MISTRAS GROUP, INC. ITEM 2. 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
months ended March 31, 2022 and 2021. 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, 2021 , filed with the Securities and
Exchange Commission on March 14, 2022 ("2021 Annual Report"). Unless otherwise
specified or the context otherwise requires, "Mistras," "the Company," "we,"
"us" and "our" refer to Mistras Group, Inc. and its consolidated subsidiaries.
The MD&A includes the following sections:
•Forward-Looking Statements
•Overview
•Note about Non-GAAP Measures
•Consolidated Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Policies and Estimates
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"). 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. These forward-looking statements are based on our current
expectations and projections about future events and they are subject to risks
and uncertainties known and unknown that could cause actual results and
developments to differ materially from those expressed or implied in such
statements.
In some cases, you can identify forward-looking statements by terminology, such
as "goals," or "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," "may," "could," "should," "would," "predicts," "appears,"
"projects," or the negative of such terms or other similar expressions. 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 2021
Annual Report as well as those discussed in this Quarterly Report on Form 10-Q
and in our other filings with the SEC .
At the time of this report, the COVID-19 pandemic is continuing to have a
negative impact on us and our key markets and is causing significant economic
disruption worldwide, although the Company has nevertheless begun approaching
pre-pandemic levels of activity in certain end markets, particularly oil and
gas. Our discussion below is qualified by the unknown impact that the COVID-19
pandemic will continue to have on our business and the economy in general,
including the duration of the health risk the COVID-19 pandemic will cause and
the resulting economic disruption.
The Company is currently unable to predict with certainty the overall impact
that the factors discussed above and the effect of the Russian-Ukrainian
conflict may have on its business, results of operations or liquidity or in
other ways which the Company cannot yet determine. To date, the Company's
European operations have begun to see increased costs associated with higher
energy costs, among others, due in part to the on-going conflict. The Company
will continue to monitor market conditions and respond accordingly.
Overview
The Company is a leading "one source" multinational provider of integrated
technology-enabled asset protection solutions, helping to maximize the safety
and operational uptime for civilization's most critical industrial and civil
assets.
Backed by an innovative, data-driven asset protection portfolio, proprietary
technologies, and decades-long legacy of industry leadership, the Company helps
clients with asset-intensive infrastructure in the oil and gas, aerospace and
defense, industrials,
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Management's Discussion and Analysis of Financial Condition and Results of
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(tabular dollars are in thousands)
power generation, and transmission (including alternative and renewable energy),
other process industries and infrastructure, research and engineering and other
industries towards achieving and maintaining operational excellence. By
supporting these organizations that help fuel our vehicles and power our
society; inspecting components that are trusted for commercial, defense, and
space craft; and building real-time monitoring equipment to enable safe travel
across bridges, 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 IoT-connected digital software and monitoring solutions, including
OneSuite™, which serves as an ecosystem platform, pulling together all of the
Company's software and data services capabilities, for the benefit of its
customers.
The Company's core capabilities also include non-destructive testing ("NDT")
field inspections enhanced by advanced robotics, laboratory quality control and
assurance testing, sensing technologies and NDT equipment, asset and mechanical
integrity engineering services, and light mechanical maintenance and access
services.
Our operations consist of three reportable segments: Services, International, and Products and Systems.
•Services provides asset protection solutions predominantly inNorth America , with the largest concentration inthe United States , followed byCanada , 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. Software, digital and data services are included in this segment. •International offers services, products and systems similar to those of the other segments to select markets withinEurope , theMiddle East ,Africa ,Asia andSouth America , but not to customers inChina andSouth Korea , which are served by the Products and Systems segment.
•Products and Systems designs, manufactures, sells, installs and services the
Company's asset protection products and systems, including equipment and
instrumentation, predominantly in
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. We perform these services largely
at our customers' facilities, while primarily servicing our aerospace customers
at our network of state-of-the-art, in-house laboratories. These solutions
typically include NDT and inspection services, and can also include a wide range
of mechanical services, including heat tracing, pre-inspection insulation
stripping, coating applications, re-insulation, engineering assessments and
long-term condition-monitoring. Under this business model, many customers
outsource their inspection to us on a "run and maintain" basis. We have
established long-term relationships as a critical solutions provider to many of
the leading companies with asset-intensive infrastructure in our target markets.
These markets include companies 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.
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 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. These
acquisitions have provided us with additional service lines, technologies,
resources and customers which we believe will enhance our advantages over our
competition.
We believe long-term growth can be realized in all of our target markets. 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.
We have continued providing our customers with innovative asset protection
software ecosystem through our MISTRAS OneSuite platform. The software platform
offers functions of MISTRAS' popular 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 50 plus applications being
offered on one centralized platform.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
(tabular dollars are in thousands)
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.
Recent Developments
The COVID-19 coronavirus (COVID-19) pandemic has continued to cause disruption
and volatility in domestic and international markets although conditions
continue to improve during 2022 as compared to 2021. The Company's businesses
have been classified as non-healthcare critical infrastructure as defined by the
U.S. Centers for Disease Control and Prevention (CDC ). Our facilities, and the
Company's customers facilities as well, have remained open with staffing
modifications and precautionary procedures taken as necessary.
Overall, we have taken actions to help ensure the health and safety of our
employees and those of our customers and suppliers; maintain business continuity
and financial strength and stability; and serve our customers as they provide
essential products and services to the world.
The COVID-19 pandemic uncertainty, significant volatility in oil prices and
decreased traffic in the aerospace industry have adversely affected our
workforce and operations, as well as the operations of our customers, suppliers
and contractors beginning in 2020. These negative factors continue to cause
volatility and uncertainty in the markets in which we operate, although we have
nevertheless begun approaching pre-pandemic levels of activity in certain end
markets, particularly oil and gas where crude oil prices have exceeded
pre-pandemic levels.
The Company has eliminated substantially all of the 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 March 31, 2022 , the cash balance was
approximately $19.9 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. 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 COVID-19 pandemic
uncertainty, 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 will continue to
monitor market conditions and respond accordingly. Refer to Item 1A. Risk
Factors in Part I of our 2021 Annual Report.
Note About Non-GAAP Measures
The Company prepares its consolidated financial statements in accordance withU.S. GAAP. 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, 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. The acquisition related costs and special items can be a net expense or credit in any given period. Our management uses this non-GAAP measure as a measure of operating performance and liquidity to assist in comparing performance from period to period on a consistent basis, as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations. We believe investors and other users of our financial statements benefit from the presentation of this non-GAAP measure in evaluating our performance. Income (loss) before special items excludes the identified adjustments, which provides additional tools to compare our core business operating 27
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Management's Discussion and Analysis of Financial Condition and Results of
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(tabular dollars are in thousands)
performance on a consistent basis and measure underlying trends and results in
our business. 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.
Results of Operations
Condensed consolidated results of operations for the three months ended
Three months ended March 31,
2022 2021
Revenues $ 161,662 $ 153,735
Gross profit 39,892 40,001
Gross profit as a % of Revenue 24.7 % 26.0 %
Loss from operations (4,698)
(4,746)
Loss from Operations as a % of Revenue (2.9) %
(3.1) %
Loss before benefit for income taxes (6,636) (7,959) Net Loss (5,353) (5,359) Net Loss attributable to Mistras Group, Inc.$ (5,363) $ (5,362) Revenue
Revenue was
Revenue by segment for the three months endedMarch 31, 2022 and 2021 were as follows: Three months ended March 31, 2022 2021 Revenue Services$ 132,946 $ 124,298 International 28,138 27,648 Products and Systems 2,936 2,988 Corporate and eliminations (2,358) (1,199) Total$ 161,662 $ 153,735 Three Months In the three months endedMarch 31, 2022 , total revenue increased 5.2% versus the prior year comparable period due predominantly to a single-digit organic increase. Services segment revenue increased 7.0%, driven predominantly by a single-digit organic increase, minimally offset by low single-digit unfavorable impact of foreign exchange rates. International segment revenue increased 1.8%, due predominantly to high single-digit organic growth mostly offset by high single-digit unfavorable impact of foreign exchange rates. Products and Systems segment revenue decreased by 1.7%, due to reduced sales volume as compared to the prior period. Oil and gas customer revenue comprised approximately 58% and 57% of total revenue for the three months endedMarch 31, 2022 and 2021, respectively. Aerospace and defense customer revenue comprised approximately 12% and 11% of total revenue for the three months endedMarch 31, 2022 and 2021, respectively. The Company's top ten customers comprised approximately 34% of total revenue for the three months endedMarch 31, 2022 , as compared to 35% for the three months endedMarch 31, 2021 , with no customer accounting for 10% or more of total revenue in either three-month period. 28
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
(tabular dollars are in thousands)
Three months ended March 31,
2022 2021
Oil and Gas Revenue by sub-category
Upstream $ 41,665 $ 33,926
Midstream 24,907 22,438
Downstream 27,651 30,848
Total $ 94,223 $ 87,212
Oil and gas upstream customer revenue increased approximately $7.7 million , or
23%, due primarily to market share gains and expanded exploration operations
compared to the prior period. Midstream customer revenues increased
approximately $2.5 million , or 11%, due to increased pipe inspection services
performed as compared to the prior year quarter. Downstream customer revenues
decreased $3.2 million or, 10%, primarily due to delays in timing associated
with customer turnarounds.
Gross Profit
Gross profit decreased by $0.1 million , or 0.3%, in the three months ended March
31, 2022 versus the prior year comparable period, on a increase in revenue of
5.2%.
Gross profit by segment for the three months ended March 31, 2022 and 2021 was
as follows:
Three months ended March 31,
2022 2021
Gross profit
Services $ 30,526 $ 31,076
% of segment revenue 23.0 % 25.0 %
International 8,190 7,625
% of segment revenue 29.1 % 27.6 %
Products and Systems 1,168 1,281
% of segment revenue 39.8 % 42.9 %
Corporate and eliminations 8 19
$ 39,892 $ 40,001
% of total revenue 24.7 % 26.0 %
Three Months
Gross profit margin was 24.7% and 26.0% for the three-month periods ended March
31, 2022 and 2021, respectively. Services segment realized a 2.0% reduction in
gross profit margin to 23.0% during the three months ended March 31, 2022 . This
was primarily due to higher benefit costs in the US and the end of government
wage subsidies received in Canada , both as compared to the prior year period.
International segment realized a 1.5% increase in gross profit margin to 29.1%
during the three months ended March 31, 2022 due primarily to continued recovery
and sales within the aerospace end market. Products and Systems segment gross
margin had a decrease of 310 basis points to 39.8% during the three months ended
March 31, 2022 due to unfavorable sales mix, as compared to gross margin of
42.9% during 2021.
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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 months endedMarch 31, 2022 and 2021 was as follows: Three months endedMarch 31, 2022 2021 Operating Expenses Selling, general and administrative expenses $
42,036
Research and engineering 551 727 Depreciation and amortization 2,795 3,074 Legal settlement and insurance recoveries, net (841) 1,030 Acquisition-related expense, net 49 277 Three Months Operating expenses decreased$0.2 million , or 0.4%, for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . Selling, general and administrative expenses increased$2.4 million during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , due to increased costs and unfavorable foreign exchange impact as compared to the prior period. Depreciation and amortization decreased$0.3 million during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . This was partially offset during the three months endedMarch 31, 2022 by a$0.8 million insurance recovery during the three months endedMarch 31, 2022 . 30
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
(tabular dollars are in thousands)Income (loss) from Operations
The following table shows a reconciliation of the income from operations to income (loss) before special items for each of our three segments, Corporate and Elimination and for the Company in total:
Three months ended
2022 2021
Services:
Income from operations (GAAP) $
3,761
Reorganization and other costs 27 71 Legal settlement and insurance recoveries, net (841) 1,650 Acquisition-related expense, net 44 243 Income before special items (non-GAAP) $ 2,991$ 6,512 International: Income (Loss) from operations (GAAP) $
284
Reorganization and other costs 87 96
Income (Loss) from operations before special items (non-GAAP) $
371 $ (724)
Products and Systems:
Loss from operations (GAAP) $
(582)
Reorganization and other costs - 27 Loss from operations before special items (non-GAAP) $ (582)$ (554) Corporate and Eliminations: Loss from operations (GAAP)$ (8,161) $ (7,893) Legal settlement and insurance recoveries, net - (620) Acquisition-related expense, net 5 34 Loss from operations before special items (non-GAAP)$ (8,156) $ (8,479) Total Company : Loss from operations (GAAP)$ (4,698) $ (4,746) Reorganization and other costs 114 194 Legal settlement and insurance recoveries, net (841) 1,030 Acquisition-related expense, net 49 277 Loss from operations before special items (non-GAAP) $
(5,376)
See section Note About Non-GAAP Measures in this report for an explanation of the use of non-GAAP measurements.
Three Months
For the three months endedMarch 31, 2022 , the loss from operations (GAAP) decreased$0.05 million or 1.0%, compared with the three months endedMarch 31, 2021 , while the loss before special items (non-GAAP) decreased$2.1 million , or 65.7%. As a percentage of revenue, the loss before special items decreased by 120 basis points to (3.3)% in the three months endedMarch 31, 2022 from (2.1)% in the three months endedMarch 31, 2021 . 31
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Mistras Group, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (tabular dollars are in thousands) Interest Expense Interest expense was approximately$1.9 million and$3.2 million for the three months endedMarch 31, 2022 and 2021, respectively. The decrease was a result of a change in the effective interest rate, due to a lower leverage ratio and the elimination of the minimum LIBOR floor. An amendment inMay 2021 to our Credit Agreement removed the LIBOR floor of 1.0%, which provided that if LIBOR is below 1.0%, the interest rate will be calculated as if LIBOR is 1.0%. Now the actual LIBOR rate is used to calculate interest, even if LIBOR is below 1.0%. This will reduce our interest rate, when LIBOR is below 1.0%. Income Taxes
Our effective income tax rate was approximately 19.3% and 32.7% for the three
months ended
The effective income tax rate benefit for the three months endedMarch 31, 2022 was lower than the statutory rate primarily due to the impact of an unfavorable discrete item related to stock compensation. The effective income tax rate for the three months endedMarch 31, 2021 was higher than the statutory rate due to the capitalization of certain non-US intercompany balances which resulted in a deductible foreign exchange loss in the US. OnDecember 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. The Appropriations Act contains a variety of tax provisions, including full expensing of business meals in 2021 and 2022, and expansion of the employee retention tax credit. We evaluated the impact of this guidance on our consolidated financial position, results of operations, and cash flows, and it will not have a material impact.
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. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. 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.
Liquidity and Capital Resources
Cash flows are summarized in the table below:
Three months ended March 31,
2022 2021
Net cash provided by (used in):
Operating activities $ (5,399) $ 3,148
Investing activities (2,737) (4,176)
Financing activities 4,323 435
Effect of exchange rate changes on cash (376) (990)
Net change in cash and cash equivalents$ (4,189)
Cash Flows from Operating Activities
During the three months endedMarch 31, 2022 , cash used in operating activities was$(5.4) million , representing a year-on-year decrease of$8.5 million , or 272%. The decrease was primarily attributable to movements in working capital and an increase in the accounts receivable balance.
Cash Flows from Investing Activities
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
(tabular dollars are in thousands)
During the three months ended March 31, 2022 and 2021, cash used in investing
activities was $2.7 million primarily attributable to a reduction in capital
expenditures and no acquisitions in the three months ended March 31, 2022 .
Cash Flows from Financing Activities
Net cash provided by financing activities was$4.3 million for the three months endedMarch 31, 2022 , compared to net cash provided by financing activities of$0.4 million for the three months endedMarch 31, 2021 . During the three months endedMarch 31, 2022 , net borrowings of debt were approximately$3.4 million higher as compared to 2021 resulting in debt paydown during the period. In addition,$0.1 million more taxes were paid related to net share settlement of share-based awards during the three months endedMarch 31, 2022 .
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
Cash Balance and Credit Facility Borrowings
As ofMarch 31, 2022 , we had cash and cash equivalents totaling$19.9 million and$11.2 million of unused commitments under our Credit Agreement with borrowings of$203.1 million and$3.3 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
Quarterly payments on the term loan increased to$3.75 million throughMarch 31, 2022 , and then to$5.0 million for each quarterly payment thereafter, with a final balloon payment at maturity.
The terms of our Credit Agreement (as modified) are described in Note 11- 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 changes in our contractual obligations and outstanding indebtedness as disclosed in the 2021 Annual Report.
Off-balance Sheet Arrangements
During the three months endedMarch 31, 2022 , 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. 33
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Table of Contents Critical Accounting Policies and Estimates There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the 2021 Annual Report.
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