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Item 7. Management’s Discussion and Analysis

2024-03-11 compared with 2023-03-15 · 135 added, 97 removed, 259 unchanged (47% of the section changed)

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This section generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 is included in Part II–Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 14, 2022, which discussion is incorporated herein by reference.

Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 are included in Part II–Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March 15, 2023, which discussion is incorporated herein by reference.

This MD&A should be read together with our audited consolidated financial statements and related notes included in Item 8 in this Annual Report.

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• Forward-Looking Statements

• COVID-19 Update

• COVID-19 and Other Updates

• Note about Non-GAAP Measures

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COVID-19 and Other Updates

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

We are currently unable to predict with certainty the effect that inflationary pressures and the Russian-Ukrainian war may have on our business, results of operations or liquidity or in other ways which we cannot yet determine.

To date, our European operations have experienced increased costs associated with higher energy costs, among others, due in part to the on-going war.

While our business and operations were negatively impacted the past several years by the COVID-19 pandemic, at the time of this Annual Report, the effects of the COVID-19 pandemic have subsided and our operations have normalized to pre-pandemic levels.

We are currently unable to predict with certainty the effects that inflationary pressures and the Russian-Ukrainian war may have on our business, results of operations or liquidity or in other ways which we cannot yet determine.

To date, our European operations have experienced increased costs associated with higher energy costs, among others, due in part to the on-going war between Russia & Ukraine.

We will continue to monitor market conditions and respond accordingly.

We are a leading "one source" multinational provider of integrated technology-enabled asset protection solutions, helping to maximize the safety and operational uptime for civilization’s most critical industrial and civil assets.

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

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

Backed by an innovative, data-driven asset protection portfolio, proprietary technologies, strong commitment to Environmental, Social, and Governance ("ESG") initiatives, and a decades-long legacy of industry leadership, MISTRAS leads customers in the oil and gas, petrochemical, aerospace and defense, renewable and nonrenewable power, civil infrastructure, and manufacturing industries towards achieving operational and environmental excellence.

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

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

and building real-time monitoring systems to help avoid catastrophic incidents, we help the world at large.

We enhance value for our clients by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial Internet of Things ("IIoT")-connected digital software and monitoring solutions, including

OneSuite, which serves as an ecosystem platform, pulling together all of our software and data services capabilities, for the benefit of our customers.

Our core capabilities also include 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.

building real-time monitoring equipment to enable safe travel across bridges;

and helping to propel sustainability, MISTRAS helps the world at large.

The Company enhances value for its customers by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial IoT-connected digital software and monitoring solutions.

The Company’s core

capabilities also include non-destructive testing ("NDT") field and in-line inspections enhanced by advanced robotics, laboratory quality control and assurance testing, sensing technologies and NDT equipment, asset and mechanical integrity engineering services, and light mechanical maintenance and access services.

Our operations consist of three reportable segments:

Services, International, and Products and Systems.

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

This segment includes data services revenue derived from the selling of licenses and analyzing and synthesizing customer data through our OneSuite platform, field operations revenue derived from work performed in the field at customer locations, and shop revenue derived from operations designing, building, and customizing products in our laboratories for our customers.

PCMS software and pipeline related software and data analysis solutions are included in this segment.

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

• North America provides asset protection solutions 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.

A majority of data analytical solutions revenues are generated by this segment.

• International offers services, products and systems similar to those of the other segments to select markets within Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by the Products and Systems segment.

• Products and Systems designs, manufactures, sells, installs and services our asset protection products and systems, including equipment and instrumentation, predominantly in the United States.

• Products and Systems designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States.

Given the role our solutions play in enhancing the safe and efficient operation of infrastructure, we have historically provided a majority of our solutions to our customers on a regular, recurring basis.

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We have focused on providing our advanced asset protection solutions to our customers using proprietary, technology-enabled software and testing instruments, including those developed by our Products and Systems segment.

We have made numerous acquisitions in an effort to grow our base of experienced, certified personnel, expand our service lines and technical capabilities, increase our geographical reach, complement our existing offerings, and leverage our fixed costs.

We have made numerous acquisitions in the past in an effort to grow our base of experienced, certified personnel, expand our service lines and technical capabilities, increase our geographical reach, complement our existing offerings, and leverage our fixed costs.

We have increased our capabilities and the size of our customer base through the development of applied technologies and managed support services, organic growth and the integration of acquired companies.

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Our level of business and financial results are impacted by world-wide macro- and micro-economic conditions generally, as well as those within our target markets.

Among other things, we expect the timing of our oil and gas customers' inspection spend to be impacted by oil price fluctuations.

Among other things, we expect the timing of our oil and gas customers' inspection expenditures to be impacted by oil price fluctuations.

We have continued providing our customers with an innovative asset protection software ecosystem through our MISTRAS OneSuite platform.

The software platform offers functions of our popular software and services brands as integrated apps on a cloud environment.

The software platform offers functions of MISTRAS' software and services brands as integrated apps on a cloud environment.

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

2023 Developments

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

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

Our cash position and liquidity remains strong.

As of December 31, 2022, our cash and cash equivalents balance was approximately $20.5 million.

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

The Russian-Ukrainian war and the conflict in the Middle East between Israel and Hamas continue 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 primarily in Europe due to increased energy costs in connection with 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.

At the time of this Annual Report, the effects of the COVID-19 pandemic have subsided, and our operations are continuing to normalize to pre-pandemic levels.

Our cash position and liquidity remain strong.

As of December 31, 2023, our cash and cash equivalents balance was approximately $17.6 million and our Credit Agreement provides us with significant liquidity.

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

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

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

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

We are currently unable to predict with certainty the overall impact that the factors discussed above and the effect of the Russian-Ukrainian war may have on our business, results of operations or liquidity or in other ways which we cannot yet determine.

To date, our European operations experienced increased costs associated with higher energy costs, among others, due in part to the Russian-Ukrainian war.

We will continue to monitor market conditions and respond accordingly.

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.

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.

This resulted in goodwill impairment charges of $13.8 million within the International reporting units during the third quarter of 2023.

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

Refer to Item 1A.

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Note about Non-GAAP Measures

We prepare our consolidated financial statements in accordance with U.S.

generally accepted accounting principles ("U.S.

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

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

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

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

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

These adjustments have been excluded from the GAAP measure because these expenses and credits are not related to our or any individual segment's core business operations.

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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.

Consolidated Results of Operations

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($ in thousands)

Revenues $ 687,373 $ 677,131

Revenue $ 705,473 $ 687,373

Gross profit 203,807 198,173

Gross profit as a % of Revenue 28.9 % 28.8 %

Income from operations 19,799 18,170

Income (loss) from operations (1,904) 19,799

Income from operations as a % of Revenue (0.3) % 2.9 %

Income before provision for income taxes 9,294 7,288

Net income 6,574 3,893

Net income attributable to Mistras Group, Inc.

Income (loss) before provision for income taxes (18,665) 9,294

Net income (loss) (17,445) 6,574

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

$ (17,453) $ 6,499

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($ in thousands)

Services $ 573,336 $ 555,387

North America $ 579,330 $ 573,336

International 124,414 112,425

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Revenue was $705.5 million for the year ended December 31, 2023, an increase of $18.1 million, or 2.6%, compared with the year ended December 31, 2022.

The increase was driven by the Services segment, which experienced a revenue increase of $17.9 million, or 3.2%, driven by single-digit organic growth in certain end markets.

The International segment revenues decreased by $4.8 million, or 4.1%, due predominantly to low double-digit unfavorable impact of foreign exchange rates which was partially offset by mid single-digit organic growth.

The Products and Systems segment decreased by $1.1 million, or 8.0%, driven by lower sales volume.

The increase was driven by the North America segment, which experienced a revenue increase of $6.0 million, or 1.0%, driven by single-digit organic growth in certain end markets.

The International segment revenues increased by $12.0 million, or 10.7%, due predominantly to low single-digit favorable impact of foreign exchange rates and by mid single-digit organic growth.

The Products and Systems segment increased by $0.3 million, or 2.0%, driven by higher sales volume.

Oil and gas customer revenue comprised approximately 59% and 56% of total revenue for the years ended December 31, 2023 and 2022, respectively.

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Total $ 415,995 $ 387,752

Oil and gas upstream customer revenue increased approximately $17.0 million, or 13%, for the year ended December 31, 2022 compared to the year ended December 31, 2021, due to continued market share gains and expanded exploration operations, as compared to the prior period.

Midstream customer revenues were flat for the year ended December 31, 2022 compared to the year ended December 31, 2021.

During 2022, we experienced the growth of our pipe inspection services including our Onstream business within this sub-category.

Downstream customer revenue increased $2.2 million, or 2%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 even with delays in timing associated with customer turnarounds in 2022.

Gross profit by segment for the years ended December 31, 2022 and 2021 were as follows:

Oil and gas upstream customer revenue increased approximately $11.8 million, or 8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, due to continued market share gains and expanded exploration operations, as compared to the prior year period.

Midstream customer revenues increased approximately $4.3 million, or 4%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, due to increased pipe inspection services.

Downstream customer revenue increased $12.2 million, or 8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, due to increased sales volume at customer refineries and increased customer turnarounds.

The following table presents revenue by type, explained directly below the table.

For the year ended December 31,

($ in thousands)

Services $ 159,049 $ 155,384

Revenue by type

Field Services $ 470,433 $ 455,051

Shop Laboratories 58,188 48,809

Data Analytical Solutions 72,458 62,410

Other 104,394 121,103

Total $ 705,473 $ 687,373

In presenting the allocation of revenues by type in the table above, management makes certain assumptions in its allocation of revenues from laboratories that provide more than one type of service.

The allocation methodology and assumptions made are consistent for the years presented.

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

Field Services revenue increased $15.4 million, or 3.4%, for the twelve months ended December 31, 2023 as compared to the twelve months ended December 31, 2022.

The increase 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 $9.4 million, or 19.2%, for the twelve months ended December 31, 2023 as compared to the twelve months ended December 31, 2022.

The increase was due to increased sales volume related to our commercial aerospace and industrials end markets.

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 Analytical 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 Analytical Solutions revenue increased $10.0 million, or 16.1%, for the twelve months ended December 31, 2023 as compared to the twelve months ended December 31, 2022.

The increase was due primarily to increased sales volume within PCMS, Onstream and other Data Analytical 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 $16.7 million, or 13.8%, for the twelve months ended December 31, 2023 as compared to the twelve months ended December 31, 2022.

Other revenues in 2023 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 as compared to the prior year period.

Gross Profit (Loss)

Gross profit (loss) by segment for the years ended December 31, 2023 and 2022 were as follows:

For the year ended December 31,

($ in thousands)

Gross profit (loss)

North America $ 163,960 $ 159,049

% of segment revenue 28.3 % 27.7 %

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Gross profit increased $5.6 million, or 2.8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, with a sales increase of $18.1 million, or 2.6%.

During 2022 certain end markets returned to pre-pandemic levels and continued organic growth across target end markets resulted in increased sales as compared to the prior period.

Gross profit margin was 28.8% and 29.1% for the years ended December 31, 2022 and 2021, respectively, due primarily to inflationary pressures in 2022 as compared to 2021.

Services segment gross profit margins had a year-on-year decrease of 30 basis points to 27.7% for the year ended December 31, 2022, due primarily to inflationary pressures and the end of government wage subsidies received in Canada.

International segment gross margins had a year-on-year increase of 70 basis points to 29.9% for the year ended December 31, 2022, due primarily to sales mix and continued growth in end markets including aerospace and defense.

Products and Systems segment gross margins decreased by 750 basis points for the year ended December 31, 2022 to 43.1%, driven by unfavorable sales mix.

Gross profit margin was 28.9% and 28.8% for the years ended December 31, 2023 and 2022, respectively, due to favorable sales mix.

North America segment gross profit margins had a year-on-year increase of 60 basis points to 28.3% for the year ended December 31, 2023, due primarily to favorable sales mix.

International segment gross margins had a year-on-year decrease of 290 basis points to 27.0% for the year ended December 31, 2023, due primarily to increased inflationary pressures.

Products and Systems segment gross margins increased by 660 basis points for the year ended December 31, 2023 to 49.7%, driven by favorable sales mix.

Operating Expenses

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Selling, general and administrative expenses $ 166,749 $ 166,400

Goodwill Impairment charges 13,799 —

Bad debt provision for troubled customers, net of recoveries — 42

Reorganization and other costs 12,269 195

Research and engineering 1,723 1,994

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% of total revenue 29.2 % 26.0 %

Operating expenses decreased $0.6 million, or (0.3)%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 due to insurance recoveries in the current period that were not received in the prior period and decreased costs related to acquisitions in 2022 as compared to 2021.

Selling, general and administrative expenses increased $5.3 million, or 3.3% for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to our elimination of substantially all temporary cost reduction and efficiency program initiatives undertaken during the first quarter of 2020 in response to COVID-19 as more fully described in "Overview" 2022 Developments .

Transactional foreign exchange expense, which is included within selling, general and administrative expenses, was approximately $0.6 million lower in 2022 as compared to 2021, due to volatility in certain foreign currencies.

Operating expenses increased $27.3 million, or 15.3%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 due primarily to impairment charges and reorganization charges recorded in the current period that were not

in the prior period.

Selling, general and administrative expenses increased $0.3 million, or 0.2% for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to unfavorable foreign currency exchange.

Income (Loss) from Operations

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($ in thousands)

North America:

Income from operations (GAAP) $ 55,170 $ 49,616

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Acquisition-related expense, net — 45

Income before special items (unaudited, non-GAAP) $ 48,961 $ 51,365

Income before special items (non-GAAP) $ 57,188 $ 48,961

International:

Income from operations (GAAP) $ 3,566 $ 1,839

Income (loss) from operations (GAAP) $ (12,229) $ 3,566

Goodwill Impairment charges 13,799 —

Reorganization and other costs 351 (43)

Legal settlement and litigation charges, net — 737

Income before special items (unaudited, non-GAAP) $ 3,523 $ 3,000

Income before special items (non-GAAP) $ 1,921 $ 3,523

Products and Systems:

Loss from operations (GAAP) $ (992) $ (117)

Income (loss) from operations (GAAP) $ 267 $ (992)

Reorganization and other costs 382 —

Loss before special items (unaudited, non-GAAP) $ (992) $ (90)

Income (loss) before special items (non-GAAP) $ 649 $ (992)

Corporate and Eliminations:

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Acquisition-related expense, net 9 31

Loss before special items (unaudited, non-GAAP) $ (31,681) $ (31,979)

Loss before special items (non-GAAP) $ (34,527) $ (31,681)

Total Company:

Income from operations (GAAP) $ 19,799 $ 18,170

Income (loss) from operations (GAAP) $ (1,904) $ 19,799

Goodwill Impairment charges 13,799 —

Bad debt provision for troubled customers, net of recoveries — 42

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Acquisition-related expense, net 9 76

Income before special items (unaudited, non-GAAP) $ 19,811 $ 22,296

Income before special items (non-GAAP) $ 25,231 $ 19,811

See " Note about Non-GAAP Measures" in this Annual Report for an explanation of our use of non-GAAP measures.

Total Company income from operations (GAAP) increased by $1.6 million, or 9.0% compared to the year ended December 31, 2021.

Total Company income before special items (non-GAAP) decreased by $2.5 million or 11.1% compared with the year

ended December 31, 2021.

Total Company income from operations (GAAP) decreased by $21.7 million, or 109.6% compared to the year ended December 31, 2022.

Total company income before special items (non-GAAP) increased by $5.4 million or 27.4% compared with the year ended December 31, 2022.

Operating expenses, excluding special items (non-GAAP), as a percentage of revenue, was 25.3% for the year ended December 31, 2023 compared to 25.9% for the year ended December 31, 2022.

The primary driver for the increase in total company income was increased sales in 2022 compared to 2021.

Income before special items as a percentage of revenue decreased by 40 basis points to 2.9% for the year ended December 31, 2022 from 3.3% for the year ended December 31, 2021.

Our discussion below is qualified by the unknown impact that the COVID-19 pandemic, or similar future health crisis, and the Russia - Ukraine war will continue to have on our business and the economy in general, including the resulting economic disruption of both.

The primary driver for the increase in total company income before special items was increased sales in 2023 compared to 2022.

Income before special items as a percentage of revenue increased by 70 basis points to 3.6% for the year ended December 31, 2023 from 2.9% for the year ended December 31, 2022.

Our discussion below is qualified by the unknown impact that the Russia - Ukraine war will continue to have on our business and the economy in general, including the resulting economic disruption.

Refer to Item 1A.

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Interest expense was $16.8 million and $10.5 million for the years ended December 31, 2023 and December 31, 2022, respectively.

The decrease was due to the Company having entered into the New Credit Agreement providing for interest to be payable based on Secured Overnight Financing Rate ("SOFR") plus a credit spread adjustment and applicable SOFR margin ranging from 1.25% to 2.75%, and the removal of the previously existing minimum LIBOR floor.

The increase was due to increased interest rates in the current period.

Our effective income tax rate was approximately 6.5% for the year ended December 31, 2023, compared to 29.3% for the year ended December 31, 2022.

The decrease in effective tax rate was primarily driven by a $1.7 million US R&D tax credit benefit, partially offset by the recording of a $1.1 million valuation allowance recorded in 2022 which was related to certain Canadian entities .

The decrease in effective tax rate was primarily driven by a $1.7 million US R&D tax credit benefit in 2022, partially offset by the recording of a $1.1 million valuation allowance recorded in 2022 which was related to certain Canadian entities .

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

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Cash Flows from Operating Activities

Cash provided by operating activities for the year ended December 31, 2022 was $26.4 million, a decrease of $15.9 million from the prior year.

The decrease was primarily attributable to movements in working capital driven primarily by a decrease in net accounts receivable collections, a decrease in accrued expenses and other liabilities and in prepaid expenses and other assets in the current year as compared to the prior year.

Cash provided by operating activities for the year ended December 31, 2023 was $26.7 million, an increase of $0.3 million from the prior year period.

The increase was mainly attributable to movements in working capital driven primarily by an increase in net accounts receivable collections, an increase in accrued expenses and other liabilities, and an increase in accounts payable in the current year as compared to the prior year.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 2022 was $12.2 million, a decrease of $6.3 million from the prior year.

Net cash used in investing activities for the year ended December 31, 2023 was $22.1 million, an increase of $9.9 million used in investing activities from the prior year period.

The Company used $10.2 million more cash for purchases of property, plant and equipment and intangible assets in 2023 compared to 2022.

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Net cash used in financing activities for the year ended December 31, 2023 was $7.7 million, compared to $16.3 million for the year ended December 31, 2022.

During the year ended December 31, 2022, we entered into a new credit agreement which replaced our prior credit agreement, as detailed more in Note 11-Long-Term Debt .

As part of this transaction, the prior revolving credit facility and term loan were repaid in full.

Net repayment of debt and revolver was approximately $13.5 million higher compared to 2021, when excluding this transaction.

In addition, for the year ended December 31, 2022 we incurred approximately $0.5 million less payments for contingent considerations, offset in part by $0.9 million taxes paid related to net share settlement of share-based awards.

During the year ended December 31, 2022, we entered into the New Credit Agreement which replaced our prior credit agreement, as detailed more in Note 11-Long-Term Debt.

As part of the New Credit Agreement, the prior revolving credit facility and term loan were repaid in full.

Net repayment of debt and revolver was approximately $9.6 million higher compared to 2022.

In addition, for the year ended December 31, 2023, we incurred approximately $0.6 million more taxes paid related to net share settlement of share-based awards.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

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

See 11-Long-Term Debt of the notes to the consolidated financial statements for additional information.

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

The New Credit Agreement permits us 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.

Additionally, the New Credit Agreement requires quarterly payments on the term loan of $1.56 million through June 30, 2024, then increasing to $2.34 million through June 30, 2025, and to $3.12 million for each quarterly payment thereafter through maturity on July 30, 2027.

See Note 11-Long-Term Debt of the notes to the consolidated financial statements for additional information.

Liquidity and Capital Resources Outlook

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We expect our future uses of cash will primarily be for repayment of debt, purchases or manufacture of field-testing equipment to support growth, additional investments in technology and software products and the replacement of existing assets and equipment used in our operations.

We often make purchases to support new sources of revenues, particularly in our Services segment.

We often make purchases to support new sources of revenues, particularly in our North America segment.

In addition, we annually fund a certain amount of replacement equipment, including a portion of our fleet vehicles.

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Our New Credit Agreement does not limit the Company’s ability to acquire other businesses or companies except for certain provisions as described within Note 11-Long-Term Debt.

We did not have any acquisitions in 2022.

In some cases, additional equipment will be needed to upgrade the capabilities of these acquired companies.

In addition, our future capital spending may increase as we pursue growth opportunities.

Our future capital spending may increase as we pursue growth opportunities and acquire additional equipment to meet or pursue business opportunities.

Other investments in infrastructure, training and software may also be required to match our growth, but we plan to continue using a disciplined approach to building our business.

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Revenue on such long-term contracts is recognized as work is performed based on total costs incurred to date in relation to the total estimated costs for the performance of the contract at completion.

This includes contract estimates of costs to be incurred for the performance of the

This includes contract estimates of costs to be incurred for the performance of the contract.

Cost estimation is based upon the professional knowledge and experience of our project managers, engineers and financial professionals.

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As of December 31, 2023 and December 31, 2022, we had $81.0 million and $77.6 million in net property, plant and equipment, respectively, and $44.0 million and $49.0 million in intangible assets, net, respectively.

See Note 9-Intangible Assets to the consolidated financial statements for the impairment charge recorded in 2020.

Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets.

We test goodwill for impairment at a “reporting unit” level (which for us is represented by (i) our Services segment, (ii) our Products and Systems segment, (iii) the European component of our International segment and (iv) the Brazilian component of our International segment).

We test goodwill for impairment at a “reporting unit” level (which for us is represented by (i) our North America segment, (ii) our Products and Systems segment, (iii) the European component of our International segment and (iv) the Brazilian component of our International segment).

Our annual impairment test is conducted on the first day of our fourth quarter, which is October 1.

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Sustained declines in our stock price and related market capitalization could impact key assumptions in the overall estimated fair values of our reporting units and could result in non-cash impairment charges that could be material to our consolidated balance sheet or results of operations.

We performed an annual quantitative impairment test as of October 31, 2022 noting no indicators of impairment in any of the Company's reporting units.

Also, as of December 31, 2022, there are no indicators of an impairment.

See Note 8-Goodwill to the consolidated financial statements for additional information.

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 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.

We elected to perform a quantitative assessment of goodwill on October 1, 2023.

Our quantitative assessment considered relevant events and circumstances occurring since our interim quantitative goodwill impairment test performed as of September

Specifically, we considered changes in macroeconomic conditions, industry and market conditions, our internal forecasts of future revenue and expenses, our stock price, any significant events affecting the Company and actual changes in the carrying values of our net assets.

After considering all positive and negative evidence for the assessment as of September 30, 2023, we concluded that it was not more likely than not that our carrying values exceeded fair values and as such, no additional impairment was indicated.

Additionally, as of December 31, 2023, there are no indicators of an impairment.

See Note 8-Goodwill of the notes to the consolidated financial statements for additional information.

We allocate the purchase price of acquired businesses to their identifiable tangible assets and liabilities as well as identifiable intangible assets, such as customer relationships, technology, non-compete agreements and trade names.

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Recent Accounting Pronouncements

For information about recent accounting pronouncements, see Note 1-Summary of Significant Accounting Policies and Practices to the consolidated financial statements.

For information about recent accounting pronouncements, see Note 1-Summary of Significant Accounting Policies and Practices of the notes to the consolidated financial statements.

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-K

Item 7. Management’s Discussion and Analysis