What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-11-06 compared with 2023-08-07 · 167 added, 133 removed, 645 unchanged (32% of the section changed)

2 unchanged sentences

and Subsidiaries

Condensed Consolidated Balance Sheets

Condensed Consolidated Balance Sheets (Unaudited)

( in thousands, except share and per share data )

June 30, 2023 December 31, 2022

ASSETS (unaudited)

September 30, 2023 December 31, 2022

Current Assets

39 unchanged sentences

( in thousands, except per share data )

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

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

2023 2022 2023 2022

6 unchanged sentences

Reorganization and other costs 2,702 130 6,017 65

Goodwill Impairment Charges 13,799 — 13,799 —

Loss on Debt Modification — 693 — 693

Legal settlement and insurance recoveries, net — — 150 ( 994 )

2 unchanged sentences

Acquisition-related expense, net — 1 5 63

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

Income (loss) from operations ( 4,682 ) 9,114 ( 2,618 ) 13,991

Interest expense 4,167 2,735 12,093 6,790

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

Income (loss) before provision (benefit) for income taxes ( 8,849 ) 6,379 ( 14,711 ) 7,201

Provision for income taxes 1,489 1,985 229 3,494

Net Income (Loss) ( 10,338 ) 4,394 ( 14,940 ) 3,707

net income attributable to noncontrolling interests, net of taxes 39 23 47 33

net income (loss) attributable to noncontrolling interests, net of taxes ( 40 ) 21 7 54

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

11 unchanged sentences

(in thousands )

Three months ended June 30, Six Months Ended June 30,

Three months ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

18 unchanged sentences

Shares Amount Total Equity

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

Balance at June 30, 2023 30,302 $ 302 $ 245,058 $ ( 16,138 ) $ ( 29,035 ) $ 200,187 $ 346 $ 200,533

Net income — — — ( 10,298 ) — ( 10,298 ) ( 40 ) ( 10,338 )

2 unchanged sentences

Net settlement of restricted stock units 51 — — — — — — —

Balance at September 30, 2023 30,353 $ 302 $ 246,075 $ ( 26,436 ) $ ( 34,463 ) $ 185,478 $ 306 $ 185,784

Balance at June 30, 2022 29,807 $ 297 $ 240,697 $ ( 18,708 ) $ ( 28,287 ) $ 193,999 $ 262 $ 194,261

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

Net income — — — 4,373 — 4,373 21 4,394

Other comprehensive income, net of tax — — — — ( 12,995 ) ( 12,995 ) — ( 12,995 )

Share-based payments — — 1,255 — — 1,255 — 1,255

Share-based compensation — — 1,396 — — 1,396 — 1,396

Net settlement of restricted stock units 35 — — — — — — —

Balance at June 30, 2022 29,807 $ 297 $ 240,697 $ ( 18,708 ) $ ( 28,287 ) $ 193,999 $ 262 $ 194,261

Six months ended

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

Nine months ended

Common Stock Additional

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Net settlement of restricted stock units 458 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 September 30, 2023 30,353 $ 302 $ 246,075 $ ( 26,436 ) $ ( 34,463 ) $ 185,478 $ 306 $ 185,784

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

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Net settlement of restricted stock units 296 2 ( 760 ) — — ( 758 ) — ( 758 )

Balance at June 30, 2022 29,807 $ 297 $ 240,697 $ ( 18,708 ) $ ( 28,287 ) $ 193,999 $ 262 $ 194,261

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

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

3 unchanged sentences

(in thousands )

Six months ended June 30,

Nine months ended September 30,

Cash flows from operating activities

2 unchanged sentences

Depreciation and amortization 25,470 25,132

Goodwill impairment charges 13,799 —

Deferred income taxes 816 1,790

Share-based compensation expense 3,985 4,166

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

Change in provision for doubtful accounts 346 —

Fair value adjustments to contingent consideration — 45

Foreign currency loss 875 4

Foreign currency (gain) loss 149 ( 924 )

Payment of finance costs — ( 448 )

Other ( 147 ) 969

11 unchanged sentences

Purchase of intangible assets ( 1,868 ) ( 580 )

Acquisition of business, net of cash acquired — —

Proceeds from sale of equipment 1,101 753

2 unchanged sentences

Repayment of finance lease obligations ( 3,812 ) ( 3,173 )

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

Repayment of long-term debt ( 5,684 ) ( 79,519 )

1 unchanged sentence

Repayment of revolver ( 57,851 ) ( 213,750 )

Payment of financing costs — ( 148 )

Payment of contingent consideration for business acquisitions — ( 405 )

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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’s core capabilities also include non-destructive testing (“NDT”) field inspections enhanced by advanced robotics, laboratory quality control, laboratory materials services, shop laboratory 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.

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

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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.

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

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.

Mistras Group, Inc.

2 unchanged sentences

(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.

In 2022, the Company eliminated substantially all of the COVID related cost reduction initiatives undertaken in 2020, including re-instatement of the savings plan employer match and increasing wages back to pre-pandemic amounts.

During the third quarter of 2023, a triggering event was identified within the Company's reporting units within the International segment due to decreased gross margin in the current period as a result of inflationary pressures and rising energy costs which resulted in an impairment within the reporting unit of $ 13.8 million.

Refer to Note 9- Goodwill .

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.

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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.

As of September 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.

The Company’s effective income tax rate was approximately ( 16.8 )% and 31.1 % for the three months ended September 30, 2023 and 2022, respectively.

The Company’s effective income tax rate was approximately ( 1.6 )% and 48.5 % for the nine months ended September 30, 2023 and 2022, respectively.

The effective income tax rate for the three months ended September 30, 2023 was lower than the statutory rate primarily due to the impact of permanent tax adjustments related to executive compensation and goodwill impairments.

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

The effective income tax rate for the nine months ended September 30, 2023 was lower than the statutory rate primarily due to the impact of permanent tax adjustments related to executive compensation and goodwill impairments.

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

Recent Accounting Pronouncements

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Revenue by industry was as follows:

Three Months Ended June 30, 2023 North America International Products Corp/Elim Total

Three Months Ended September 30, 2023 North America International Products Corp/Elim Total

Oil & Gas $ 94,390 $ 8,827 $ 35 $ — $ 103,252

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Total $ 148,814 $ 30,980 $ 2,829 $ ( 3,269 ) $ 179,354

Three Months Ended June 30, 2022 North America International Products Corp/Elim Total

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

Oil & Gas $ 90,578 $ 6,418 $ 35 $ — $ 97,031

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Total $ 152,778 $ 25,693 $ 3,078 $ ( 3,087 ) $ 178,462

Six Months Ended June 30, 2023 North America International Products Corp/Elim Total

Nine Months Ended September 30, 2023 North America International Products Corp/Elim Total

Oil & Gas $ 281,663 $ 26,291 $ 87 $ — $ 308,041

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

Six Months Ended June 30, 2022 North America International Products Corp/Elim Total

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

Oil & Gas $ 270,289 $ 22,018 $ 212 $ — $ 292,519

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Revenue per key geographic location was as follows:

Three Months Ended June 30, 2023 North America International Products Corp/Elim Total

Three Months Ended September 30, 2023 North America International Products Corp/Elim Total

United States $ 126,239 $ 120 $ 1,032 $ ( 849 ) $ 126,542

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Total $ 148,814 $ 30,980 $ 2,829 $ ( 3,269 ) $ 179,354

Three Months Ended June 30, 2022 North America International Products Corp/Elim Total

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

United States $ 130,206 $ 240 $ 1,523 $ ( 1,098 ) $ 130,871

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Total $ 152,778 $ 25,693 $ 3,078 $ ( 3,087 ) $ 178,462

Six Months Ended June 30, 2023 North America International Products Corp/Elim Total

Nine Months Ended September 30, 2023 North America International Products Corp/Elim Total

United States $ 369,811 $ 709 $ 4,478 $ ( 1,718 ) $ 373,280

3 unchanged sentences

Total $ 431,295 $ 90,664 $ 9,897 $ ( 8,457 ) $ 523,399

Six Months Ended June 30, 2022 North America International Products Corp/Elim Total

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

United States $ 370,426 $ 747 $ 4,366 $ ( 2,319 ) $ 373,220

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These assets and liabilities are aggregated on an individual contract basis and reported on the Consolidated Balance Sheets at the end of each reporting period within accounts receivable, net or accrued expenses and other current liabilities.

Revenue recognized during the 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.

Revenue recognized during the nine months ended September 30, 2023 and 2022 that was included in the contract liability balance at the beginning of such year was $ 5.7 million and $ 4.0 million, respectively, 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.

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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.

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 1,300,000 shares were available for future grants as of September 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.

For each of the three and nine months ended September 30, 2023 and 2022, the Company did no t recognize any share-based compensation expense related to stock option awards.

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.

For the three months ended September 30, 2023 and September 30, 2022, the Company recognized share-based compensation expense related to restricted stock unit awards of $ 0.7 million and $ 0.9 million, respectively.

For the nine months ended September 30, 2023 and 2022, the Company recognized share-based compensation expense related to restricted stock unit awards of $ 2.5 million and $ 2.8 million, respectively.

As of September 30, 2023, there was $ 8.1 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which is expected to be recognized over a remaining weighted-average period of 2.7 years.

Upon vesting, restricted stock units are generally net share-settled to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock.

A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows:

Six months ended June 30,

Nine months ended September 30,

Restricted stock awards vested 430 326

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(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,

A summary of the fully-vested common stock the Company issued to its non-employee directors, in connection with its non-employee director compensation, is as follows:

Nine months ended September 30,

Awards issued 99 70

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

Six months ended June 30,

Nine months ended September 30,

Units Weighted

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Granted 591 $ 8.37 675 $ 7.65

Released ( 430 ) $ 6.09 ( 326 ) $ 10.03

Vested ( 430 ) $ 6.14 ( 326 ) $ 10.03

Forfeited ( 120 ) $ 7.96 ( 42 ) $ 8.19

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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 Company maintains Performance Restricted Stock Units (PRSUs) that have been granted to select executives and senior officers whose ultimate payout may vary between zero and 200 % of the target award, 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 performance metrics for the Company's PRSUs awarded in 2022 as it utilized for the 2021 PRSUs.

The three metrics were:

Free Cash Flow net cash provided by operating activities less purchases of property, plant, equipment and intangible assets and is subject to adjustments approved by the Compensation Committee.

Free Cash Flow defined as net cash provided by operating activities less purchases of property, plant, equipment and intangible assets and is subject to adjustments approved by the Compensation Committee.

Adjusted EBITDA defined as net income attributable to the Company plus:

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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 2021), compared to the average share price during the 20 -trading day period ending on the final measurement date (the last 20 trading days of 2022).

Any cash dividends or distributions paid in 2021 will be added to calculate the return to shareholders during the year.

Any cash dividends or distributions paid in 2022 were 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.

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(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.

For 2023, the Compensation Committee used different performance metrics for PRSUs approved in that year.

The three metrics are:

Free Cash Flow net cash provided by operating activities less purchases of property, plant, equipment and intangible assets and is subject to adjustments approved by the Compensation Committee.

Adjusted EBITDA defined as net income attributable to the Company plus:

interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense and certain acquisition related costs (including transaction due diligence costs and adjustments to the fair value of contingent consideration), foreign exchange (gain) loss and, if applicable, certain special items which are noted.

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

Compensation costs related to the PRSUs are subsequently adjusted for changes in the expected outcomes of the performance conditions.

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

Compensation costs related to the PRSUs with performance conditions 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.

Earned PRSUs generally vest ratably on each of the first four anniversary dates following 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,

Nine months ended September 30,

Units Weighted

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Performance condition adjustments ( 314 ) $ 8.34 ( 269 ) $ 7.71

Released ( 64 ) $ 5.58 ( 17 ) $ 6.85

Vested ( 64 ) $ 5.58 ( 17 ) $ 6.85

Forfeited ( 84 ) $ ( 6.95 ) — $ —

1 unchanged sentence

100 $ 9.83 443 $ 9.74

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.

During the nine months ended September 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 314,000 units during the nine months ended September 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 September 30, 2023 and September 30, 2022, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $ 0.1 million and $ 0.3 million, respectively.

For the nine months ended September 30, 2023 and September 30, 2022, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $ 0.6 million and $ 0.9 million, respectively.

At September 30, 2023, there was $ 0.7 million of total unrecognized compensation costs related to approximately 100,000 non-vested PRSUs, which is expected to be recognized over a remaining weighted-average period of 1.0 year.

Mistras Group, Inc.

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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,

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

2023 2022 2023 2022

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_______________

(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.

(1) For the three and nine months ended September 30, 2023, 1,508,255 and 926,224 shares related to restricted stock, respectively, were excluded from the calculation of diluted EPS due to the net loss for the period.

Mistras Group, Inc.

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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,

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 nine months ended September 30, 2023 and 2022:

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

2023 2022 2023 2022

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Accounts receivable consisted of the following:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Trade accounts receivable $ 138,286 $ 127,767

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Accounts receivable, net $ 136,363 $ 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.

The Company had $ 27.8 million and $ 13.5 million of unbilled revenue accrued as of September 30, 2023 and December 31, 2022, respectively.

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

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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.

The parties agreed to a settlement in the quarter ending June 30, 2023 with releases executed in July 2023, whereby the Company released its claim for the $ 1.4 million of outstanding receivables.

Accordingly, the receivable has been written off.

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Inventories consist of the following (in thousands):

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Raw materials and consumable supplies $ 8,694 $ 7,745

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Property, plant and equipment consisted of the following:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Land $ 2,438 $ 2,529

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Property, plant and equipment, net $ 79,762 $ 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.

Depreciation expense for the three months ended September 30, 2023 and 2022 was approximately $ 6.6 million and $ 5.9 million, respectively.

Depreciation expense for the nine months ended September 30, 2023 and 2022 was $ 19.0 million and $ 18.3 million, respectively.

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

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Foreign currency translation ( 191 ) ( 126 ) — ( 317 )

Balance at June 30, 2023 $ 187,368 $ 14,218 $ — $ 201,586

Impairment charges — ( 13,799 ) — ( 13,799 )

Balance at 30, September 30, 2023 $ 185,519 $ — $ — $ 185,519

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.

During the third quarter of 2023, a triggering event was identified within the Company's reporting units within the International segment due to decreased gross margin in the current period as a result of inflationary pressures and rising energy costs impacting the International reporting units' operations.

As a result, the Company performed an interim quantitative goodwill impairment test.

In performing the interim quantitative goodwill impairment test and consistent with prior practice, the Company determined the fair value of each of the reporting units using a combination of the income approach and the market approach by assessing each

Mistras Group, Inc.

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

of these valuation methodologies based upon availability and relevance of comparable company data and determining the appropriate weighting.

Under the income approach, the fair value for each of the reporting units was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate.

The Company used internal forecasts, updated for recent events, to estimate future cash flows estimated using a terminal value calculation, which incorporates historical and forecasted trends, including an estimate of long-term future growth rates, based on the Company’s most recent views of the long-term outlook for each reporting unit.

The internal forecasts include assumptions about future profitability, including the expected demand for the Company’s goods and services.

Due to the inherent uncertainties involved in making estimates and assumptions, actual results may differ from those assumed in the forecasts.

The Company derived the discount rates using a capital asset pricing model and analyzing published rates for industries relevant to the reporting units to estimate the cost of equity financing.

The Company used discount rates that are commensurate with the risks and uncertainties inherent in the respective businesses and in the internally developed forecasts, updated for recent events.

Increased interest rates in the current period increased the discount rate associated with the reporting units which contributed in an unfavorable decrease in the reporting units value.

The market approach valuation was derived from metrics of publicly traded companies or historically completed transactions of comparable businesses.

The selection of comparable businesses was based on the markets in which the reporting units operate, considering risk profiles, size, geography, and diversity of products and services.

Based upon the results of the interim quantitative goodwill impairment test, the Company recorded an impairment charge of $ 13.8 million within the International reporting units.

The impairment was calculated based on the difference between the estimated fair value and the carrying value of the reporting units and is included in Goodwill impairment charges on the condensed consolidated statements of income (loss) for the three and nine months ended September 30, 2023.

Any significant adverse changes in future periods to the Company’s internal forecasts or the external market conditions, if any, could reasonably be expected to negatively affect its key assumptions and may result in future goodwill impairment charges which could be material.

Intangible Assets

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

(Years) Gross

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Total $ 185,470 $ ( 141,002 ) $ 44,468 $ 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.

Amortization expense for the three months ended September 30, 2023 and 2022 was approximately $ 2.2 million and $ 2.3 million, respectively.

Amortization expense for the nine months ended September 30, 2023 and September 30, 2022 was $ 6.5 million and $ 6.9 million, respectively.

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

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

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Accrued salaries, wages and related employee benefits $ 27,749 $ 26,684

6 unchanged sentences

Total $ 81,853 $ 77,844

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

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

Long-Term Debt

Long-term debt consisted of the following:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Senior credit facility $ 72,118 $ 65,250

8 unchanged sentences

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.

The Credit Agreement permits the Company to borrow up to $ 100 million in non-U.S.

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.

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◦ 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.

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

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

◦ Total Consolidated Debt means all indebtedness (including subordinated debt) of the Company on a consolidated basis.

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• 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.

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.

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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.

As of September 30, 2023, the Company had borrowings of $ 189.7 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 $ 1.2 million as of September 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 September 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.

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.

At September 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 $ 18.0 thousand and interest rates range from 0.4 % to 3.5 %.

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Financial instruments measured at fair value on a recurring basis

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

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

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.

1 unchanged sentence

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

Six months ended June 30,

Nine months ended September 30,

Beginning balance $ 938 $ 1,831

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Ending balance $ — $ 938

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

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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.

As of September 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.

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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.

On April 25, 2023, the parties agreed to settle all claims, and in July 2023, the parties executed a settlement agreement.

As part of the settlement, the Company paid $ 0.3 million in July 2023 (which the Company estimates is significantly less than the cost of going to trial) and released its claim of $ 1.4 million for 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.

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

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

Two proceedings were filed in California Superior Court for the County of Los Angeles regarding alleged violations of the California Labor Code.

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, 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.

The two cases were consolidated and payment was demanded for all damages, including unpaid wages, and various fines and penalties available under California law.

On May 4, 2021, the Company agreed to a settlement of all claims in the cases, which was more formally documented pursuant to a settlement agreement completed October 5, 2021, as amended as of May 3, 2022.

3 unchanged sentences

Pension Related Contingencies

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.

Certain of the 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.

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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.

The balance of the estimated total amount of this potential liability as of September 30, 2023 is approximately $ 2.5 million, which were incurred in 2018 and 2019.

Segment Disclosure

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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.

Corporate and other assets are

Mistras Group, Inc.

2 unchanged sentences

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

comprised principally of cash, deposits, property, plant and equipment, domestic deferred taxes, deferred charges and other assets.

Corporate loss from operations consists of administrative charges related to corporate personnel and other charges that cannot be readily identified for allocation to a particular segment.

Selected consolidated financial information by segment for the periods shown was as follows:

(with intercompany transactions eliminated in Corporate and eliminations)

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

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

2023 2022 2023 2022

4 unchanged sentences

$ 179,354 $ 178,462 $ 523,399 $ 519,155

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

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

2023 2022 2023 2022

5 unchanged sentences

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,

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

2023 2022 2023 2022

5 unchanged sentences

$ ( 4,682 ) $ 9,114 $ ( 2,618 ) $ 13,991

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

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

2023 2022 2023 2022

9 unchanged sentences

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Intangible assets, net

4 unchanged sentences

$ 44,468 $ 49,015

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

North America $ 414,190 $ 407,779

3 unchanged sentences

$ 536,690 $ 534,904

Refer to Note 2 – Revenue , for revenue by geographic area for the three and six months ended June 30, 2023 and 2022.

Refer to Note 2 – Revenue , for revenue by geographic area for the three and nine months ended September 30, 2023 and 2022.

Mistras Group, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

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

Subsequent Events

On October 9, 2023, Sotirios Vahaviolos retired as Executive Chairman of the Board (the “Board”) of Mistras Group, Inc., but remains employed as a Senior Advisor to the Chief Executive Officer.

In addition, Dr.

Vahaviolos continues to serve as a member of the Board and as Chairman Emeritus.

On the same day, the Board elected Manuel N.

Stamatakis to serve as Chairman of the Board to succeed Dr.

Vahaviolos in that role.

On October 9, 2023, the Board also approved the termination without cause of Dennis Bertolotti as the Company’s President and Chief Executive Officer.

In connection with his termination as President and Chief Executive Officer, Mr.

Bertolotti resigned as a director, effective immediately.

The Board appointed Mr.

Stamatakis to serve as interim President and Chief Executive Officer until a permanent President and Chief Executive Officer is appointed.

The Company expects to record approximately $ 2.6 million during the fourth quarter of 2023 related to the termination.

Mistras Group, Inc.

and Subsidiaries

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

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

What changed 10-Q

Item 1. Financial Statements