What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-03 compared with 2023-11-06 · 89 added, 165 removed, 165 unchanged (61% 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 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”).

The following Management’s Discussion and Analysis (“MD&A”) provides a discussion of our results of operations and financial position for the three months ended March 31, 2024 and 2023.

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 (the "Quarterly Report") and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Annual Report”).

Unless otherwise specified or the context otherwise requires, “Mistras,” “the Company,” “we,” “us” and “our” refer to Mistras Group, Inc.

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Forward-Looking Statements

This report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”).

This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”).

Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact.

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You are urged not to place undue reliance on any such forward-looking statements, any of which may turn out to be wrong due to inaccurate assumptions, various risks, uncertainties or other factors known and unknown.

Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those discussed in the “Business—Forward-Looking Statements,” and “Risk Factors” sections of our 2022 Annual Report as well as those discussed in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those discussed in the “Business—Forward-Looking Statements,” and “Risk Factors” sections of our 2023 Annual Report as well as those discussed in this Quarterly Report and in our other filings with the SEC.

In addition, there are various developments discussed below which could create risks and uncertainty about our business, results of operations or liquidity.

The Company is a leading “one source” multinational provider of integrated technology-enabled asset protection solutions helping to maximize the safety and operational uptime for civilization’s most critical industrial and civil assets.

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, the Company helps clients with asset-intensive infrastructure in the oil and gas, aerospace and defense, industrials, power generation and transmission (including alternative and renewable energy), other process industries and infrastructure, research and engineering and other industries towards achieving and maintaining operational excellence.

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

The Company enhances value for its clients by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial Internet of Things ("IoT")-connected digital software and monitoring solutions, including OneSuite™, which serves as an ecosystem platform, pulling together all of the Company’s software and data services capabilities, for the benefit of its customers.

Mistras Group, Inc.

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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, 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’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.

Our operations consist of three reportable segments:

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

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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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.

The Russian-Ukrainian war and the conflict in the Middle East between Israel and Hamas are creating 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.

Our cash position and liquidity remains strong.

As of March 31, 2024, the cash balance was approximately $16.9 million, and with our Credit Agreement, provides us with significant liquidity.

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

Any legislation or

Mistras Group, Inc.

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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 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.

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.

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.

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 and an impairment was recorded during the quarter ended September 30, 2023 related to the Company's European reporting units.

The Company’s European operations are currently experiencing higher energy costs, among other increased costs, due in part to the Russian-Ukrainian war and the conflict in the Middle East between Israel and Hamas.

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

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

generally accepted accounting principles ("GAAP").

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.

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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.

and Subsidiaries

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

(tabular dollars are in thousands)

Results of Operations

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

Condensed consolidated results of operations for the three months ended March 31, 2024 and 2023 were as follows:

Three months ended March 31,

Revenues $ 184,442 $ 168,016

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Gross profit as a % of Revenue 27.7 % 27.4 %

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

Income from Operations as a % of Revenue (2.6) % 5.1 % (0.5) % 2.7 %

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

Income (loss) from operations 5,553 (1,830)

Income (loss) from Operations as a % of Revenue 3.0 % (1.1) %

Income (loss) before benefit for income taxes 1,123 (5,898)

Net Income (Loss) 1,004 (4,978)

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$ 995 $ (4,986)

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

North America $ 148,814 $ 152,778 $ 431,295 $ 435,251

International 30,980 25,693 90,664 83,441

Products and Systems 2,829 3,078 9,897 8,666

Corporate and eliminations (3,269) (3,087) (8,457) (8,203)

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

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 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 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.

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

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

2022 Quarterly Revenues

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

Oil and Gas Revenue by sub-category

Upstream $ 36,397 $ 38,051 $ 35,173 $ 36,435

Midstream 20,427 27,153 25,885 23,540

Downstream 37,399 36,061 35,973 35,258

Revenue was $184.4 million for the three months ended March 31, 2024, an increase of $16.4 million, or 9.8%, compared with the three months ended March 31, 2023.

Revenue by segment for the three months ended March 31, 2024 and 2023 were as follows:

Three months ended March 31,

North America $ 150,349 $ 136,932

International 33,047 29,407

Products and Systems 3,210 3,739

Corporate and eliminations (2,164) (2,062)

Total $ 184,442 $ 168,016

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

In the three months ended March 31, 2024, total revenue increased 9.8% versus the prior year comparable period due predominantly to a high single-digit organic increase.

North America segment revenue increased 9.8%, driven predominantly by a high single-digit organic increase and increased turnarounds in the current year, minimally supported by low single-digit favorable impact of foreign exchange rates.

International segment revenue increased 12.4%, due predominantly to low double-digit organic growth and low single-digit favorable impact of foreign exchange rates.

Products and Systems segment revenue decreased by 14.1%, due to decreased sales volume and shipments as compared to the prior period.

Oil and gas customer revenue comprised approximately 61% and 59% of total revenue for the three months ended March 31, 2024 and 2023, respectively.

Aerospace and defense customer revenue comprised approximately 12% and 11% of total revenue for the three months ended March 31, 2024 and 2023, respectively.

The Company’s top ten customers comprised approximately 39% of total revenue for the three months ended March 31, 2024, as compared to 36% for the three months ended March 31, 2023, with no customer accounting for 10% or more of total revenue in either three-month period.

Three months ended March 31,

Oil and Gas Revenue by sub-category

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Total $ 113,165 $ 98,665

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.

Oil and gas upstream customer revenue increased approximately $4.8 million, or 13%, due primarily to market share gains and increased exploration activity as compared to the prior period.

Midstream customer revenues increased approximately $0.2 million, or 1%, due to decreased pipe inspection services performed as compared to the prior period.

Downstream customer revenues increased $9.5 million or, 23%, primarily due to increased customer turnarounds in the current year that were delayed in the prior period.

Mistras Group, Inc.

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Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three months ended March 31,

Revenue by type

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

Field Services revenue increased by $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.

Field Services revenue increased by $16.7 million as compared to the prior period primarily due to increases in sales volume in our oil and gas, industrials and infrastructure, research and engineering end markets within our North America segment and oil and gas end market within our International segment.

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

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 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.

Shop revenues increase by $4.1 million as compared to the prior period quarter due to increased sales volumes related to our aerospace and defense end market in our North America and International segments.

Data Analytical Solutions revenues are comprised of revenue derived from data software sales & subscriptions, implementation services and analytics which offer insights and generate value from asset protection.

Data Analytical Solutions revenue is derived from work performed by Mistras employees in our facilities, or at customer locations.

Data Analytical Solutions revenue decreased by $1.3 million as compared to the prior period due to decreased sales volume within PCMS 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 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.

and Subsidiaries

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

(tabular dollars are in thousands)

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

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

2023 2022 2023 2022

Other revenues decreased by $3.0 million as compared to the prior year primarily due to decreased sales within the defense sector within the North America segment offset by increased private space shop related activities during the quarter.

Gross profit increased by $5.0 million, or 10.9%, in the three months ended March 31, 2024 versus the prior year comparable period, an increase in revenue of 9.8%.

Gross profit by segment for the three months ended March 31, 2024 and 2023 was as follows:

Three months ended March 31,

North America $ 39,991 $ 36,637

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% of total revenue 27.7 % 27.4 %

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.

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Gross profit margin was 27.7% and 27.4% for the three-month periods ended March 31, 2024 and 2023, respectively.

North America segment realized a decrease of 0.2% in gross profit margin to 26.6% during the three months ended March 31, 2024 as compared to the prior period.

This was primarily due to unfavorable sales mix in the period ended March 31, 2024 as compared to the prior period, and higher benefit claims expense in the current year period.

International segment realized a 3.5% increase in gross profit margin to 28.6% during the three months ended March 31, 2024 due primarily to a better sales mix and decreased energy costs in the current period.

Products and Systems segment gross margin had a decrease of 5.0% to 50.2% during the three months ended March 31, 2024 due to decreased sales volume as compared to the prior period.

Operating Expenses

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

Operating expenses for the three months ended March 31, 2024 and 2023 was as follows:

Three months ended March 31,

Operating Expenses

Selling, general and administrative expenses $ 41,189 $ 42,823

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

Loss on debt modification — 693 — 693

Reorganization and other costs 1,557 2,076

Goodwill Impairment Charges 13,799 — 13,799 —

Research and engineering 343 480

Depreciation and amortization 2,447 2,525

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

Acquisition-related expense, net 1 3

$ 59,064 $ 44,670 $ 152,799 $ 133,242

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

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

Operating expenses decreased $2.4 million, or 4.9%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Selling, general and administrative expenses decreased $1.6 million during the three months ended March 31, 2024 compared to the three months ended March 31, 2023, due to cost reduction measures implemented in 2023 and favorable foreign exchange impact as compared to the prior period.

Reorganization and other costs decreased by approximately $0.5 million as compared to the prior year due primarily to a decrease in severance costs during the period.

Depreciation and amortization decreased $0.1 million during the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Mistras Group, Inc.

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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 September 30, Nine months ended September 30,

2023 2022 2023 2022

Income (loss) from Operations

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

Three months ended March 31,

North America:

Income from operations (GAAP) $ 13,561 $ 9,378

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

Reorganization and other costs — 61

Legal settlement and insurance recoveries, net — — 150 (841)

Acquisition-related expense, net — — — 45

Income from operations before special items (non-GAAP) $ 13,561 $ 9,439

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Income (loss) from operations (GAAP) $ 1,124 $ (568)

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:

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

Reorganization and other costs 102 107

Income (loss) from operations before special items (non-GAAP) $ 1,226 $ (461)

Products and Systems:

Income from operations (GAAP) $ 314 $ 384

Reorganization and other costs 2 —

Income from operations before special items (non-GAAP) $ 316 $ 384

Corporate and Eliminations:

Loss from operations (GAAP) $ (9,446) $ (11,024)

Loss on debt modification — 693 — 693

Reorganization and other costs 1,453 1,908

Acquisition-related expense, net 1 3

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

Loss from operations before special items (non-GAAP) $ (7,992) $ (9,113)

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Income (loss) from operations (GAAP) $ 5,553 $ (1,830)

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

Goodwill Impairment charges 13,799 — 13,799 —

Reorganization and other costs 1,557 2,076

Loss on debt modification — 693 — 693

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

Acquisition-related expense, net 1 3

Income from operations before special items (non-GAAP) $ 7,111 $ 249

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

For the three months ended March 31, 2024, income (loss) from operations (GAAP) increased $7.4 million or 403.4%, compared with the three months ended March 31, 2023, while the income from operations before special items (non-GAAP) improved by $6.9 million, or 2,755.8%.

As a percentage of revenue, the income (loss) before special items improved by 380 basis points to 3.9% in the three months ended March 31, 2024 compared to 0.1% in the three months ended March 31, 2023.

Interest Expense

Interest expense was approximately $4.4 million and $4.1 million for the three months ended March 31, 2024 and 2023, respectively.

The increase was a result of increased interest rates in the period.

Our effective income tax rate was approximately 10.6% and 15.6% for the three months ended March 31, 2024 and 2023, respectively.

The effective income tax rate for the three months ended March 31, 2024 was lower than the statutory rate primarily due to the impact of favorable discrete items including stock compensation.

The effective income tax rate for the three months ended

Mistras Group, Inc.

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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 $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.

March 31, 2023 was lower than the statutory rate primarily due to the impact of an favorable discrete item related to stock compensation.

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

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

Mistras Group, Inc.

and Subsidiaries

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

(tabular dollars are in thousands)

Liquidity and Capital Resources

Cash flows are summarized in the table below:

Nine months ended September 30,

Three months ended March 31,

Net cash provided by (used in):

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Cash Flows from Operating Activities

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.

During the three months ended March 31, 2024, cash provided by operating activities was $0.6 million, representing a year-on-year decrease of $3.8 million, or 86%.

The decrease was primarily attributable to a decrease in days sales outstanding and movements in working capital, as compared to the prior year quarter.

Cash Flows from Investing Activities

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.

During the three months ended March 31, 2024 and 2023, cash used in investing activities was $5.6 million, primarily attributable to increased expenditures for vehicles leased related to customer projects and additional capital expenditures as compared to the prior period.

Cash Flows from Financing Activities

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.

Net cash provided by financing activities was $5.1 million for the three months ended March 31, 2024, compared to net cash used in financing activities of $4.0 million for the three months ended March 31, 2023.

During the three months ended March 31, 2024, net borrowings of debt were approximately $10.1 million higher as compared to 2023 resulting in debt borrowings during the period.

In addition, $0.8 million more taxes were paid related to net share settlement of share-based awards during the three months ended March 31, 2024.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

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.

The effect of exchange rate changes on our cash and cash equivalents was a decrease of $0.9 million in the three months ended March 31, 2024, compared to an increase of $0.2 million for the three months ended March 31, 2023.

Cash Balance and Credit Facility Borrowings

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.

As of March 31, 2024, we had cash and cash equivalents totaling $16.9 million and $104.0 million of unused commitments under our Credit Agreement with borrowings of $194.9 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 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.

As of March 31, 2024, we were in compliance with the terms of the Credit Agreement and will continuously monitor our compliance with the covenants contained in the Credit Agreement.

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

Contractual Obligations

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

There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2023 Annual Report.

Off-balance Sheet Arrangements

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.

During the three months ended March 31, 2024, 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