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 and
six months ended June 30, 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, strong commitment to Environmental, Social, and Governance (ESG)
initiatives 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
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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 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.
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 an 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 85 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
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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 June 30, 2022 , the cash balance was
approximately $18.6 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.
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 Russian-Ukrainian conflict. The
Company 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 28
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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 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 and six months ended
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Revenues $ 179,031 $ 177,677 $ 340,693 $ 331,412
Gross profit 53,558 55,336 93,450 95,337
Gross profit as a % of Revenue 29.9 % 31.1 % 27.4 % 28.8 %
Income from operations 9,576 11,374 4,877 6,628
Income from Operations as a % of Revenue 5.3 % 6.4 % 1.4 % 2.0 %
Income before provision (benefit) for income
taxes 7,459 8,219 822 260
Net Income (loss) 4,666 5,945 (687) 586
Net Income (loss) attributable to Mistras
Group, Inc. $ 4,643 $ 5,937 $ (720) $ 575
Revenue
Revenue was $179.0 million for the three months ended June 30, 2022 , an increase
of $1.4 million , or 0.8%, compared with the three months ended June 30, 2021 .
Revenue for the six months ended June 30, 2022 was $340.7 million , an increase
of $9.3 million , or 2.8%, compared with the six months ended June 30, 2021 .
Revenue by segment for the three and six months ended June 30, 2022 and 2021 was
as follows:
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Revenue
Services $ 149,528 $ 144,977 $ 282,474 $ 269,275
International 29,610 31,951 57,748 59,599
Products and Systems 2,652 3,203 5,588 6,191
Corporate and eliminations (2,759) (2,454) (5,117) (3,653)
$ 179,031 $ 177,677 $ 340,693 $ 331,412
Three Months
In the three months ended June 30, 2022 , total revenue increased 0.8% versus the
prior year comparable period due predominantly to a low single-digit organic
increase. Services segment revenue increased 3.1% due to single-digit organic
growth and International segment revenue decreased (7.3)%, due predominantly to
low double-digit unfavorable impact of foreign exchange rates which was offset
by low single-digit organic growth. Products and Systems segment revenue
decreased by $0.6 million , due to decreased sales volume as compared to the
prior period.
Oil and gas customer revenue comprised approximately 57% and 54% of total
revenue for the three months ended June 30, 2022 and 2021, respectively.
Aerospace and defense customer revenue comprised approximately 13% and 10% of
total revenue for the three months ended June 30, 2022 and 2021, respectively.
The Company's top ten customers comprised approximately 33% of total revenue for
the three months ended June 30, 2022 , as compared to 35% for the three months
ended June 30, 2021 , with no customer accounting for 10% or more of total
revenue in either three-month period.
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Six months
In the six months ended June 30, 2022 , total revenue increased 2.8% versus the
comparable prior period. The increase was due to organic growth in our core
business as our end markets recover from the effects of COVID-19. In addition,
the Company realized a low single-digit unfavorable revenue impact from foreign
exchange rates. Our Services segment revenue increased 4.9% due predominantly to
organic growth in end-markets. International segment revenue decreased (3.1)%
due to a high single-digit unfavorable revenue impact from foreign exchange
rates which was partially offset by mid single-digit favorable organic growth.
Oil and gas customer revenue comprised approximately 57% and 55% of total
revenue for the six months ended June 30, 2022 and 2021, respectively. Aerospace
and defense customer revenue comprised approximately 12% and 10% of total
revenue for the six months ended June 30, 2022 and 2021, respectively. The
Company's top ten customers comprised approximately 33% of total revenue for the
six months ended June 30, 2022 , as compared to 35% for the six months ended June
30, 2021 , with no customer accounting for 10% or more of total revenue in either
six-month period.
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Oil and Gas Revenue by sub-category
Upstream $ 39,443 $ 36,205 $ 81,108 $ 70,131
Midstream 32,949 29,797 57,856 52,235
Downstream 28,873 29,574 56,524 60,422
Total $ 101,265 $ 95,576 $ 195,488 $ 182,788
Oil and gas upstream customer revenue increased approximately $11.0 million , or
16%, for the six months ended June 30, 2022 as compared to the six months ended
June 30, 2021 , and $3.2 million , or 9% for the three months ended June 30, 2022
as compared to the three months ended June 30, 2021 due to continued market
share gains and expanded exploration operations compared to the prior period.
Midstream customer revenues increased approximately $5.6 million , or 11%, for
the six months ended June 30, 2022 as compared to the six months ended June 30,
2021 , and $3.2 million , or 11% for the three months ended June 30, 2022 as
compared to the three months ended June 30, 2021 due to increased pipe
inspection services performed as compared to the prior year.
Downstream customer revenue decreased $(3.9) million , or (6)%, for the six
months ended June 30, 2022 as compared to the six months ended June 30, 2021 ,
and $(0.7) million , or (2)% for the three months ended June 30, 2022 as compared
to the three months ended June 30, 2021 primarily due to delays in timing
associated with customer turnarounds.
Gross Profit
Gross profit decreased by$(1.8) million , or 3.2%, in the three months endedJune 30, 2022 versus the prior year comparable period, on an increase in revenue of 0.8%.
Gross profit decreased by
Gross profit by segment for the three and six months ended
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Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Gross profit
Services $ 42,954 $ 43,761 $ 73,479 $ 74,837
% of segment revenue 28.7 % 30.2 % 26.0 % 27.8 %
International 9,440 9,615 17,630 17,240
% of segment revenue 31.9 % 30.1 % 30.5 % 28.9 %
Products and Systems 1,157 1,952 2,325 3,233
% of segment revenue 43.6 % 60.9 % 41.6 % 52.2 %
Corporate and eliminations 7 8 16 27
$ 53,558 $ 55,336 $ 93,450 $ 95,337
% of total revenue 29.9 % 31.1 % 27.4 % 28.8 %
Three Months
Gross profit margin was 29.9% and 31.1% for the three-month periods ended June
30, 2022 and 2021, respectively. Services segment realized a 1.5% reduction in
gross profit margin to 28.7% during the three months ended June 30, 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 1.8% increase in gross profit margin to 31.9%
during the three months ended June 30, 2022 due primarily to continued recovery
and sales within the aerospace end market. Products and Systems segment gross
margin decreased 17.3% to 43.6% during the three months ended June, 2022 due to
unfavorable sales mix.
Six months
Gross profit margin was 27.4% and 28.8% for the six months ended June 30, 2022
and 2021, respectively. Gross profit margin decreased primarily due to higher
benefit costs and the end of government wage subsidies received in Canada within
the Services segment, partially offset by continued recovery and sales within
the aerospace end market within the International segment.
Operating Expenses
Operating expenses for the three and six months endedJune 30, 2022 and 2021 was as follows: Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 Operating Expenses Selling, general and administrative expenses$ 40,676 $ 39,719 $ 82,712 $ 79,358 Bad debt provision for troubled customers, net of recoveries 289 - 289 - Research and engineering 522 620 1,073 1,347 Depreciation and amortization 2,635 3,078 5,430 6,152 Legal settlement and insurance recoveries, net (153) - (994) 1,030 Acquisition-related expense, net 13 545 63 822 Three Months Total operating expenses were flat for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . Selling, general and administrative expenses increased$1.0 million during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 , due to the reversal of remaining COVID-19 temporary cost reductions inAugust 2021 , which had been initially implemented in 2020. Depreciation and amortization decreased$(0.4) million during the 32
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three months ended
Six months
Operating expenses decreased$(0.1) million , for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . Selling, general, and administrative expenses increased$3.4 million during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 primarily due to the reversal of remaining COVID-19 temporary cost reductions inAugust 2021 , which had been initially implemented in 2020, and wage subsidies received in 2021. Legal settlements, net of insurance recoveries for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 decreased$2.6 million due primarily to insurance recoveries received in the first quarter of 2022. Depreciation and amortization decreased$(0.7) million during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . Acquisition-related expense decreased$(0.8) million for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 due to remeasurement of acquisition related contingent consideration which occurred in 2021. 33
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(tabular dollars are in thousands)Income (loss) from Operations
The following table shows a reconciliation of the income (loss) from operations
to income (loss) before special items for each of our three segments, Corporate
and Eliminations and the Company in total:
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Services:
Income from operations (GAAP) $ 14,855 $ 18,358 $ 18,615 $ 22,906
Bad debt provision for troubled customers,
net of recoveries 289 - 289 -
Reorganization and other costs 1 26 28 97
Legal settlement and insurance recoveries,
net - - (841) 1,650
Acquisition-related expense, net - 545 45 788
Income from operations before special
items (non-GAAP) $ 15,145 $ 18,929 $ 18,136 $ 25,441
International:
Income from operations (GAAP) $ 1,580 $
1,809
Reorganization and other costs (187) 30 (99) 126 Income from operations before special items (non-GAAP)$ 1,393 $ 1,839 $ 1,765 $ 1,115 Products and Systems: Income (loss) from operations (GAAP) $ (420)$ 209 $ (1,002) $ (372) Reorganization and other costs - - - 27 Income (loss) from operations (GAAP) $ (420)$ 209 $ (1,002) $ (345) Corporate and Eliminations: Loss from operations (GAAP)$ (6,439) $ (9,002) $ (14,600) $ (16,895) Loss on debt modification - 277 - 277 Reorganization and other costs 6 - 6 - Acquisition-related expense, net 13 - 18 34 Legal settlement and insurance recoveries, net (153) - (153) (620) Loss from operations before special items (non-GAAP)$ (6,573) $ (8,725) $ (14,729) $ (17,204) Total Company : Income from operations (GAAP)$ 9,576 $ 11,374 $ 4,877 $ 6,628 Bad debt provision for troubled customers, net of recoveries 289 - 289 - Reorganization and other costs (180) 56 (65) 250 Loss on debt modification - 277 - 277 Legal settlement and insurance recoveries, net (153) - (994) 1,030 Acquisition-related expense, net 13 545 63 822 Income from operations before special items (non-GAAP)$ 9,545 $ 12,252 $ 4,170 $ 9,007
See section Note About Non-GAAP Measures in this report for an explanation of the use of non-GAAP measurements.
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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) Three Months For the three months endedJune 30, 2022 , income from operations (GAAP) decreased$(1.8) million , compared with the three months endedJune 30, 2021 , while income before special items (non-GAAP) decreased$(2.7) million . As a percentage of revenue, income before special items decreased by 160 basis points to 5.3% in the three months endedJune 30, 2022 from 6.9% in the three months endedJune 30, 2021 . Six months For the six months endedJune 30, 2022 , income (loss) from operations (GAAP) decreased$(1.8) million , compared with the six months endedJune 30, 2021 , while income (loss) from operations before special items (non-GAAP) decreased$(4.8) million . As a percentage of revenue, income (loss) from operations before special items decreased by 150 basis points to 1.2% in the six months endedJune 30, 2022 from 2.7% in the six months endedJune 30, 2021 . During the six months endedJune 30, 2022 , the Company experienced overall organic growth offset by foreign currency headwinds. Interest Expense Interest expense was approximately$2.1 million and$3.2 million for the three months endedJune 30, 2022 and 2021, respectively. Interest expense was approximately$4.1 million and$6.4 million for the six months endedJune 30, 2022 and 2021, respectively. The decrease for both periods 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 in theMay 2021 amendment to our credit agreement. 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 37.4% and 27.7% for the three months endedJune 30, 2022 and 2021, respectively. Our effective income tax rate was approximately 183.6% and (125.4)% for the six months endedJune 30, 2022 and 2021, respectively. The effective income tax rate for the three months endedJune 30, 2022 was higher than the statutory rate primarily due to a$0.7 million valuation allowance recorded on a foreign jurisdiction. The effective income tax rate for the three months endedJune 30, 2021 was higher than the statutory rate due to earnings in jurisdictions with higher income tax rates thanthe United States . The valuation allowance of$0.7 million has been recorded to recognize only the portion of the deferred tax assets that are more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth. The effective income tax rate for the six months endedJune 30, 2022 was higher than the statutory rate due primarily to a$0.7 million valuation allowance recorded during the period which was related to a foreign jurisdiction. The effective income tax rate for the six months endedJune 30, 2021 was lower than the statutory rate due to capitalization of certain non-US intercompany balances which resulted in a deductible foreign exchange loss in the US. OnDecember 27, 2020 ,the United States enacted the Consolidated Appropriations Act, 2021, (the "Appropriations Act") an additional stimulus package providing financial relief for individuals and small business. The Appropriations Act contains a variety of tax provisions, including full expensing of business meals in 2021 and 2022, and expansion of the employee retention tax credit. We evaluated the impact of this guidance on our consolidated financial position, results of operations, and cash flows, and it will not have a material impact.
Income tax expense varies as a function of pre-tax income and the level of non-deductible expenses, such as certain amounts of meals and entertainment expense, valuation allowances, and other permanent differences. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. Our effective income tax rate may fluctuate over the
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(tabular dollars are in thousands)next few years due to many variables including the amount and future geographic distribution of our pre-tax income, changes resulting from our acquisition strategy, and increases or decreases in our permanent differences.
Liquidity and Capital Resources
Cash flows are summarized in the table below:
Six months ended June 30,
2022 2021
Net cash provided by (used in): Operating activities$ 7,809 $ 18,126 Investing activities (6,499) (10,318) Financing activities (5,056) (12,970) Effect of exchange rate changes on cash (1,755)
(656)
Net change in cash and cash equivalents$ (5,501) $
(5,818)
Cash Flows from Operating Activities
During the six months endedJune 30, 2022 , cash provided by operating activities was$7.8 million , representing a year-on-year decrease of$(10.3) million , or 57%. The decrease was primarily attributable to a net working capital increase in the course of normal operations.
Cash Flows from Investing Activities
During the six months ended
Cash Flows from Financing Activities
Net cash used in financing activities was$5.1 million for the six months endedJune 30, 2022 , compared to net cash used in financing activities of$13.0 million for the six months endedJune 30, 2021 . During the six months endedJune 30, 2022 , net repayments of debt were approximately$6.6 million lower as compared to 2021 as cash flows were used to support operating activities.
Effect of Exchange Rate Changes on Cash and Cash Equivalents
The effect of exchange rate changes on our cash and cash equivalents was a decrease of$(1.8) million in the six months endedJune 30, 2022 , compared to a decrease of$(0.7) million for the six months endedJune 30, 2021 . The primary driver of the change was foreign currency fluctuations during the quarter related to the Euro and the US Dollar.
Cash Balance and Credit Facility Borrowings
As ofJune 30, 2022 , we had cash and cash equivalents totaling$18.6 million and$11.7 million of unused commitments under our Credit Agreement with borrowings of$195.3 million and$3.0 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
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Table of Contents
The terms of our Credit Agreement are described in Note 11-Long-Term Debt of the
Notes to the Unaudited Condensed Consolidated Financial Statements, under the
heading "Senior Credit Facility" and in Note 16 Subsequent Events of the Notes.
Contractual Obligations
There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2021 Annual Report except as noted in Note 16 Subsequent Events.
Off-balance Sheet Arrangements
During the six months endedJune 30, 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. 37
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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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