What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-06 compared with 2023-08-07 · 105 added, 103 removed, 225 unchanged (48% of the section changed)

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

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

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

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

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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.

Our operations consist of three reportable segments:

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

Our operations consist of three reportable segments:

North America, International, and Products and Systems.

• North America provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of NDT, inspection, mechanical and engineering services that are used to evaluate the structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components.

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OneSuite serves as a single access portal for customers' data activities and provides access to 90 plus applications being offered on one centralized platform.

We have continued to develop new technologies to provide monitoring of wind blade integrity through our Sensoria™ tool.

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

This tool provides additional growth and expansion of our

Recent Developments

The Russian-Ukrainian war is creating disruption in the oil and gas market and the supply chain in general, which is resulting in some disruption to our business operations primarily in Europe due to increased energy costs.

Mistras Group, Inc.

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(tabular dollars are in thousands)

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

Recent Developments

Issues related to the COVID-19 coronavirus (COVID-19) pandemic have subsided significantly during 2022 and are not impacting our business in any material manner during 2023.

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

Our cash position and liquidity remains strong.

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

As of September 30, 2023, the cash balance was approximately $12.8 million and our Credit Agreement provides us with significant liquidity.

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

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

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

The Company’s European operations are currently experiencing higher energy costs, among other increased costs, due in part to the Russian-Ukrainian war and an impairment was recorded during the quarter ended September 30, 2023 related to the Company's European reporting units.

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

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Income (loss) before special items is not used to determine incentive compensation for executives or employees, nor is it a replacement for the reported GAAP financial performance and/or necessarily comparable to the non-GAAP financial measures of other companies.

Any measure that eliminates the foregoing items has material limitations as a performance or liquidity measure and should not be considered alternatives to net income (loss) or any other measures derived in accordance with GAAP.

Because Income (loss) from operations before special items may not be calculated in the same manner by all companies, this measure may not be comparable to other similarly titled measures used by other companies.

Mistras Group, Inc.

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Results of Operations

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

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

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

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

2023 2022 2023 2022

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$ (10,298) $ 4,373 $ (14,947) $ 3,653

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

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

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

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

Revenue was $179.4 million for the three months ended September 30, 2023, an increase of $0.9 million, or 0.5%, compared with the three months ended September 30, 2022.

Revenue for the nine months ended September 30, 2023 was $523.4 million, an increase of $4.2 million, or 0.8%, compared with the nine months ended September 30, 2022.

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

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

2023 2022 2023 2022

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

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

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

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

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

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

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

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

In the three months ended September 30, 2023, total revenue increased 0.5% versus the prior year comparable period due predominantly to increased sales volume as compared to the prior period.

North America segment revenue decreased 2.6% due to decreases in sales volume in our aerospace and defense and power generation & transmission end markets, amongst others.

International segment revenue increased 20.6%, due predominantly to low double-digit organic growth and mid single-digit favorable foreign exchange rates impact.

Products and Systems segment revenue decreased 8.1%, due to decreased sales volume as compared to the prior period.

Oil and gas customer revenue comprised approximately 58% and 54% of total revenue for the three months ended September 30, 2023 and 2022, respectively.

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

The Company’s top ten customers comprised approximately 36% of total revenue for the three months ended September 30, 2023, as compared to 32% for the three months ended September 30, 2022, with no customer accounting for 10% or more of total revenue in either three-month period.

Mistras Group, Inc.

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

In the nine months ended September 30, 2023, total revenue increased 0.8% versus the comparable prior period.

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

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

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

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

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

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

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

Our North America segment revenue decreased 0.9% due primarily to decreases in sales volume in our aerospace and defense and other process industries end markets which was partially offset by increased sales volume in our oil and gas end market.

International segment revenue increased 8.7% due to mid single-digit organic growth and offset by low single-digit unfavorable revenue impact from foreign exchange rates.

Products and Systems segment revenue increased by 14.2% due to increased sales volume within the power generation & transmission end market, as compared to the prior period.

Oil and gas customer revenue comprised approximately 59% and 56% of total revenue for the nine months ended September 30, 2023 and 2022, respectively.

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

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

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

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

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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Total $ 103,252 $ 97,031 $ 308,041 $ 292,519

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

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

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

Oil and gas upstream customer revenue increased approximately $7.3 million, or 7%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, and $2.9 million, or 8%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 due to increased exploration operations and market share gains compared to the prior period.

Midstream customer revenues increased approximately $1.3 million, or 2%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, and $0.3 million, or 1%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 due to comparable pipe inspection services performed in both years.

Downstream customer revenue increased $6.9 million, or 6%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, and $3.0 million, or 8%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 due to increased sales volume at customer refineries and increased customer turnarounds.

Mistras Group, Inc.

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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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Shop Laboratories 14,840 12,528 42,216 35,533

Data Solutions 18,107 16,236 34,919 28,635

Data Analytical Solutions 17,997 17,151 52,916 45,786

Other 23,800 30,257 79,766 92,451

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

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

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

Field Services revenue increased by $3.1 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, and increased $4.2 million, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

The increase in both periods was due to increased sales volume in our oil and gas end market for our North America and International segments.

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

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

Shop revenues increased by $6.7 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, and increased $2.3 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

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

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

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

Data Solutions revenue increased by $6.3 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, and $1.9 million, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 due primarily to increased sales volume within PCMS, Onstream and other Data Solutions offerings within our North America segment.

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

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

Data Solutions revenue increased by $7.1 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, and increased $0.8 million, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 due primarily to increased sales volume within PCMS, Onstream and other Data Solutions offerings within our North America segment.

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

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

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

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

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

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

Other revenues decreased by $12.7 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, and decreased $6.5 million, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Other revenues decreased primarily due to decreased sales within the aerospace and defense sector and due to declines in our other end markets within the North America and International segments.

Gross profit increased by $0.6 million, or 1.1%, in the three months ended September 30, 2023 versus the prior year comparable period, on an increase in revenue of 0.5%.

Gross profit increased by $2.9 million, or 2.0%, in the nine months ended September 30, 2023 on an increase in revenue of 0.8%.

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

Mistras Group, Inc.

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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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% of total revenue 30.3 % 30.1 % 28.7 % 28.4 %

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

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

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

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

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

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

Gross profit margin was 30.3% and 30.1% for the three-month periods ended September 30, 2023 and 2022, respectively.

North America segment realized an increase of 0.7% in gross profit margin to 30.1% during the three months ended September 30, 2023.

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

International segment realized a decrease of (2.5)% in gross profit margin to 27.4% during the three months ended September 30, 2023 due primarily to increased inflationary costs as compared to the prior year period.

Products and Systems segment realized an increase of 0.1% in gross profit margin to 38.7% during the three months ended September 30, 2023 due to favorable sales mix.

Gross profit margin was 28.7% and 28.4% for the nine months ended September 30, 2023 and 2022, respectively.

Gross profit margin increased due to favorable sales mix.

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

Operating Expenses

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

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

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

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

2023 2022 2023 2022

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

Loss on debt modification — 693 — 693

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

Goodwill Impairment Charges 13,799 — 13,799 —

Research and engineering 438 450 1,428 1,523

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% of total revenue 32.9 % 25.0 % 29.2 % 25.7 %

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

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

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

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

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

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

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

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

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

Total operating expenses increased $14.4 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, due predominantly to impairment charges of $13.8 million incurred in the third quarter of 2023 as more fully described in Note 9- Goodwill of the Notes to the Unaudited Condensed Consolidated Financial Statements.

Selling, general and administrative expenses decreased $1.2 million during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, due mainly to favorable foreign currency exchange.

Depreciation and amortization was flat during the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

During the three months ended September 30, 2023, $2.7 million of reorganization and other related costs were incurred, which were due to the Company's on-going efficiency and productivity initiatives.

Operating expenses increased $19.6 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 due predominantly to impairment charges of $13.8 million incurred in the third quarter of 2023 as more fully described in Note 9- Goodwill of the Notes to the Unaudited Condensed Consolidated Financial Statements.

Selling, general, and administrative expenses increased $0.3 million during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to favorable foreign currency exchange.

Reorganization and other costs for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 increased $6.0 million due to professional fees and restructuring charges associated with changes in the Company's organizational structure.

Depreciation and amortization decreased $0.5 million during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Income (loss) from Operations

Mistras Group, Inc.

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Income (loss) from Operations

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

Three months ended 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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Income (loss) from operations (GAAP) $ (12,970) $ 814 $ (13,031) $ 2,678

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

Goodwill Impairment charges 13,799 — 13,799 —

Reorganization and other costs, net 33 (15) 228 (114)

Income from operations before special items (non-GAAP) $ 862 $ 799 $ 996 $ 2,564

Products and Systems:

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

Loss from operations (GAAP) $ (557) $ (333) $ (78) $ (1,334)

Reorganization and other costs 189 — 189 —

Income (loss) from operations before special items (non-GAAP) $ (368) $ (333) $ 111 $ (1,334)

Corporate and Eliminations:

Loss from operations (GAAP) $ (9,159) $ (8,067) $ (29,228) $ (22,668)

Loss on debt modification — 693 — 693

Reorganization and other costs 2,445 133 5,026 139

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Total Company:

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

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

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

Goodwill Impairment charges 13,799 — 13,799 —

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

Loss on debt modification — 693 — 693

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

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Income from operations before special items (non-GAAP) $ 11,819 $ 9,938 $ 17,353 $ 14,108

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

Mistras Group, Inc.

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

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

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

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

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

See section Note About Non-GAAP Measures in this Quarterly Report on Form 10-Q for an explanation of the use of non-GAAP measurements.

For the three months ended September 30, 2023, income from operations (GAAP) decreased $13.8 million compared with the three months ended September 30, 2022, while income before special items (non-GAAP) increased $1.9 million for the three months ended September 30, 2023 compared with the three months ended September 30, 2022.

As a percentage of revenue, income before special items increased by 100 basis points to 6.6% in the three months ended September 30, 2023 from 5.6% in the three months ended September 30, 2022.

For the nine months ended September 30, 2023, income from operations (GAAP) decreased $16.6 million, compared with the nine months ended September 30, 2022, while income from operations before special items (non-GAAP) increased $3.2 million for the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022.

As a percentage of revenue, income from operations before special items increased by 60 basis points to 3.3% in the nine months ended September 30, 2023 from 2.7% in the nine months ended September 30, 2022.

During the nine months ended September 30, 2023, the Company experienced overall organic growth offset by increased reorganization costs.

Interest Expense

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

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

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

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

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

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

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

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

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

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

Interest expense was approximately $4.2 million and $2.7 million for the three months ended September 30, 2023 and 2022, respectively.

Interest expense was approximately $12.1 million and $6.8 million for the nine months ended September 30, 2023 and 2022, respectively.

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

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

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

Our 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 impairment.

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 impairment.

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.

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

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Cash flows are summarized in the table below:

Six months ended June 30,

Nine months ended September 30,

Net cash provided by (used in):

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Cash Flows from Operating Activities

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

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

During the nine months ended September 30, 2023, cash provided by operating activities was $10.7 million, representing a year-on-year increase of $0.2 million, or 1%.

The increase was primarily related to decreased days sales outstanding in the current year period and offset by an increase in prepaid expenses and other assets.

Cash Flows from Investing Activities

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

During the nine months ended September 30, 2023, cash used in investing activities was $15.2 million, compared to $8.9 million net cash used in investing activities for the nine months ended September 30, 2022.

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

Cash Flows from Financing Activities

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

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

Net cash used in financing activities was $1.8 million for the nine months ended September 30, 2023, compared to net cash used in financing activities of $4.8 million for the nine months ended September 30, 2022.

This was primarily due to during the nine months ended September 30, 2023, net repayments of debt were approximately $2.2 million higher as compared to 2022.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

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

The effect of exchange rate changes on our cash and cash equivalents was a decrease of $1.4 million in the nine months ended September 30, 2023, compared to a decrease of $2.9 million for the nine months ended September 30, 2022.

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

Cash Balance and Credit Facility Borrowings

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

As of September 30, 2023, we had cash and cash equivalents totaling $12.8 million and $114.2 million of unused commitments under our Credit Agreement with borrowings of $189.7 million and $2.9 million of letters of credit outstanding.

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

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

As of June 30, 2023, we were in compliance with the terms of the Credit Agreement and will continuously monitor our compliance with the covenants contained in the Credit Agreement.

As of September 30, 2023, we were in compliance with the terms of the Credit Agreement and will continuously monitor our compliance with the covenants contained in the Credit Agreement.

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

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Off-balance Sheet Arrangements

During the six months ended June 30, 2023, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

During the nine months ended September 30, 2023, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis