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
nine months ended September 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 .
While the Company's business and operations were negatively impacted the past
several years by the COVID-19 pandemic, at the time of this report, the effects
of the COVID-19 pandemic have to a large degree subsided, and the Company has
begun approaching pre-pandemic levels of activity in certain end markets,
particularly oil and gas.
The Company is currently unable to predict with certainty the effect that
inflationary pressures and the Russian-Ukrainian conflict may have on the
Company's 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 towards achieving and maintaining operational
excellence. By supporting these organizations that help fuel our vehicles and
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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 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 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 maximize uptime, performance and safety of wind turbine blades. This tool
provides additional growth and expansion of our
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Management's Discussion and Analysis of Financial Condition and Results of
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(tabular dollars are in thousands)capabilities to serve both new and existing wind turbines and greatly enhances our product offerings within the renewable energy industry.
Recent Developments
Throughout 2022, conditions have continued to improve related to the COVID-19 coronavirus (COVID-19) pandemic in domestic and international markets and operations are approaching pre-pandemic levels of activity.
The Company has eliminated substantially all of the cost reduction initiatives undertaken in 2020, including re-installing of the savings plan employer match and increasing wages back to pre-pandemic l. Our cash position and liquidity remains strong. As ofSeptember 30, 2022 , the cash balance was approximately$18.1 million . InApril 2021 , theBiden 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 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 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. 28
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(tabular dollars are in thousands)Results of Operations
Condensed consolidated results of operations for the three and nine months ended
Three months ended
2022 2021 2022 2021
Revenues $ 178,462 $ 174,556 $ 519,155 $ 505,968
Gross profit 53,784 52,216 147,233 147,553
Gross profit as a % of Revenue 30.1 % 29.9 % 28.4 % 29.2 %
Income from operations 9,114 9,236 13,991 15,864
Income from Operations as a % of Revenue 5.1 % 5.3 % 2.7 % 3.1 %
Income before provision for income taxes 6,379 6,910 7,201 7,170
Net Income 4,394 3,397 3,707 3,983
Net Income attributable to Mistras
Group, Inc. $ 4,373 $ 3,380 $ 3,653 $ 3,955
Revenue
Revenue was $178.5 million for the three months ended September 30, 2022 , an
increase of $3.9 million , or 2.2%, compared with the three months ended
September 30, 2021 . Revenue for the nine months ended September 30, 2022 was
$519.2 million , an increase of $13.2 million , or 2.6%, compared with the nine
months ended September 30, 2021 .
Revenue by segment for the three and nine months ended
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Revenue
Services $ 152,778 $ 144,976 $ 435,251 $ 414,251
International 25,693 29,100 83,441 88,699
Products and Systems 3,078 3,308 8,666 9,499
Corporate and eliminations (3,087) (2,828) (8,203) (6,481)
$ 178,462 $ 174,556 $ 519,155 $ 505,968
Three Months
In the three months ended September 30, 2022 , total revenue increased 2.2%
versus the prior year comparable period due predominantly to a mid single-digit
organic increase. Services segment revenue increased 5.4% due to single-digit
organic growth and International segment revenue decreased (11.7)%, due
predominantly to low double-digit unfavorable impact of foreign exchange rates
which was partially offset by low single-digit organic growth. Products and
Systems segment revenue decreased by $0.2 million , due to decreased sales volume
as compared to the prior period.
Oil and gas customer revenue comprised approximately 54% and 53% of total
revenue for the three months ended September 30, 2022 and 2021, respectively.
Aerospace and defense customer revenue comprised approximately 12% and 10% of
total revenue for the three months ended September 30, 2022 and 2021,
respectively. The Company's top ten customers comprised approximately 32% of
total revenue for the three months ended September 30, 2022 and 2021, with no
customer accounting for 10% or more of total revenue in either three-month
period.
Nine months
In the nine months endedSeptember 30, 2022 , total revenue increased 2.6% versus the comparable prior period, due primarily to organic growth in our core business, partially offset by an unfavorable revenue impact from foreign exchange rates. Our Services segment revenue increased 5.1% due predominantly to continued recovery in the Oil & Gas and Aerospace & Defense 29
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Management's Discussion and Analysis of Financial Condition and Results of
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(tabular dollars are in thousands)
markets. International segment revenue decreased (5.9)% due to a low
double-digit unfavorable revenue impact from foreign exchange rates which was
partially offset by mid single-digit favorable organic growth. Products and
Systems segment revenue decreased by
Oil and gas customer revenue comprised approximately 56% and 54% of total revenue for the nine months endedSeptember 30, 2022 and 2021, respectively. Aerospace and defense customer revenue comprised approximately 12% and 10% of total revenue for the nine months endedSeptember 30, 2022 and 2021, respectively. The Company's top ten customers comprised approximately 33% of total revenue for the nine months endedSeptember 30, 2022 and 2021, with no customer accounting for 10% or more of total revenue in either nine-month period. Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Oil and Gas Revenue by sub-category Upstream $ 36,328$ 32,793 $ 117,436 $ 102,923 Midstream 28,925 30,232 86,781 82,467 Downstream 31,778 29,427 88,302 89,849 Total $ 97,031$ 92,452 $ 292,519 $ 275,239 Oil and gas upstream customer revenue increased approximately$3.5 million , or 11% for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 and$14.5 million , or 14%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 , due to continued market share gains and expanded exploration operations for both instances, as compared to the prior period. Midstream customer revenues decreased$(1.3) million , or (4)% for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 due to reduced inspections services and increased approximately$4.3 million , or 5%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 , due to increased pipe inspection services performed as compared to the prior year. Downstream customer revenue increased$2.4 million , or 8% for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 primarily due to timing and an increase in turnarounds during the current year, and decreased$(1.5) million , or (2)%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 due to delays in timing associated with customer turnarounds.
Gross Profit
Gross profit increased by
Gross profit decreased by
Gross profit by segment for the three and nine months ended
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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 ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Gross profit
Services $ 44,869 $ 41,749 $ 118,348 $ 116,587
% of segment revenue 29.4 % 28.8 % 27.2 % 28.1 %
International 7,694 9,038 25,324 26,278
% of segment revenue 29.9 % 31.1 % 30.3 % 29.6 %
Products and Systems 1,189 1,422 3,514 4,655
% of segment revenue 38.6 % 43.0 % 40.5 % 49.0 %
Corporate and eliminations 32 7 47 33
$ 53,784 $ 52,216 $ 147,233 $ 147,553
% of total revenue 30.1 % 29.9 % 28.4 % 29.2 %
Three Months
Gross profit margin was 30.1% and 29.9% for the three-month periods ended
September 30, 2022 and 2021, respectively. Services segment realized a 0.6%
increase in gross profit margin to 29.4% during the three months ended September
30, 2022 . This was primarily due to better sales mix as compared to the prior
period. International segment realized a (1.2)% decrease in gross profit margin
to 29.9% during the three months ended September 30, 2022 due to inflationary
impacts prevalent in the European region, partially offset by favorable sales
mix and price increases in response to these inflationary impacts. Products and
Systems segment gross margin decreased (4.4)% to 38.6% during the three months
ended September, 2022 due to unfavorable sales mix and higher costs.
Nine months
Gross profit margin was 28.4% and 29.2% for the nine months endedSeptember 30, 2022 and 2021, respectively. Gross profit margin decreased primarily due to higher benefit costs, increased costs due to inflation and the end of government wage subsidies received inCanada .
Operating Expenses
Operating expenses for the three and nine months ended
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Operating Expenses
Selling, general and administrative expenses $ 41,590 $ 39,221 $ 124,303 $ 118,579
Bad debt provision for troubled customers,
net of recoveries - - 289 -
Research and engineering 450 595 1,523 1,942
Depreciation and amortization 2,629 2,918 8,058 9,070
Legal settlement and insurance recoveries,
net - - (994) 1,030
Acquisition-related expense, net 1 246 63 1,068
Three Months
Total operating expenses increased $1.7 million during the three months ended
September 30, 2022 compared to the three months ended September 30, 2021 .
Selling, general and administrative expenses increased $2.4 million during the
three months ended September 30, 2022 compared to the three months ended
September 30, 2021 , due to the reversal of remaining COVID-19 temporary cost
reductions in August 2021 , which had been initially implemented in 2020.
Depreciation and
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Management's Discussion and Analysis of Financial Condition and Results of
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(tabular dollars are in thousands)
amortization decreased
Nine months
Operating expenses increased$1.6 million , for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . Selling, general, and administrative expenses increased$5.7 million during the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 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 which were not received in 2022. Legal settlements, net of insurance recoveries for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 decreased$2.0 million due primarily to insurance recoveries received in the first half of 2022. Depreciation and amortization decreased$(1.0) million during the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . Acquisition-related expense decreased$(1.0) million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 due to remeasurement of acquisition related contingent consideration which occurred in 2021. 33
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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)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 September 30, Nine months ended September 30,
2022 2021 2022 2021
Services:
Income from operations (GAAP) $ 16,700 $ 16,085 $ 35,315 $ 38,991
Bad debt provision for troubled customers,
net of recoveries - - 289 -
Reorganization and other costs 12 - 40 97
Legal settlement and insurance recoveries,
net - - (841) 1,650
Acquisition-related expense, net - 246 45 1,034
Income from operations before special
items (non-GAAP) $ 16,712 $ 16,331 $ 34,848 $ 41,772
International:
Income from operations (GAAP) $ 814 $
1,169 $ 2,678
Reorganization and other costs (15) (2) (114) 124 Income from operations before special items (non-GAAP) $ 799$ 1,167 $ 2,564$ 2,282 Products and Systems: Loss from operations (GAAP) $ (333)$ (281) $ (1,334)$ (653) Reorganization and other costs - - - 27 Loss from operations before special items (non-GAAP) $ (333)$ (281) $ (1,334)$ (626) Corporate and Eliminations: Loss from operations (GAAP) $ (8,067)$ (7,737) $ (22,668) $ (24,632) Loss on debt modification 693 - 693 278 Reorganization and other costs 133 - 139 - Acquisition-related expense, net 1 - 19 34 Legal settlement and insurance recoveries, net - - (153) (620) Loss from operations before special items (non-GAAP) $ (7,240)$ (7,737) $ (21,970) $ (24,940) Total Company : Income from operations (GAAP) $ 9,114$ 9,236 $ 13,991$ 15,864 Bad debt provision for troubled customers, net of recoveries - - 289 - Reorganization and other costs 130 (2) 65 248 Loss on debt modification 693 - 693 278 Legal settlement and insurance recoveries, net - - (994) 1,030 Acquisition-related expense, net 1 246 64 1,068 Income from operations before special items (non-GAAP) $ 9,938$ 9,480 $ 14,108$ 18,488
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 endedSeptember 30, 2022 , income from operations (GAAP) for the Company in total decreased$(0.1) million , compared with the three months endedSeptember 30, 2021 , while income from operations before special items (non-GAAP) for the Company in total increased$0.5 million . As a percentage of revenue, total Company income from operations before special items increased by 20 basis points to 5.6% in the three months endedSeptember 30, 2022 from 5.4% in the three months endedSeptember 30, 2021 .
Nine months
For the nine months endedSeptember 30, 2022 , income from operations (GAAP) for the Company in total decreased$(1.9) million , compared with the nine months endedSeptember 30, 2021 , while income from operations before special items (non-GAAP) for the Company in total decreased$(4.4) million . As a percentage of revenue, total Company income from operations before special items decreased by 100 basis points to 2.7% in the nine months endedSeptember 30, 2022 from 3.7% in the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2022 , the Company experienced overall organic growth offset by foreign currency headwinds. Interest Expense Interest expense was approximately$2.7 million and$2.3 million for the three months endedSeptember 30, 2022 and 2021, respectively. Interest expense was approximately$6.8 million and$8.7 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase in the three months endedSeptember 30, 2022 was due to an increase in interest rates compared to the prior year quarter. The decrease in interest expense for the nine months endedSeptember 30, 2022 compared to the prior year period results from the Company having entered into the New Credit Agreement providing for interest to be payable based on SOFR plus a credit spread adjustment and applicable SOFR margin ranging from 1.25% to 2.75%, and removed the previously existing minimum LIBOR floor. Income Taxes Our effective income tax rate was approximately 31.1% and 50.8% for the three months endedSeptember 30, 2022 and 2021, respectively. Our effective income tax rate was approximately 48.5% and 44.4% for the nine months endedSeptember 30, 2022 and 2021, respectively. The effective income tax rate for the three months endedSeptember 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 Company's effective income tax rate for the three months endedSeptember 30, 2021 was higher than the statutory rate primarily due to various permanent tax adjustments and a$1.2 million valuation allowance recorded during the period which was related to various state deferred tax assets and earnings in jurisdictions with higher income tax rates thanthe United States . On the basis of this evaluation, as ofSeptember 30, 2022 , a valuation allowance of$0.9 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset 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 nine months endedSeptember 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 year which was related to a foreign jurisdiction. The effective income tax rate for the nine months endedSeptember 30, 2021 was higher than the statutory rate due to various permanent tax adjustments and a$1.2 million valuation allowance recorded during the year related to various state deferred tax assets offset by 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. 35
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(tabular dollars are in thousands)
On August 19, 2022 , the United States enacted the Inflation Reduction Act, (the
"Inflation Act"), a package intended to reduce inflation. The Inflation Act
contains a variety of tax provisions, including a 15% corporate minimum tax, a
tax on stock repurchases, and various tax credit opportunities. 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:
Nine months ended September 30,
2022 2021
Net cash provided by (used in):
Operating activities $ 10,531 $ 22,469
Investing activities (8,877) (15,494)
Financing activities (4,753) (8,866)
Effect of exchange rate changes on cash (2,927) (1,272)
Net change in cash and cash equivalents $ (6,026)
Cash Flows from Operating Activities
During the nine months endedSeptember 30, 2022 , cash provided by operating activities was$10.5 million , representing a year-on-year decrease of$(11.9) million , or 53%. The decrease was primarily attributable to a build up of net working capital in the course of normal operations.
Cash Flows from Investing Activities
During the nine months ended
Cash Flows from Financing Activities
Net cash used in financing activities was$4.8 million for the nine months endedSeptember 30, 2022 , compared to net cash used in financing activities of$8.9 million for the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2022 , net repayments of debt were approximately$3.0 million lower as compared to 2021 as cash flows were used to support operating activities.
Effect of Exchange Rate Changes on Cash and Cash Equivalents
The effect of exchange rate changes on our cash and cash equivalents was a decrease of$(2.9) million in the nine months endedSeptember 30, 2022 , compared to a decrease of$(1.3) million for the nine months endedSeptember 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 of
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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
The terms of our New 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".
Contractual Obligations
There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2021 Annual Report, other than the Senior Credit Facility refinancing described in Note 11-Long-Term Debt.
Off-balance Sheet Arrangements
During the nine months endedSeptember 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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