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, 2020 and June 30, 2019 . 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, 2019 , filed with the
Securities and Exchange Commission on March 27, 2020 ("2019 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
•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 2019
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. 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.
Overview
We offer our customers "OneSource for Asset Protection Solutions®" and are a
leading global provider of technology-enabled asset protection solutions used to
evaluate the structural integrity and reliability of critical energy, commercial
aerospace and defense, industrial and public infrastructure. We combine
industry-leading products and technologies, expertise in mechanical integrity
(MI), Non-Destructive Testing (NDT), Destructive Testing (DT), mechanical and
predictive maintenance (PdM) services, process and fixed asset engineering and
consulting services, proprietary data analysis and our world class enterprise
inspection database management and analysis software, PCMS, to deliver a
comprehensive portfolio of customized solutions, ranging from routine
inspections to complex, plant-wide asset integrity management and assessments.
These mission critical solutions enhance our customers' ability to comply with
governmental safety and environmental regulations, extend the useful life of
their assets, increase productivity, minimize repair costs, manage risk and
avoid catastrophic disasters. Our comprehensive "OneSource" portfolio of
customized solutions, utilizing a proven systematic method that creates a
closed-loop lifecycle for addressing continuous asset protection and
improvement, helps us to deliver value to our customers.
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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)
Our operations consist of three reportable segments: Services, International,
and Products and Systems.
•Services provides asset protection solutions predominantly in North America ,
with the largest concentration in the United States , followed by Canada ,
consisting primarily of NDT, inspection, mechanical and engineering services
that are used to evaluate the structural integrity and reliability of critical
energy, industrial and public infrastructure and commercial aerospace
components. PCMS software and pipeline related software and data analysis
solutions are included in this segment.
•International offers services, products and systems similar to those of the
other segments to select markets within Europe , the Middle East , Africa , Asia
and South America , but not to customers in China and South Korea , which are
served by the Products and Systems segment.
•Products and Systems designs, manufactures, sells, installs and services the
Company's asset protection products and systems, including equipment and
instrumentation, predominantly in the United States .
Given the role our solutions play in enhancing the safe and efficient operation
of infrastructure, we have historically provided a majority of our solutions to
our customers on a regular, recurring basis. 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 oil and gas (downstream, midstream, upstream and
petrochemical), commercial aerospace and defense, power generation (natural gas,
fossil, nuclear, alternative, renewable, and transmission and distribution),
public infrastructure, chemicals, transportation, primary metals and
metalworking and research and engineering institutions.
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 that we believe will enhance our advantages over our
competition.
We believe long-term growth can be realized in all of our target markets. We
expect the timing of our oil and gas customers inspection spend to be impacted
by oil price fluctuations.
Recent Developments
In March 2020 , the World Health Organization declared the outbreak of a novel
coronavirus (COVID-19) as a pandemic, which continues to spread throughout the
United States . The COVID-19 pandemic has caused significant volatility in
domestic and international markets. There is on-going uncertainty around the
breadth and duration of business disruptions related to COVID-19, as well as its
impact on the U.S. and international economies. In addition, oil prices have
varied significantly and airline traffic has also dropped significantly. In
response to the COVID-19 pandemic, companies within the oil and gas and
aerospace industries (including our customers) have announced spending cuts
and/or slowdowns (or temporary cessation) in production which, in turn, may
result in decreases in awards of new contracts or adjustments, reductions,
suspensions or cancellations of existing contracts. These declines were driven
in large measure by various factors surrounding the COVID-19 pandemic and, in
the case of the oil and gas market, other macroeconomic events such as the
geopolitical tensions between OPEC and Russia .
The COVID-19 pandemic, 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. These negative factors have also resulted in significant volatility
and uncertainty in the markets in which we operate. To successfully navigate
through this unprecedented period, we continue to focus on the following key
priorities:
•Ensuring the health and safety of our employees and those of our customers and suppliers;
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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)
•Maintaining business continuity and financial strength and stability; and
•Serving our customers as they provide essential products and services to the
world.
While we cannot fully assess the impact that the COVID-19 pandemic or the significant volatility in oil prices will have on all of our operations at this time, there are certain impacts that we have identified:
•The financial market volatility that resulted from COVID-19 and the drop in oil prices required that we reassess the goodwill we had recorded related to various prior acquisitions under the guidance of ASC 350 during the first quarter of 2020. We determined that the fair values of various reporting units were less than their carrying values (including goodwill). As a result, we recorded an impairment charge related to goodwill of approximately$77.1 million during the first quarter of 2020. See Note 8-Goodwill in the Unaudited Condensed Consolidated Financial Statements. •These same events required that we reassess the tangible and intangible assets recorded under the guidance of ASC 360 during the first quarter of 2020. We determined that the fair values of certain asset groups were less than their carrying values (excluding goodwill). As a result, we recorded impairment charges related to intangible assets of approximately$28.8 million and a right-of-use asset of approximately$0.2 million during the first quarter of 2020. See Note 9-Intangible Assets and Note 13-Leases in the Unaudited Condensed Consolidated Financial Statements. To respond to the economic downturn resulting from the COVID-19 pandemic and the then drop in oil prices, inMarch 2020 , we initiated a cost reduction and efficiency program. As part of this program, our named executive officers have voluntarily taken temporary salary reductions ranging from 25% to 45% of their base salary. In addition, we instituted a reduction for our other salaried employees, at lower percentages, and suspended our voluntary match under our sponsored savings plans for ourU.S. and Canadian employees. These reductions became effective at the beginning of the second quarter of 2020 and, except for the salary reductions for certain lower salaried employees, will continue through the third quarter. At the end of the third quarter, management will assess whether to change these cost saving measures. In addition, our non-employee directors voluntarily agreed to a$3,750 reduction in their second and third quarter 2020 payments. We are currently unable to predict with certainty the overall impact that the COVID-19 pandemic and volatility in oil prices 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 2019 Annual Report on Form 10-K ("2019 Annual Report") for the year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission ("SEC") onMarch 27, 2020 .
Note About Non-GAAP Measures
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 segments, the Corporate segment and the "Total Company ", with tables reconciling the measure to a financial measure under GAAP. This non-GAAP measure excludes from the GAAP measure "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. We believe investors and other users of our financial statements benefit from the presentation of "Income (loss) before special items" for each of our three segments, the Corporate segment and theTotal Company 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 GAAP and/or necessarily comparable to the non-GAAP financial measures of other companies. 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)Results of Operations
Condensed consolidated results of operations for the three and six months ended
Six months ended June
Three months ended June 30, 30,
2020 2019 2020 2019
Revenue $ 124,435 $ 200,616 $ 283,900 $ 377,403
Gross profit 41,158 60,071 81,802 108,945
Gross profit as a % of Revenue 33.1 % 29.9 % 28.8 % 28.9 %
Total operating expenses 41,541 44,652 193,413 97,922
Operating expenses as a % of Revenue 33.4 % 22.3 % 68.1 % 25.9 %
Income (loss) from operations (383) 15,419 (111,611) 11,023
Income (loss) from Operations as a % of Revenue (0.3) % 7.7 % (39.3) % 2.9 %
Interest expense 2,976 3,579 5,765 7,106
Income (loss) before provision (benefit) for
income taxes (3,359) 11,840 (117,376) 3,917
Provision (benefit) for income taxes (694) 4,397 (16,189) 1,760
Net income (loss) (2,665) 7,443 (101,187) 2,157
Less: Net income (loss) attributable to
non-controlling interests, net of taxes (9) 12 (22) 19
Net income (loss) attributable to Mistras
Group, Inc. $ (2,656) $ 7,431 $ (101,165) $ 2,138
Revenue
Revenue was $124.4 million for the three months ended June 30, 2020 , a decrease
of $76.2 million , or 38.0%, compared with the three months ended June 30, 2019 .
Revenue for the six months ended June 30, 2020 was $283.9 million , a decrease of
$93.5 million , or 24.8%, compared with the six months ended June 30, 2019 .
Revenue by segment for the three and six months ended June 30, 2020 and June 30,
2019 were as follows:
Six months ended June
Three months ended June 30, 30,
2020 2019 2020 2019
Revenue
Services $ 100,677 $ 161,210 $ 229,550 $ 301,507
International 21,343 37,090 50,410 72,252
Products and Systems 4,002 4,269 6,814 7,701
Corporate and eliminations (1,587) (1,953) (2,874) (4,057)
$ 124,435 $ 200,616 $ 283,900 $ 377,403
Three Months
In the three months ended June 30, 2020 , total revenue decreased 38.0% due
predominantly to a double-digit organic decline and, to a much lesser extent,
the low single-digit unfavorable impact of foreign exchange rates, partially
offset by low single-digit acquisition growth. The decrease in revenue was
primarily the result of the impact of COVID-19, which disrupted the timing of
projects for many of our customers. Services segment revenue decreased 37.5%,
driven predominantly by a double-digit organic decline and, to a much lesser
extent, the low single-digit unfavorable impact of foreign exchange rates,
partially offset by low single-digit acquisition growth. International segment
revenue decreased 42.5%, due predominantly to the organic decline and, to a much
lesser extent, the low single-digit unfavorable impact of foreign exchange rate.
Products and Systems segment revenue decreased by 6.3%, due to organic decline.
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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) Oil and gas customer revenue comprised approximately 54% and 60% of total revenue for the three months endedJune 30, 2020 and 2019, respectively. Aerospace and defense customer revenue comprised approximately 14% and 12% of total revenue for the three months endedJune 30, 2020 and 2019, respectively. The Company's top ten customers comprised approximately 29% of total revenue for the three months endedJune 30, 2020 , as compared to 38% for the three months endedJune 30, 2019 , with no customer accounting for 10% or more of total revenue in either three-month period.
Six months
In the six months endedJune 30, 2020 , total revenue decreased 24.8% due predominantly to a double-digit organic decline and, to a much lesser extent, the low single-digit unfavorable impact of foreign exchange rates, partially offset by low single-digit acquisition growth. The decrease in revenue was primarily the result of the impact of COVID-19, which disrupted the timing of projects for many of our customers. Services segment revenue decreased 23.9%, driven predominantly by a double-digit organic decline and, to a much lesser extent, the low single-digit unfavorable impact of foreign exchange rates, partially offset by low single-digit acquisition growth. International segment revenue decreased 30.2%, due predominantly to the organic decline and, to a much lesser extent, the low single-digit unfavorable impact of foreign exchange rate. Products and Systems segment revenue decreased by 11.5%, due to the organic decline. Oil and gas customer revenue comprised approximately 56% and 59% of total revenue for the six months endedJune 30, 2020 and 2019, respectively. Aerospace and defense customer revenue comprised approximately 15% and 13% of total revenue for the six months endedJune 30, 2020 and 2019, respectively. The Company's top ten customers comprised approximately 31% of total revenue for the six months endedJune 30, 2020 , as compared to 39% for the six months endedJune 30, 2019 , with no customer accounting for 10% or more of total revenue in either six-month period. Gross Profit Gross profit decreased by$18.9 million , or 31.5%, in the three months endedJune 30, 2020 , on a decrease in sales of 38.0%. Gross profit decreased by$27.1 million , or 24.9%, in the six months endedJune 30, 2020 , on a decrease in sales of 24.8%.
Gross profit by segment for the three and six months ended
Six months ended June
Three months ended June 30, 30,
2020 2019 2020 2019
Gross profit
Services $ 33,940 $ 47,208 $ 66,177 $ 84,573
% of segment revenue 33.7 % 29.3 % 28.8 % 28.1 %
International 5,392 11,058 13,415 21,418
% of segment revenue 25.3 % 29.8 % 26.6 % 29.6 %
Products and Systems 1,838 1,825 2,206 3,064
% of segment revenue 45.9 % 42.8 % 32.4 % 39.8 %
Corporate and eliminations (12) (20) 4 (110)
$ 41,158 $ 60,071 $ 81,802 $ 108,945
% of total revenue 33.1 % 29.9 % 28.8 % 28.9 %
Three months
Gross profit margin was 33.1% and 29.9% for the three-month periods ended June
30, 2020 and 2019, respectively. COVID-19, the significant drop in oil prices
and decrease in aerospace production have had a significant unfavorable impact
on sales volume; however, gross profit margin improved due primarily to better
employee utilization and, to a lesser extent, the favorable impact of mix of
sales. Services segment gross profit margins had a year-on-year increase of 440
basis points to 33.7% during the three months ended June 30, 2020 , due primarily
to better employee utilization, favorable mix of sales on lower sales volume and
Canadian wage subsidies. International segment gross margins had a year-on-year
decline of 450 basis points to 25.3% during the three months ended June 30,
2020 , due primarily to reduced volumes and lower employee
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
(tabular dollars are in thousands)
utilization. Products and Systems segment gross margin had a year-on-year
increase in gross profit margin to 45.9% during the three months ended
Six months
Gross profit margin was 28.8% and 28.9% for the six-month periods endedJune 30, 2020 and 2019, respectively. Services segment gross profit margins had a year-on-year increase of 70 basis points to 28.8% in the six months endedJune 30, 2020 , on a decrease in sales volume. International segment gross margins had a year-on-year decline of 300 basis points to 26.6% in the six months endedJune 30, 2020 due to lower levels of employee utilization. Products and Systems segment gross margin had a year-on-year decline of 740 basis points to 32.4% in the six months endedJune 30, 2020 , due to unfavorable sales mix.
Operating Expenses
Operating expenses for the three and six months endedJune 30, 2020 and 2019 was as follows: Six months ended June Three months ended June 30, 30, 2020 2019 2020 2019 Operating Expenses Selling, general and administrative expenses$ 37,607 $ 41,923 $ 79,165 $ 83,686 Bad debt provision for troubled customers, net of recoveries - (2,693) - 2,798 Impairment charges - - 106,062 - Pension withdrawal expense - - - 534 Research and engineering 708 754 1,532 1,611 Depreciation and amortization 3,207 4,119 7,177 8,291 Acquisition-related expense (benefit), net 19 549 (523) 1,002$ 41,541 $ 44,652 $ 193,413 $ 97,922 % of total revenue 33.4 % 22.3 % 68.1 % 25.9 % Three months Operating expenses decreased$3.1 million , or 7%, for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 , due predominantly to the Company's cost reduction and efficiency program initiated during the first quarter of 2020 in response to COVID-19 as more fully described in Recent Developments under the Overview of this section. During the three months endedJune 30, 2020 , there was an additional$0.8 million additive selling, general and administration expenses related to the Company's most recent acquisition. During the three months endedJune 30, 2020 , there was approximately$1.3 million additional foreign currency exchange losses as compared with the prior period due to volatility in certain foreign currencies.
Six months
Operating expenses increased$95.5 million , or 98%, for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 , due predominantly to impairment charges of$106.1 million in 2020 as more fully described in Note 8-Goodwill and Note 9-Intangible Assets to these Unaudited Condensed Consolidated Financial Statements. Excluding the 2020 impairment charges, operating expenses decreased due to the Company's cost reduction and efficiency program initiated during the first quarter of 2020 in response to COVID-19 as more fully described in Recent Developments under the Overview of this section. In addition, this decrease was due to lower bad debt, pension withdrawal, depreciation and amortization, and net acquisition-related expenses for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . These decreases in expense were partially offset by approximately$2.3 million foreign currency exchange losses during the six months endedJune 30, 2020 as compared with the prior period due to volatility in certain foreign currencies, as well as approximately an incremental$1.8 million in selling, general and administration expenses related to the Company's most recent acquisition. 34
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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 and for the
Company in total:
Six months ended June
Three months ended June 30, 30,
2020 2019 2020 2019
Services:
Income (loss) from operations (GAAP) $ 10,837 $ 20,905 $ (70,657) $ 24,958
Bad debt provision (benefit) for troubled
customers, net of recoveries - (1,977) - 2,778
Impairment charges - - 86,200 -
Pension withdrawal expense - - - 534
Reorganization and other costs 45 77 67 77
Acquisition-related expense (benefit), net 19 397 (522) 702
Income before special items (non-GAAP) $ 10,901 $ 19,402 $ 15,088 $ 29,049
International:
Income (loss) from operations (GAAP) $ (1,937) $ 2,450 $ (22,356) $ 2,234
Bad debt provision (benefit) for troubled
customers, net of recoveries - (716) - 20
Impairment charges - - 19,862 -
Reorganization and other costs 366 107 292 265
Income (loss) before special items
(non-GAAP) $ (1,571) $ 1,841 $ (2,202) $ 2,519
Products and Systems:
Loss from operations (GAAP) $ (96) $ (405) $ (1,776) $ (1,733)
Loss before special items (non-GAAP) $ (96) $ (405) $ (1,776) $ (1,733)
Corporate and Eliminations:
Loss from operations (GAAP) $ (9,187) $ (7,531) $ (16,822) $ (14,436)
Loss on debt modification 645 - 645 -
Reorganization and other costs 86 - 123 60
Acquisition-related expense, net - 152 - 300
Loss before special items (non-GAAP) $ (8,456) $ (7,379) $ (16,054) $ (14,076)
Total Company :
Income (loss) from operations (GAAP) $ (383) $ 15,419 $ (111,611) $ 11,023
Bad debt provision (benefit) for troubled
customers, net of recoveries - (2,693) - 2,798
Impairment charges - - 106,062 -
Pension withdrawal expense - - - 534
Reorganization and other costs 497 184 482 402
Loss on debt modification 645 - 645 -
Acquisition-related expense (benefit), net 19 549 (522) 1,002
Income (loss) before special items
(non-GAAP) $ 778 $ 13,459 $ (4,944) $ 15,759
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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, 2020 , income (loss) from operations (GAAP) decreased$15.8 million , compared with the three months endedJune 30, 2019 , while income (loss) before special items (non-GAAP) decreased$12.7 million , or 94%. As a percentage of revenue, income (loss) before special items decreased by 610 basis points to 0.6% in the three months endedJune 30, 2020 from 6.7% in the three months endedJune 30, 2019 . The COVID-19 outbreak, significant drop in oil prices has adversely affected our workforce and operations, as well as the operations of our customers, suppliers and contractors. These negative factors have resulted in significant volatility and uncertainty in the markets in which we operate. We are currently unable to predict or determine the overall impact that the COVID-19 pandemic and drop in oil prices may have on our business, results of operations, or liquidity. Refer to Item 1A. Risk Factors in Part I of our 2019 Form 10-K, and the additional risk factors included in Part II, Item 1.A. of this Form 10-Q for further discussion.
Six months
For the six months endedJune 30, 2020 , income (loss) from operations (GAAP) decreased$122.6 million , compared with the six months endedJune 30, 2019 , while income (loss) before special items (non-GAAP) decreased$20.7 million , or 131%. As a percentage of revenue, income (loss) before special items decreased by 590 basis points to (1.7)% in the six months endedJune 30, 2020 from 4.2% in the six months endedJune 30, 2019 . During the six months endedJune 30, 2020 , the COVID-19 outbreak and significant drop in oil prices has adversely affected our workforce and operations, as well as the operations of our customers, suppliers and contractors and was the primary reason for the impairment charges. These negative factors have resulted in significant volatility and uncertainty in the markets in which we operate. We are currently unable to predict or determine the overall impact that the COVID-19 pandemic and drop in oil prices may have on our business, results of operations, or liquidity. Refer to Item 1A. Risk Factors in Part I of our 2019 Form 10-K, and the additional risk factors included in Part II, Item 1.A. of this Form 10-Q for further discussion.
Interest Expense
Interest expense was approximately$3.0 million and$3.6 million for the three months endedJune 30, 2020 and 2019, respectively. Interest expense was approximately$5.8 million and$7.1 million for the six months endedJune 30, 2020 and 2019, respectively. The decrease was due to lower average level of borrowings on our Credit Agreement attributable primarily to payments on borrowings for the acquisition completed during the fourth quarter of 2018, partially offset by an increase in the base borrowing rate during the second quarter as a result of theMay 2020 amendment to our Credit Agreement.
Income Taxes
The Company's effective income tax rate was approximately 21% and 37% for the three months endedJune 30, 2020 and 2019, respectively. The Company's effective income tax rate was approximately 14% and 45% for the six months endedJune 30, 2020 and 2019. The effective income tax rate for the three months endedJune 30, 2020 approximated the statutory rate, as the favorable impact of the CARES Act was offset by the unfavorable impact of taxes in other jurisdictions and other permanent book to tax differences. the effective income tax rate for the six months endedJune 30, 2020 was lower than the statutory rate primarily due to impairments for which the Company will not realize income tax benefits, partially offset by income tax benefits of the CARES Act enacted onMarch 27, 2020 . The CARES Act provides a five-year carryback of net operating losses generated in years 2018 through 2020. As the statutory federal income tax rate applicable to certain years within the carryback period is 35%, carryback to those years of our estimated 2020 annual federal tax loss provides a tax benefit in excess of the current federal statutory rate of 21%, resulting in an increased income tax benefit. We project that the income tax effects of the CARES Act will result in additional income tax benefit recognized throughout the 2020 tax year and a cash refund in 2021 of taxes paid in prior years. The effective income tax rate for the three months endedMarch 31, 2019 was higher than the statutory rate due to the impact of discrete items, the global intangible low-taxes income, and executive compensation, and other provisions resulting from theDecember 22, 2017 passage of the Tax Cuts and Jobs Act and foreign tax rates different than statutory rates in theU.S. 36
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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)Liquidity and Capital Resources
Cash flows are summarized in the table below:
Six months ended June 30,
2020 2019
Net cash provided by (used in): Operating activities$ 34,862 $ 21,105 Investing activities (7,248) (11,048) Financing activities (20,337) (23,139) Effect of exchange rate changes on cash 295
39
Net change in cash and cash equivalents$ 7,572 $
(13,043)
Cash Flows from Operating Activities
During the six months endedJune 30, 2020 , cash provided by operating activities was$34.9 million , representing a year-on-year increase of$13.8 million , or 65%. The increase was primarily attributable to movements in working capital.
Cash Flows from Investing Activities
During the six months endedJune 30, 2020 , cash used in investing activities was$7.2 million , compared with$11.0 million in 2019. The decrease is primarily attributable to a reduction in capital expenditures to$7.6 million for the six months endedJune 30, 2020 compared with$12.0 million in the comparable 2019 period.
Cash Flows from Financing Activities
Net cash used in financing activities was$20.3 million for the six months endedJune 30, 2020 , compared to net cash used of$23.1 million for the six months endedJune 30, 2019 . During the six months endedJune 30, 2020 , net repayments of debt was approximately$5.2 million higher as compared to 2019. In addition, for the six months endedJune 30, 2020 we made payments of$1.3 million and$1.5 million for acquisition-related contingent consideration and financing costs, respectively.
Effect of Exchange Rate Changes on Cash and Cash Equivalents
The effect of exchange rate changes on our cash and cash equivalents was an
increase of
Cash Balance and Credit Facility Borrowings
The terms of our Credit Agreement have not changed from those set forth in Part II, Item 7 of our 2019 Annual Report under the Section "Liquidity and Capital Resources", except as described in Note 11 - Long Term Debt to the Notes to Unaudited Condensed Consolidated Financial Statements in this Quarterly Report, under the heading "Senior Credit Facility". As ofJune 30, 2020 , we had cash and cash equivalents totaling$22.6 million and available borrowing capacity of$33.1 million under our Credit Agreement with borrowings of$230.2 million and$3.9 million of letters of credit outstanding. We finance operations primarily through our existing cash balances, cash collected from operations, bank borrowings and capital lease financing. We believe these sources are sufficient to fund our operations for the foreseeable future.
As of
Contractual Obligations
There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2019 Annual Report.
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Table of Contents
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(tabular dollars are in thousands)Off-balance Sheet Arrangements
During the six months endedJune 30, 2020 , 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. 38
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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 2019 Annual Report.
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