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, 2020 and September 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
The Company is a leading "one source" multinational provider of integrated technology-enabled asset protection solutions, helping to maximize the safety and operational uptime for civilization's most critical industrial and civil assets. Backed by an innovative, data-driven asset protection portfolio, proprietary technologies, and decades-long legacy of industry leadership, the Company leads clients in the oil and gas, aerospace and defense, power generation, infrastructure, and manufacturing industries towards achieving and maintaining operational excellence. By supporting these organizations that help fuel our vehicles and power our society; inspecting components that are trusted for commercial, defense, and space craft; and building real-time monitoring equipment to enable safe travel across bridges, the Company helps the world at large.
The Company enhances value for its clients by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial IoT-connected digital software and monitoring solutions. The company's core capabilities also
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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)
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 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 (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 the
COVID-19 coronavirus (COVID-19) as a pandemic, which continues to infect the
population throughout the United States and most other parts of the world. 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 dropped
significantly, and airline traffic has experienced a significant decline. In
response to various factors surrounding the COVID-19 pandemic and, in the case
of the oil and gas market, other macroeconomic events, companies within the oil
and gas and aerospace industries (including our customers) have reduced spending
and/or slowed down (or temporarily ceased) production. This, in turn, resulted
in decreases in awards of new contracts or adjustments, reductions, suspensions
or cancellations of existing contracts.
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
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(tabular dollars are in thousands)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; •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 continue to have on 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 factors discussed above, inMarch 2020 we initiated a cost reduction and efficiency program. As part of this program, our named executive officers took voluntarily temporary salary reductions ranging from 25% to 45% of their base salary. In addition, we instituted a reduction for certain 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, continued through the end of the third quarter of 2020. In addition, our non-employee directors voluntarily agreed to a$3,750 reduction in their second and third quarter 2020 director's fee payments. Beginning in the fourth quarter of 2020, all salary and director fees reductions were removed and pay levels were returned to first quarter levels, though certain other cost reduction measures have remained in place. 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.
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. Our management uses "Income (loss) before special items" for each of our three segments, the Corporate segment and theTotal Company 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 "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 32
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Management's Discussion and Analysis of Financial Condition and Results of
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(tabular dollars are in thousands)
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 nine months ended
Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Revenue $ 147,894 $ 192,192 $ 431,794 $ 569,595
Gross profit 47,384 57,769 129,186 166,714
Gross profit as a % of Revenue 32.0 % 30.1 % 29.9 % 29.3 %
Income (loss) from operations 5,742 10,779 (105,869) 21,802
Income (loss) from Operations as a % of
Revenue 3.9 % 5.6 % (24.5) % 3.8 %
Income (loss) before provision (benefit) for
income taxes 2,097 7,820 (115,279) 11,737
Net income (loss) 1,553 3,087 (99,634) 5,244
Net income (loss) attributable to Mistras
Group, Inc. $ 1,523 $ 3,093 $ (99,642) $ 5,231
Revenue
Revenue was $147.9 million for the three months ended September 30, 2020 , a
decrease of $44.3 million , or 23.0%, compared with the three months ended
September 30, 2019 . Revenue for the nine months ended September 30, 2020 was
$431.8 million , a decrease of $137.8 million , or 24.2%, compared with the nine
months ended September 30, 2019 .
Revenue by segment for the three and nine months ended
Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Revenue
Services $ 119,721 $ 152,572 $ 349,271 $ 454,079
International 26,477 37,050 76,887 109,302
Products and Systems 3,932 5,521 10,746 13,222
Corporate and eliminations (2,236) (2,951) (5,110) (7,008)
$ 147,894 $ 192,192 $ 431,794 $ 569,595
Three Months
In the three months ended September 30, 2020 , total revenue decreased 23.0%
versus the prior year comparable period due predominantly to a double-digit
organic decline offset by low single-digit favorable impact of foreign exchange
rates and acquisition growth. The decrease in revenue across all our segments
was primarily the result of the impact of COVID-19, which disrupted the timing
of projects or purchases for many of our customers. Services segment revenue
decreased 21.5%, driven predominantly by a double-digit organic decline and, to
a lesser extent, low single-digit unfavorable impact of foreign exchange rates,
partially offset by low single-digit acquisition growth. International segment
revenue decreased 28.5%, due predominantly to the organic decline partially
offset by low single-digit favorable impact of foreign exchange rates. Products
and Systems segment revenue decreased by 28.8%, due to organic decline.
Oil and gas customer revenue comprised approximately 55% and 59% of total
revenue for the three months ended September 30, 2020 and 2019, respectively.
Aerospace and defense customer revenue comprised approximately 10% and 12% of
total revenue for the three months ended September 30, 2020 and 2019,
respectively. The Company's top ten customers comprised
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
(tabular dollars are in thousands)
approximately 29% of total revenue for the three months ended
Nine Months
In the nine months endedSeptember 30, 2020 , total revenue decreased 24.2% versus the prior year comparable period due predominantly to a double-digit organic decline and, to a lesser extent, low single-digit unfavorable impact of foreign exchange rates, partially offset by low single-digit acquisition growth. The decrease in revenue across all our segments was primarily the result of the impact of COVID-19, which disrupted the timing of projects or deferral of purchases for many of our customers. Services segment revenue decreased 23.1%, driven predominantly by a double-digit organic decline and, to a lesser extent, low single-digit unfavorable impact of foreign exchange rates, partially offset by low single-digit acquisition growth. International segment revenue decreased 29.7%, due predominantly to the organic decline and, to a lesser extent, low single-digit unfavorable impact of foreign exchange rate. Products and Systems segment revenue decreased by 18.7%, due to the organic decline. Oil and gas customer revenue comprised approximately 56% and 59% of total revenue for the nine months endedSeptember 30, 2020 and 2019, respectively. Aerospace and defense customer revenue comprised approximately 13% and 13% of total revenue for the nine months endedSeptember 30, 2020 and 2019, respectively. The Company's top ten customers comprised approximately 30% of total revenue for the nine months endedSeptember 30, 2020 , as compared to 35% for the nine months endedSeptember 30, 2019 , with no customer accounting for 10% or more of total revenue in either nine-month period.
Gross Profit
Gross profit decreased by$10.4 million , or 18.0%, in the three months endedSeptember 30, 2020 versus the prior year comparable period, on a decrease in revenue of 23.0%. Gross profit decreased by$37.5 million , or 22.5%, in the nine months endedSeptember 30, 2020 , on a decrease in sales of 24.2%.
Gross profit by segment for the three and nine months ended
Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Gross profit
Services $ 37,603 $ 43,330 $ 103,780 $ 127,903
% of segment revenue 31.4 % 28.4 % 29.7 % 28.2 %
International 8,197 11,695 21,612 33,113
% of segment revenue 31.0 % 31.6 % 28.1 % 30.3 %
Products and Systems 1,628 2,739 3,834 5,803
% of segment revenue 41.4 % 49.6 % 35.7 % 43.9 %
Corporate and eliminations (44) 5 (40) (105)
$ 47,384 $ 57,769 $ 129,186 $ 166,714
% of total revenue 32.0 % 30.1 % 29.9 % 29.3 %
Three Months
Gross profit margin was 32.0% and 30.1% for the three-month periods ended
September 30, 2020 and 2019, respectively. COVID-19, the significant drop in oil
prices and a 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
300 basis points to 31.4% during the three months ended September 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 60 basis points to 31.0% during the three months ended
September 30, 2020 , due primarily to reduced volumes and unfavorable sales mix.
Products and Systems segment gross margin had a year-on-year decrease of 820
basis points to 41.4% during the three months ended September 30, 2020 due to
unfavorable sales mix.
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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) Nine Months Gross profit margin was 29.9% and 29.3% for the nine months endedSeptember 30, 2020 and 2019, respectively. Services segment gross profit margins had a year-on-year increase of 150 basis points to 29.7% in the nine months endedSeptember 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 220 basis points to 28.1% in the nine months endedSeptember 30, 2020 due to lower levels of employee utilization and sales mix. Products and Systems segment gross margin had a year-on-year decline of 820 basis points to 35.7% in the nine months endedSeptember 30, 2020 , due to unfavorable sales volume and mix.
Operating Expenses
Operating expenses for the three and nine months endedSeptember 30, 2020 and 2019 was as follows: Three months ended September 30, Nine months ended September 30, 2020 2019 2020 2019 Operating Expenses Selling, general and administrative expenses$ 37,473 $ 42,328 $ 116,638 $ 126,014 Bad debt provision for troubled customers, net of recoveries - - - 2,798 Impairment charges - - 106,062 - Pension withdrawal expense - (45) - 489 Research and engineering 638 650 2,170 2,261 Depreciation and amortization 3,182 4,089 10,359 12,380 Legal settlement (360) - (360) - Acquisition-related expense (benefit), net 709 (32) 186 970 Three Months Operating expenses decreased$5.3 million , or 11%, for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 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. These reductions were partially offset during the three months endedSeptember 30, 2020 by an additional$0.2 million additive selling, general and administration expenses related to the Company's most recent acquisition inSeptember 2019 . During the three months endedSeptember 30, 2020 , there was approximately$0.7 million additional foreign currency exchange losses as compared with the prior period due to volatility in certain foreign currencies.
Nine Months
Operating expenses increased$90.1 million , or 62%, for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 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 the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report. 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. Operating expenses for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 also decreased due to lower bad debt, pension withdrawal, depreciation and amortization, and net acquisition-related expenses. These decreases in expense were partially offset by approximately$3.0 million foreign currency exchange losses during the nine months endedSeptember 30, 2020 as compared with the prior period due to volatility in certain foreign currencies, as well as approximately an incremental$1.1 million in selling, general and administration expenses related to the Company's most recent acquisition inSeptember 2019 . 35
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
(tabular dollars are in thousands)Income (loss) from Operations
The following table shows a reconciliation of the income (loss) from operations
to income (loss) before special items for each of our three segments and for the
Company in total:
Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Services:
Income (loss) from operations (GAAP)
$ (57,058) $ 40,715 Bad debt provision for troubled customers, net of recoveries - - - 2,778 Impairment charges - - 86,200 - Pension withdrawal expense (benefit) - (45) - 489 Reorganization and other costs 58 125 125 202 Legal settlement (360) - (360) - Acquisition-related expense (benefit), net 709 (125) 186 577
Income before special items (non-GAAP)
$ 29,093 $ 44,761 International: Income (loss) from operations (GAAP)$ (66) $ 2,921 $ (22,422) $ 5,155 Bad debt provision for troubled customers, net of recoveries - - - 20 Impairment charges - - 19,862 - Reorganization and other costs 21 90 313 355 Income (loss) before special items (non-GAAP)$ (45) $ 3,011 $ (2,247) $ 5,530 Products and Systems: Income (loss) from operations (GAAP)$ (160) $ 509
Reorganization and other costs 5 218 5 218
Loss before special items (non-GAAP)
$ (1,931) $ (1,006) Corporate and Eliminations: Loss from operations (GAAP)$ (7,631) $ (8,408) $ (24,453) $ (22,844) Loss on debt modification - - 645 - Reorganization and other costs 14 44 137 104 Acquisition-related expense, net - 93 - 393
Loss before special items (non-GAAP)
$ (23,671) $ (22,347) Total Company : Income (loss) from operations (GAAP)$ 5,742 $ 10,779 $ (105,869) $ 21,802 Bad debt provision for troubled customers, net of recoveries - - - 2,798 Impairment charges - - 106,062 - Pension withdrawal expense (benefit) - (45) - 489 Reorganization and other costs 98 477 580 879 Loss on debt modification - - 645 - Legal settlement (360) - (360) - Acquisition-related expense (benefit), net 709 (32) 186 970 Income (loss) before special items (non-GAAP)$ 6,189 $ 11,179 $ 1,244 $ 26,938
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, 2020 , income (loss) from operations (GAAP) decreased$5.0 million or 47%, compared with the three months endedSeptember 30, 2019 , while income (loss) before special items (non-GAAP) decreased$5.0 million , or 45%. As a percentage of revenue, income (loss) before special items decreased by 160 basis points to 4.2% in the three months endedSeptember 30, 2020 from 5.8% in the three months endedSeptember 30, 2019 . 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. 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.
Nine Months
For the nine months endedSeptember 30, 2020 , income (loss) from operations (GAAP) decreased$127.7 million , compared with the nine months endedSeptember 30, 2019 , while income (loss) before special items (non-GAAP) decreased$25.7 million , or 95%. As a percentage of revenue, income (loss) before special items decreased by 440 basis points to 0.3% in the nine months endedSeptember 30, 2020 from 4.7% in the nine months endedSeptember 30, 2019 . During the nine months endedSeptember 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$3.6 million and$3.0 million for the three months endedSeptember 30, 2020 and 2019, respectively. The increase was due to an increase in the base borrowing rate during the second quarter as a result of theMay 2020 amendment to our Credit Agreement. Interest expense was approximately$9.4 million and$10.1 million for the nine months endedSeptember 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 26% and 61% for the three months endedSeptember 30, 2020 and 2019, respectively. The Company's effective income tax rate was approximately 14% and 55% for the nine months endedSeptember 30, 2020 and 2019. The effective income tax rate for the three months endedSeptember 30, 2020 was greater than the statutory rate due to the unfavorable impact of taxes in other jurisdictions and other permanent book to tax differences offset by the favorable impact of the CARES act. The effective income tax rate for the nine months endedSeptember 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 and nine months endedSeptember 30, 2019 was higher than the statutory rate due to the impact of discrete items, the global intangible low-taxed income, executive compensation, 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. 37
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
(tabular dollars are in thousands)Liquidity and Capital Resources
Cash flows are summarized in the table below:
Nine months ended
2020 2019
Net cash provided by (used in):
Operating activities $ 41,791 $ 40,476
Investing activities (10,558) (21,628)
Financing activities (25,077) (29,521)
Effect of exchange rate changes on cash 944 (499)
Net change in cash and cash equivalents
Cash Flows from Operating Activities
During the nine months ended
Cash Flows from Investing Activities
During the nine months endedSeptember 30, 2020 , cash used in investing activities was$10.6 million , compared with$21.6 million in 2019. The decrease is primarily attributable to a reduction in capital expenditures to$11.0 million for the nine months endedSeptember 30, 2020 compared with$18.0 million in the comparable 2019 period.
Cash Flows from Financing Activities
Net cash used in financing activities was$25.1 million for the nine months endedSeptember 30, 2020 , compared to net cash used of$29.5 million for the nine months endedSeptember 30, 2019 . During the nine months endedSeptember 30, 2020 , net repayments of debt was approximately$3.7 million lower as compared to 2019. In addition, for the nine months endedSeptember 30, 2020 we made payments of$1.3 million and$1.5 million for acquisition-related contingent consideration and financing costs, respectively offset by$2.6 million less taxes paid related to net share settlement of share-based awards.
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 are set forth in Part II, Item 7 of our 2019 Annual Report under the Section "Liquidity and Capital Resources", as modified 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 ofSeptember 30, 2020 , we had cash and cash equivalents totaling$22.1 million and available borrowing capacity of$35.3 million under our Credit Agreement with borrowings of$226.4 million and$4.3 million of letters of credit outstanding. We finance operations primarily through our existing cash balances, cash collected from operations, bank borrowings and capital lease financing. We believe these sources are sufficient to fund our operations for the foreseeable future.
As of
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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Off-balance Sheet Arrangements
During the nine months endedSeptember 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. 39
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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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