outcomes of the performance conditions. Compensation cost related to the PRSUs with a market condition is not reversed if the market condition is not achieved, provided the employee requisite service has been rendered. PRSUs generally vest ratably on each of the first four anniversary dates upon completion of the performance period, for a total requisite service period of up to five years and have no dividend rights. A summary of the Company’s PRSU activity is as follows: Six months ended June 30, 2023 2022 Units Weighted Average Grant-Date Fair Value Units Weighted Average Grant-Date Fair Value Outstanding at beginning of period: 280 $ 9.96 388 $ 10.07 Granted 282 $ 8.50 341 $ 6.55 Performance condition adjustments ( 215 ) $ 8.27 ( 163 ) $ 8.34 Released ( 64 ) $ 5.58 ( 17 ) $ 6.85 Forfeited ( 84 ) $ 6.95 — $ — Outstanding at end of period: 199 $ 9.45 549 $ 9.12 During the six months ended June 30, 2023, the Compensation Committee approved the final calculation of the award metrics for calendar year 2022. As a result, the calendar year 2023 PRSUs decreased by approximately 215,000 units during the six months ended June 30, 2023 as a result of the final calculation of award metrics for 2022 awards and based on forecasted results for 2023 as compared to performance metrics determined by the Compensation Committee. For the three months ended June 30, 2023 and June 30, 2022, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $ 0.2 million and $ 0.3 million, respectively. For the six months ended June 30, 2023 and June 30, 2022, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $ 0.6 million and $ 0.6 million, respectively. At June 30, 2023, there was $ 1.5 million of total unrecognized compensation costs related to approximately 199,000 non-vested PRSUs, which is expected to be recognized over a remaining weighted-average period of 1.6 years. Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 4. Earnings (loss) per Share Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income (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. The following table sets forth the computations of basic and diluted earnings (loss) per share: Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Basic earnings (loss) per share Numerator: Net income (loss) attributable to Mistras Group, Inc. $ 337 $ 4,643 $ ( 4,649 ) $ ( 720 ) Denominator: Weighted average common shares outstanding 30,368 29,957 30,214 29,840 Basic earnings (loss) per share $ 0.01 $ 0.15 $ ( 0.15 ) $ ( 0.02 ) Diluted earnings (loss) per share: Numerator: Net income (loss) attributable to Mistras Group, Inc. $ 337 $ 4,643 $ ( 4,649 ) $ ( 720 ) Denominator: Weighted average common shares outstanding 30,368 29,957 30,214 29,840 Dilutive effect of restricted stock units outstanding (1) 292 276 — — 30,660 30,233 30,214 29,840 Diluted earnings (loss) per share $ 0.01 $ 0.15 $ ( 0.15 ) $ ( 0.02 ) _______________ (1) For the six months ended June 30, 2023 and 2022, 1,106,595 shares and 1,412,073 shares related to restricted stock were excluded from the calculation of diluted EPS due to the net loss for the period. 5. Acquisitions Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Acquisition-Related Expense In the course of its acquisition activities, the Company incurs costs in connection with due diligence, such as professional fees, and other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a quarterly basis. These amounts are reported as Acquisition-related expense, net on the Unaudited Condensed Consolidated Statements of Income (Loss) and were as follows for the three and six months ended June 30, 2023 and 2022: Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Due diligence, professional fees and other transaction costs $ 1 $ 13 $ 3 $ 18 Adjustments to fair value of contingent consideration liabilities — 45 Acquisition-related expense, net $ 1 $ 13 $ 3 $ 63 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. 6. Accounts Receivable, net Accounts receivable consisted of the following: June 30, 2023 December 31, 2022 Trade accounts receivable $ 120,634 $ 127,767 Allowance for credit losses ( 1,861 ) ( 4,110 ) Accounts receivable, net $ 118,773 $ 123,657 The Company had $ 20.5 million and $ 13.5 million of unbilled revenue accrued as of June 30, 2023 and December 31, 2022, respectively. These amounts are included in the trade accounts receivable balances above. Unbilled revenue is generally billed in the subsequent quarter to their revenue recognition. The Company considers unbilled receivables as short-term in nature as they are normally converted to trade receivables within 90 days, thus future changes in economic conditions will not have a significant effect on the credit loss estimate. The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of December 31, 2019, approximately $ 1.4 million of past due receivables were outstanding from this customer. The Company received notice from the customer in December 2019, alleging that the work performed was not in compliance with the contract. The Company 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. The parties agreed to a settlement in the quarter ending June 30, 2023 with releases executed in July, whereby the Company would release its claim for the $ 1.4 million of outstanding receivables. Accordingly, the receivable has been written off. See Note 14- Commitments and Contingencies for additional details. 7. Inventory Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Inventories consist of the following (in thousands): June 30, 2023 December 31, 2022 Raw materials and consumable supplies $ 8,841 $ 7,745 Work in progress and finished goods 7,226 5,811 Inventories $ 16,067 $ 13,556 8. Property, Plant and Equipment, net Property, plant and equipment consisted of the following: Useful Life (Years) June 30, 2023 December 31, 2022 Land $ 2,449 $ 2,529 Buildings and improvements 30 - 40 25,815 24,800 Office furniture and equipment 5 - 8 22,270 18,057 Machinery and equipment 5 - 7 259,697 251,282 310,231 296,668 Accumulated depreciation and amortization ( 228,934 ) ( 219,107 ) Property, plant and equipment, net $ 81,297 $ 77,561 Depreciation expense for the three months ended June 30, 2023 and 2022 was approximately $ 6.2 million and $ 5.8 million, respectively. Depreciation expense for the six months ended June 30, 2023 and 2022 was $ 12.4 million and $ 12.3 million, respectively. 9. Goodwill 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 1,658 293 — 1,951 Balance at June 30, 2023 $ 187,368 $ 14,218 $ — $ 201,586 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 June 30, 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. Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 10. Intangible Assets The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows: June 30, 2023 December 31, 2022 Useful Life (Years) Gross Amount Accumulated Amortization Net Carrying Amount Gross Amount Accumulated Amortization Net Carrying Amount Customer relationships 5 - 18 $ 110,469 $ ( 87,519 ) $ 22,950 $ 109,683 $ ( 84,130 ) $ 25,553 Software/Technology 3 - 15 52,759 ( 30,550 ) 22,209 51,028 ( 28,669 ) 22,359 Covenants not to compete 2 - 5 12,534 ( 12,472 ) 62 12,488 ( 12,416 ) 72 Other 2 - 12 10,457 ( 9,533 ) 924 10,389 ( 9,358 ) 1,031 Total $ 186,219 $ ( 140,074 ) $ 46,145 $ 183,588 $ ( 134,573 ) $ 49,015 Amortization expense for the three months ended June 30, 2023 and 2022 was approximately $ 2.2 million and $ 2.3 million, respectively. Amortization expense for the six months ended June 30, 2023 and June 30, 2022 was $ 4.3 million and $ 4.6 million, respectively. 11. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following: June 30, 2023 December 31, 2022 Accrued salaries, wages and related employee benefits $ 26,811 $ 26,684 Contingent consideration, current portion — 937 Accrued workers’ compensation and health benefits 3,760 3,660 Deferred revenue 9,257 7,521 Pension accrual 2,458 2,519 Right-of-use liability - Operating 10,603 10,376 Other accrued expenses 26,083 26,147 Total $ 78,972 $ 77,844 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) 12. Long-Term Debt Long-term debt consisted of the following: June 30, 2023 December 31, 2022 Senior credit facility $ 61,150 $ 65,250 Senior secured term loan, net of unamortized debt issuance costs of $ 0.5 million and $ 0.5 million, respectively 118,326 121,399 Other 4,195 4,602 Total debt 183,671 191,251 Less: Current portion ( 7,550 ) ( 7,425 ) Long-term debt, net of current portion $ 176,121 $ 183,826 Senior Credit Facility 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 $ 119 million as of June 30, 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 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 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 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. Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) • The 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 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 June 30, 2023, the Company had borrowings of $ 179.5 million and a total of $ 2.9 million of letters of credit outstanding under the Credit Agreement. The Company has capitalized costs associated with debt modifications of $ 1.3 million as of June 30, 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 June 30, 2023, the Company was in compliance with the terms of the Credit Agreement. The Company continuously monitors compliance with the covenants contained in its Credit Agreement. Other debt The Company’s other debt includes bank financing provided at the local subsidiary level used to support working capital requirements and fund capital expenditures. At June 30, 2023, there was an aggregate of approximately $ 4.2 million outstanding, payable at various times through 2030. Monthly payments range from $ 1.0 thousand to $ 16.0 thousand and interest rates range from 0.4 % to 3.5 %. 13. Fair Value Measurements The Company performs fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a three level hierarchy that prioritizes the inputs used to measure fair value. Financial instruments measured at fair value on a recurring basis The fair value of contingent consideration liabilities was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the applicable acquisition agreements. The following table represents the changes in the fair value of Level 3 contingent consideration: Six months ended June 30, 2023 2022 Beginning balance $ 938 $ 1,831 Payments ( 938 ) ( 938 ) Revaluation — 45 Ending balance $ — $ 938 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Financial instruments not measured at fair value on a recurring basis The Company has evaluated current market conditions and borrower credit quality and has determined that the carrying value of its long-term debt approximates fair value. The fair value of the Company’s notes payable and finance lease obligations approximates their carrying amounts based on anticipated interest rates which management believes would currently be available to the Company for similar issuances of debt. 14. Commitments and Contingencies Legal Proceedings and Government Investigations The Company is periodically involved in lawsuits, investigations and claims that arise in the ordinary course of business. The Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it. Except for possible losses from the matters described below, the Company does not believe that any currently pending or threatened legal proceeding to which the Company is or is likely to become a party will have a material adverse effect on its business, results of operations, cash flows or financial condition. The costs incurred by the Company to defend lawsuits, investigations and claims and amounts the Company pays to other parties because of these matters may be covered by insurance in some circumstances. Litigation and Commercial Claims The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of June 30, 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 on December 17, 2019, in an action captioned Mistras Group, Inc. v. Epic Y-Grade Pipeline LP, to recover the $ 1.4 million and other amounts due to the Company. The customer filed a counterclaim on March 6, 2020, alleging breach of contract and seeking recovery of its alleged damages. On April 25, 2023, the Company settled all claims related to this litigation. In July 2023, the parties executed a settlement agreement, resulting in a payment by the Company of $ 0.3 million (paid in July 2023 and 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. 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. Two proceedings were filed in California Superior Court for the County of Los Angeles regarding alleged violations of the California Labor Code. Both cases were captioned Justin Price v. 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, on behalf of the State of California under the California Private Attorney General Act on the basis of the same alleged violations. The two cases were consolidated and requested payment of all damages, including unpaid wages, and various fines and penalties available under California law. On May 4, 2021, the Company agreed to a settlement of all claims in the cases, which was more formally documented pursuant to a settlement agreement completed October 5, 2021, as amended as of May 3, 2022. Pursuant to the settlement, the Company agreed to pay $ 2.3 million to resolve the allegations in these proceedings and to be responsible for the employer portion of payroll taxes on the amount of the settlement allocated to wages. The settlement as agreed upon by the parties received final court approval on September 26, 2022, and the Company paid the settlement proceeds and related payroll taxes to the claims administrator in the fourth quarter of 2022. The Company recorded expense of approximately $ 1.6 million during the three months ended March 31, 2021 related to this settlement, which is in addition to expense of $ 0.8 million the Company recorded during the three months ended December 31, 2020. Pension Related Contingencies Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Certain 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 June 30, 2023 is approximately $ 2.5 million, which were incurred in 2018 and 2019. Severance and labor disputes During December 2019, the Company executed an agreement to sell the rights of certain customer "staff leasing" contracts related to its German subsidiary for total consideration of approximately $ 0.1 million, effective January 1, 2020. No other assets or liabilities other than those employee benefits related to employees working on the customer contracts were included in the sale. As of June 30, 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. 15. Segment Disclosure The Company’s three operating segments are: • North America. This segment provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of NDT, inspection, mechanical and engineering services that are used to evaluate the safety, structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components. Software, digital and data services are included in this segment. • International. This segment offers services, products and systems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment. • Products and Systems. This segment designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States. Costs incurred for general corporate services, including finance, legal, and certain other costs that are provided to the segments are reported within Corporate and eliminations. 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 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 . Segment income from operations is one of the primary performance measures used by the chief operating decision maker, to assess the performance of each segment and make resource allocation decisions. Certain general and administrative costs such as human resources, information technology and training are allocated to the segments. Segment income from operations excludes interest and other financial charges and income taxes. Corporate and other assets are comprised principally of cash, deposits, property, plant and equipment, domestic deferred taxes, deferred charges and other assets. Corporate loss from operations consists of administrative charges related to corporate personnel and other charges that cannot be readily identified for allocation to a particular segment. Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) Selected consolidated financial information by segment for the periods shown was as follows: (with intercompany transactions eliminated in Corporate and eliminations) Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Revenue North America $ 145,550 $ 149,528 $ 282,482 $ 282,474 International 30,277 29,610 59,684 57,748 Products and Systems 3,329 2,652 7,068 5,588 Corporate and eliminations ( 3,126 ) ( 2,759 ) ( 5,188 ) ( 5,117 ) $ 176,030 $ 179,031 $ 344,046 $ 340,693 Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Gross profit North America $ 39,679 $ 42,954 $ 76,316 $ 73,479 International 8,398 9,440 15,766 17,630 Products and Systems 1,614 1,157 3,676 2,325 Corporate and eliminations 31 7 41 16 $ 49,722 $ 53,558 $ 95,799 $ 93,450 Income (loss) from operations by operating segment includes intercompany transactions, which are eliminated in Corporate and eliminations. Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Income (loss) from operations North America $ 12,338 $ 14,855 $ 21,715 $ 18,615 International 507 1,580 ( 61 ) 1,864 Products and Systems 94 ( 420 ) 478 ( 1,002 ) Corporate and eliminations ( 9,046 ) ( 6,439 ) ( 20,067 ) ( 14,600 ) $ 3,893 $ 9,576 $ 2,065 $ 4,877 Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Depreciation and amortization North America $ 6,370 $ 6,166 $ 12,727 $ 12,759 International 1,889 1,919 3,748 3,977 Products and Systems 87 120 343 337 Corporate and eliminations ( 37 ) ( 77 ) ( 96 ) ( 138 ) $ 8,309 $ 8,128 $ 16,722 $ 16,935 Table of Contents Mistras Group, Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements (tabular dollars and shares in thousands, except per share data) June 30, 2023 December 31, 2022 Intangible assets, net North America $ 40,650 $ 43,260 International 3,758 4,422 Products and Systems 1,267 1,208 Corporate and eliminations 470 125 $ 46,145 $ 49,015 June 30, 2023 December 31, 2022 Total assets North America $ 408,583 $ 407,779 International 105,751 104,531 Products and Systems 13,127 12,408 Corporate and eliminations 13,485 10,186 $ 540,946 $ 534,904 Refer to Note 2 – Revenue , for revenue by geographic area for the three and six months ended June 30, 2023 and 2022. Table of Contents Mistras Group, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (tabular dollars are in thousands)