Document
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
 
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __ to __
 
Commission file number 001- 34481
 
 
Mistras Group, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
22-3341267
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
195 Clarksville Road
Princeton Junction, New Jersey
 
08550
(Address of principal executive offices)
 
(Zip Code)
 
(609) 716-4000

(Registrant’s telephone number, including area code) 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
ý Yes  o No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
ý Yes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Emerging Growth Company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes  ý No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
MG
New York Stock Exchange

As of May 2, 2019, the registrant had 28,646,123 shares of common stock outstanding.
 
 
 
 
 



Table of Contents

TABLE OF CONTENTS
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i

Table of Contents

PART I—FINANCIAL INFORMATION
 
ITEM 1.                           Financial Statements
 


Mistras Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
 
(unaudited)
 
 
 
March 31, 2019
 
December 31, 2018
ASSETS
 

 
 

Current Assets
 

 
 

Cash and cash equivalents
$
24,600

 
$
25,544

Accounts receivable, net
138,505

 
148,324

Inventories
13,571

 
13,053

Prepaid expenses and other current assets
21,029

 
15,870

Total current assets
197,705

 
202,791

Property, plant and equipment, net
93,916

 
93,895

Intangible assets, net
109,055

 
111,395

Goodwill
280,696

 
279,259

Deferred income taxes
2,861

 
1,930

Other assets
41,204

 
4,767

Total assets
$
725,437

 
$
694,037

LIABILITIES AND EQUITY
 

 
 

Current Liabilities
 

 
 

Accounts payable
$
13,275

 
$
13,863

Accrued expenses and other current liabilities
79,641

 
73,895

Current portion of long-term debt
6,787

 
6,833

Current portion of finance lease obligations
3,764

 
3,922

Income taxes payable
3,911

 
1,958

Total current liabilities
107,378

 
100,471

Long-term debt, net of current portion
280,919

 
283,787

Obligations under finance leases, net of current portion
9,046

 
9,075

Deferred income taxes
24,571

 
23,148

Other long-term liabilities
34,427

 
6,482

Total liabilities
456,341

 
422,963

Commitments and contingencies


 


Equity
 

 
 

Preferred stock, 10,000,000 shares authorized

 

Common stock, $0.01 par value, 200,000,000 shares authorized, 28,626,687 and 28,562,608 shares issued
286

 
285

Additional paid-in capital
227,790

 
226,616

Retained earnings
66,260

 
71,553

Accumulated other comprehensive loss
(25,426
)
 
(27,557
)
Total Mistras Group, Inc. stockholders’ equity
268,910

 
270,897

Non-controlling interests
186

 
177

Total equity
269,096

 
271,074

Total liabilities and equity
$
725,437

 
$
694,037

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


1

Table of Contents

Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of (Loss) Income
(in thousands, except per share data)
 
Three months ended
 
March 31, 2019
 
March 31, 2018
 
 

 
 

Revenue
$
176,787

 
$
187,630

Cost of revenue
122,417

 
133,787

Depreciation
5,496

 
5,698

Gross profit
48,874

 
48,145

Selling, general and administrative expenses
41,763

 
39,034

Bad debt provision for troubled customers, net of recoveries
5,491

 

Pension withdrawal expense
534

 

Research and engineering
857

 
756

Depreciation and amortization
4,172

 
2,950

Acquisition-related expense (benefit), net
453

 
(994
)
(Loss) income from operations
(4,396
)
 
6,399

Interest expense
3,527

 
1,792

(Loss) income before (benefit) provision for income taxes
(7,923
)
 
4,607

(Benefit) provision for income taxes
(2,637
)
 
1,688

Net (loss) income
(5,286
)
 
2,919

Less: net income attributable to non-controlling interests, net of taxes
7

 
12

Net (loss) income attributable to Mistras Group, Inc.
$
(5,293
)
 
$
2,907

(Loss) earnings per common share:
 

 
 

Basic
$
(0.19
)
 
$
0.10

Diluted
$
(0.19
)
 
$
0.10

Weighted average common shares outstanding:
 

 
 

Basic
28,574

 
28,304

Diluted
28,574

 
29,362

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


2

Table of Contents

Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income
(in thousands)
 
 
Three months ended
 
March 31, 2019
 
March 31, 2018
 
 
 
 
Net (loss) income
$
(5,286
)
 
$
2,919

Other comprehensive income:
 

 
 

Foreign currency translation adjustments
2,131

 
1,500

Comprehensive (loss) income
(3,155
)
 
4,419

Less: comprehensive income attributable to non-controlling interest
9

 
14

Comprehensive (loss) income attributable to Mistras Group, Inc.
$
(3,164
)
 
$
4,405

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


3

Table of Contents

Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Equity
(in thousands)
 
Common Stock
 
Additional
paid-in capital
 
Retained
earnings
 
Accumulated
other
comprehensive income (loss)
 
Total
Mistras Group,
Inc.
Stockholders’ Equity
 
Noncontrolling Interest
 
 
 
Shares
 
Amount
 
 
 
 
 
 
Total Equity
Balance at December 31, 2018
28,563

 
$
285

 
$
226,616

 
$
71,553

 
$
(27,557
)
 
$
270,897

 
$
177

 
$
271,074

Net loss

 

 

 
(5,293
)
 

 
(5,293
)
 
7

 
(5,286
)
Other comprehensive income, net of tax

 

 

 

 
2,131

 
2,131

 
2

 
2,133

Share-based payments
61

 
1

 
1,426

 

 

 
1,427

 

 
1,427

Net settlement on vesting of restricted stock units

 

 
(284
)
 

 

 
(284
)
 

 
(284
)
Exercise of stock options
3

 

 
32

 

 

 
32

 

 
32

Balance at March 31, 2019
28,627

 
$
286

 
$
227,790

 
$
66,260

 
$
(25,426
)
 
$
268,910

 
$
186

 
$
269,096

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
28,295

 
$
282

 
$
222,425

 
$
64,717

 
$
(16,805
)
 
$
270,619

 
$
173

 
$
270,792

Net income

 

 

 
2,907

 

 
2,907

 
12

 
2,919

Other comprehensive income, net of tax

 

 

 

 
1,500

 
1,500

 
2

 
1,502

Share-based payments
19

 

 
1,194

 

 

 
1,194

 

 
1,194

Net settlement on vesting of restricted stock units

 

 
(43
)
 

 

 
(43
)
 

 
(43
)
Balance at March 31, 2018
28,314

 
$
282

 
$
223,576

 
$
67,624

 
$
(15,305
)
 
$
276,177

 
$
187

 
$
276,364


The accompanying notes are an integral part of these condensed consolidated financial statements.


4

Table of Contents


Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands) 
 
Three months ended
 
March 31, 2019
 
March 31, 2018
 
 
 
 
Cash flows from operating activities
 

 
 

Net (loss) income
$
(5,286
)
 
$
2,919

Adjustments to reconcile net (loss) income to net cash provided by operating activities
 

 
 

Depreciation and amortization
9,668

 
8,648

Deferred income taxes
244

 
260

Share-based compensation expense
1,356

 
1,126

Bad debt provision for troubled customers, net of recoveries
5,491

 

Fair value adjustments to contingent consideration
305

 
(1,033
)
Foreign currency (gain) loss
(647
)
 
45

Other
(163
)
 
(167
)
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions
 

 
 
Accounts receivable
4,904

 
(15
)
Inventories
(505
)
 
(468
)
Prepaid expenses and other assets
(5,425
)
 
(437
)
Accounts payable
(541
)
 
(732
)
Accrued expenses and other liabilities
(3,189
)
 
(3,703
)
Income taxes payable
1,965

 
(625
)
Net cash provided by operating activities
8,177

 
5,818

Cash flows from investing activities
 

 
 

Purchase of property, plant and equipment
(5,637
)
 
(5,182
)
Purchase of intangible assets
(88
)
 
(165
)
Proceeds from sale of equipment
724

 
575

Net cash used in investing activities
(5,001
)
 
(4,772
)
Cash flows from financing activities
 

 
 

Repayment of capital lease obligations
(1,124
)
 
(1,630
)
Proceeds from borrowings of long-term debt
121

 
371

Repayment of long-term debt
(1,694
)
 
(834
)
Proceeds from revolver
6,500

 
18,600

Repayment of revolver
(7,500
)
 
(10,700
)
Payment of contingent consideration for business acquisitions

 
(1,503
)
Taxes paid related to net share settlement of share-based awards
(284
)
 
(43
)
Proceeds from exercise of stock options
32

 

Net cash (used in) provided by financing activities
(3,949
)
 
4,261

Effect of exchange rate changes on cash and cash equivalents
(171
)
 
284

Net change in cash and cash equivalents
(944
)
 
5,591

Cash and cash equivalents at beginning of period
25,544

 
27,541

Cash and cash equivalents at end of period
$
24,600

 
$
33,132

Supplemental disclosure of cash paid
 

 
 

Interest
$
3,428

 
$
1,590

Income taxes
$
1,091

 
$
2,136

Noncash investing and financing
 

 
 

Equipment acquired through capital lease obligations
$
1,086

 
$
587

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)




1.                                      Description of Business and Basis of Presentation
 
Description of Business
 
Mistras Group, Inc. and subsidiaries ("the Company") is a leading “one source” global provider of technology-enabled asset protection solutions used to evaluate the structural integrity and reliability of critical energy, industrial and public infrastructure. The Company combines industry-leading products and technologies, expertise in mechanical integrity (MI), non-destructive testing (NDT) and mechanical services and proprietary data analysis software to deliver a comprehensive portfolio of customized solutions, ranging from routine inspections to complex, plant-wide asset integrity assessments and management. These mission critical solutions enhance customers’ ability to extend the useful life of their assets, increase productivity, minimize repair costs, comply with governmental safety and environmental regulations, manage risk and avoid catastrophic disasters. The Company serves a global customer base of companies with asset-intensive infrastructure, including companies in the oil and gas, commercial aerospace and defense, fossil and nuclear power, alternative and renewable energy, public infrastructure, chemicals, transportation, primary metals and metalworking, pharmaceutical/biotechnology and food processing industries and research and engineering institutions.
 
Basis of Presentation
 
The condensed consolidated financial statements contained in this report are unaudited. In the opinion of management, the condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods of the years ending December 31, 2019 and 2018. Certain items included in these statements are based on management’s estimates. Actual results may differ from those estimates. The results of operations for any interim period are not necessarily indicative of the results expected for the year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K (“2018 Annual Report”) for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on March 15, 2019.
 
Principles of Consolidation
 
The accompanying unaudited condensed consolidated financial statements include the accounts of Mistras Group, Inc. and its wholly and majority-owned subsidiaries. For subsidiaries in which the Company’s ownership interest is less than 100%, the non-controlling interests are reported in stockholders’ equity in the accompanying condensed consolidated balance sheets. The non-controlling interests in net income, net of tax, is classified separately in the accompanying condensed consolidated statements of income. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Reclassification

Certain amounts in prior periods have been reclassified to conform to the current year presentation. Such reclassifications did not have a material effect on the Company's financial condition or results of operations as previously reported.

Customers

There were no customers that represented 10% of our revenues for either of the three months ended March 31, 2019 or 2018, respectively.

Significant Accounting Policies
 
The Company’s significant accounting policies are disclosed in Note 1 — Summary of Significant Accounting Policies and Practices in the 2018 Annual Report. On an ongoing basis, the Company evaluates its estimates and assumptions, including among other things, those related to revenue recognition, long-lived assets, goodwill and acquisitions. Since the date of the 2018 Annual Report, there have been no material changes to the Company's significant accounting policies, other than its adoption of the new leasing standard on January 1, 2019.


6

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


Income Taxes

On December 22, 2017, the United States enacted fundamental changes to federal tax law following the passage of the Tax Cuts and Jobs Act (the “Tax Act”). The Company’s financial statements for the periods ended March 31, 2019 and March 31, 2018 reflected provisions of the Tax Act effective for periods beginning after December 31, 2017, which includes the reduced federal corporate tax rate of from 35% to 21%, adjustments made to executive compensation and meals and entertainment rules, and the inclusion of new categories of income, global intangible low-taxes income (“GILTI”) and foreign derived intangible income (“FDII”). The Company’s effective income tax rate was approximately 33% and 37% for the three months ended March 31, 2019 and 2018, respectively. The effective income tax rate for the first quarter of 2019 and 2018 was higher than the statutory rate due to the impact of discrete items, GILTI and executive compensation provisions resulting from the passage of the Tax Act, and foreign tax rates different than statutory rates in the U.S.
The Company has completed the accounting for the adoption of the Tax Act, but the amounts recorded in 2019 for the Tax Act related to the calculations of the GILTI, FDII, executive compensation and meals and entertainment are the Company’s best estimates based on the current data and guidance available. The Company is continuing to evaluate the state tax conformity to the Tax Act, including the GILTI provisions. Given the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). In 2018, the Company made an accounting policy election to account for these effects under the period cost method.
Mistras and its subsidiaries file tax returns in the U.S., including various state and local returns and in other foreign jurisdictions. The Company believes adequate provision has been made for all income tax uncertainties.  
Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which the Company adopted as of January 1, 2019. Topic 842 requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. The Company elected the modified retrospective method permitted by the standard, upon which prior-period information has not been restated.

The standard provided for several practical expedient options for use in transition. The Company elected to utilize the “package of practical expedients,” which permits the Company not to reassess previous conclusions reached on lease identification, lease classification and initial direct costs. The Company also elected to utilize the practical expedient available to not separate lease and non-lease components within the lease and have therefore accounted for all lease components as a single lease component.
Adoption of the new standard resulted in the recording of a right-of-use (ROU) asset and liability related to the Company’s operating leases of approximately $38 million as of January 1, 2019. The new standard did not have a material impact to our statements of (loss) income or cash flows.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350). This amendment eliminates Step Two of the goodwill impairment test. Under the amendments in this update, entities should perform the annual goodwill impairment test by comparing the carrying value of its reporting units to their fair value. An entity should record an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Tax deductibility of goodwill should be considered in evaluating any reporting unit's impairment loss to be taken. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company early adopted ASU 2017-04 in the third quarter of 2017 for its condensed consolidated financial statements and related disclosures.

2. Revenue

The majority of the Company's revenues are derived from providing services on a time and material basis and are short-term in nature. The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which was adopted on January 1, 2018.
Performance Obligations

7

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606.  A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and is, therefore, not distinct. The Company provides highly integrated and bundled inspection services to its customers. Some of our contracts have multiple performance obligations, most commonly due to the contract providing both goods and services. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is a relative selling price based on price lists.
Contract modifications are not routine in the performance of our contracts. Generally, when contracts are modified, the modification is to account for changes in scope to the goods and services that are provided. In most instances, contract modifications are for goods or services that are distinct, and, therefore, are accounted for as a separate contract.

Our performance obligations are satisfied over time as work progresses or at a point in time. The majority of our revenue recognized over time as work progresses is related to our service deliverables, which includes providing testing, inspection and mechanical services to our customers. Revenue is recognized over time based on time and material incurred to date which best portrays the transfer of control to the customer. The Company also utilizes an available practical expedient that provides for revenue to be recognized in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. Fixed fee arrangements are determined based on expected labor, material, and overhead to be consumed on fulfillment of such services. Revenue is recognized on a cost-to-cost method tracked on an input basis.

The majority of our revenue recognized at a point in time is related to product sales when the customer obtains control of the asset, which is generally upon shipment to the customer. Contract costs include labor, material and overhead.

The Company expects any significant remaining performance obligations to be satisfied within one year.

Contract Estimates

The majority of our revenues are short-term in nature. The Company has many Master Service Agreements (MSAs) that specify an overall framework and terms of contract when the Company and customers agree upon services or products to be provided. The actual contracting to provide services or furnish products are triggered by a work order, purchase order, or some similar document issued pursuant to a MSA which sets forth the scope of services and/or identifies the products to be provided. From time-to-time, the Company may enter into long-term contracts, which can range from several months to several years. Revenue on such long-term contracts is recognized as work is performed based on total costs incurred to date in relation to the total estimated costs for the performance of the contract at completion. This includes contract estimates of costs to be incurred for the performance of the contract. Cost estimation is based upon the professional knowledge and experience of our project managers, engineers and financial professionals. Factors that are considered in estimating the work to be completed include the availability of materials, the effect of any delays in our project performance and the recoverability of any claims. Whenever revisions of estimates, contract costs and/or contract values indicate that the contract costs will exceed estimated revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.

Revenue by Category

The following series of tables present our disaggregated revenues:

Revenue by industry was as follows:


8

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


Three months ended March 31, 2019
Services
 
International
 
Products
 
Corp/Elim
 
Total

Oil & Gas
$
91,666

 
$
9,704

 
$
15

 
$

 
$
101,385

Aerospace & Defense
12,794

 
11,654

 
307

 

 
24,755

Industrials
16,123

 
5,075

 
432

 

 
21,630

Power generation & Transmission
6,262

 
1,422

 
1,380

 

 
9,064

Other Process Industries
6,319

 
2,242

 
5

 

 
8,566

Infrastructure, Research & Engineering
2,590

 
2,733

 
847

 

 
6,170

Other
4,544

 
2,332

 
446

 
(2,105
)
 
5,217

Total
$
140,298

 
$
35,162

 
$
3,432

 
$
(2,105
)
 
$
176,787


Three months ended March 31, 2018
Services
 
International
 
Products
 
Corp/Elim
 
Total
Oil & Gas
$
103,290

 
$
8,108

 
$
563

 
$

 
$
111,961

Aerospace & Defense
12,457

 
14,465

 
667

 

 
27,589

Industrials
11,717

 
6,400

 
540

 

 
18,657

Power generation & Transmission
6,359

 
720

 
1,556

 

 
8,635

Other Process Industries
5,407

 
1,790

 
5

 

 
7,202

Infrastructure, Research & Engineering
2,180

 
2,519

 
500

 

 
5,199

Other
4,185

 
4,454

 
2,353

 
(2,605
)
 
8,387

Total
$
145,595

 
$
38,456

 
$
6,184

 
$
(2,605
)
 
$
187,630


Revenue per key geographic location was as follows:
Three months ended March 31, 2019
Services
 
International
 
Products
 
Corp/Elim
 
Total
United States
$
113,136

 
$
276

 
$
1,970

 
$
(1,282
)
 
$
114,100

Other Americas
26,708

 
2,229

 
66

 
(56
)
 
28,947

Europe
428

 
31,540

 
421

 
(763
)
 
31,626

Asia-Pacific
26

 
1,117

 
975

 
(4
)
 
2,114

Total
$
140,298

 
$
35,162

 
$
3,432

 
$
(2,105
)
 
$
176,787



Three months ended March 31, 2018
Services
 
International
 
Products
 
Corp/Elim
 
Total
United States
$
123,562

 
$
267

 
$
3,258

 
$
(1,097
)
 
$
125,990

Other Americas
21,783

 
1,902

 
81

 
(253
)
 
23,513

Europe
155

 
34,219

 
1,120

 
(1,226
)
 
34,268

Asia-Pacific
95

 
2,068

 
1,725

 
(29
)
 
3,859

Total
$
145,595

 
$
38,456

 
$
6,184

 
$
(2,605
)
 
$
187,630


Contract Balances

9

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the condensed consolidated balance sheet. Amounts are generally billed as work progresses in accordance with agreed-upon contractual terms, generally at periodic intervals (e.g., weekly, bi-weekly or monthly). Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities. These assets and liabilities are aggregated on an individual contract basis and reported on the condensed consolidated balance sheet at the end of each reporting period within accrued expenses and other current liabilities.
Revenue recognized in 2019, that was included in the contract liability balance at the beginning of the year was $1.8 million. Changes in the contract asset and liability balances during the quarter ended March 31, 2019, were not materially impacted by any other factors. The Company has elected to utilize a practical expedient to expense incremental costs incurred related to obtaining a contract. The Company’s expenses are expected to be amortized over a period less than one year.

3.                                      Share-Based Compensation
 
The Company has share-based incentive awards outstanding to its eligible employees and non-employee directors under three equity incentive plans: (i) the 2007 Stock Option Plan (the "2007 Plan"), (ii) the 2009 Long-Term Incentive Plan (the "2009 Plan") and (iii) the 2016 Long-Term Incentive Plan (the "2016 Plan"). No further awards may be granted under the 2007 and 2009 Plans, although awards granted under the 2007 and 2009 Plans remain outstanding in accordance with their terms. Awards granted under the 2016 Plan may be in the form of stock options, restricted stock units and other forms of share-based incentives, including performance restricted stock units, stock appreciation rights and deferred stock rights.
 
Stock Options
 
For the three months ended March 31, 2019 and 2018, the Company did not recognize any share-based compensation expense related to stock option awards, as all outstanding stock options awards are fully vested.

No unrecognized compensation costs remained related to stock option awards as of March 31, 2019.
 
No stock options were granted during the three months ended March 31, 2019 and March 31, 2018.

The following table sets forth a summary of the stock option activity, weighted average exercise prices and options outstanding as of March 31, 2019 and March 31, 2018:
 
For the three months ended March 31,
 
2019
 
2018
 
Common
Stock
Options
 
Weighted
Average
Exercise
Price
 
Common
Stock
Options
 
Weighted
Average
Exercise
Price
Outstanding at beginning of period:
2,105

 
$
13.47

 
2,130

 
$
13.43

Granted

 
$

 

 
$

Exercised
(4
)
 
$
10.00

 

 
$

Expired or forfeited

 
$

 

 
$

Outstanding at end of period:
2,101

 
$
13.47

 
2,130

 
$
13.43

 
Restricted Stock Unit Awards
 
For the three months ended March 31, 2019 and March 31, 2018, the Company recognized share-based compensation expense related to restricted stock unit awards of $0.9 million and $0.8 million, respectively. As of March 31, 2019, there was $10.0 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which are expected to be recognized over a remaining weighted average period of 2.9 years.

A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows: (awards in thousands, fair value in millions)

10

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)



 
For the three months ended March 31,
 
2019
 
2018
Restricted stock awards vested
50

 
4

Fair value of awards vested
$
0.7

 
$
0.1


Upon vesting, restricted stock units are generally net share-settled to cover the required minimum withholding tax and the remaining amount is converted into an equivalent number of shares of common stock.

A summary of the fully-vested common stock the Company issued to its five non-employee directors, in connection with its non-employee director compensation plan, is as follows: (awards in thousands, fair value in millions)

 
For the three months ended March 31,
 
2019
 
2018
Awards issued
14

 
10

Grant date fair value of awards issued
$
0.2

 
$
0.2


A summary of the Company's outstanding, non-vested restricted share units is as follows:

 
For the three months ended March 31,
 
2019
 
2018
 
Units
 
Weighted
Average
Grant-Date
Fair Value
 
Units
 
Weighted
Average
Grant-Date
Fair Value
Outstanding at beginning of period:
443

 
$
20.55

 
532

 
$
21.05

Granted
334

 
$
14.04

 
211

 
$
19.20

Released
(50
)
 
$
19.21

 
(4
)
 
$
24.08

Forfeited
(8
)
 
$
20.78

 
(16
)
 
$
19.82

Outstanding at end of period:
719

 
$
17.61

 
723

 
$
20.52


 
Performance Restricted Stock Units

The Company maintains Performance Restricted Stock Units (PRSUs) that have been granted to select executives and senior officers whose ultimate payout is based on the Company’s performance over a one-year period based on three metrics, as defined: (1) Operating Income, (2) Adjusted EBITDAS and (3) Revenue. There also is a discretionary portion of the PRSUs based on individual performance, at the discretion of the Compensation Committee (Discretionary PRSUs). PRSUs and Discretionary PRSUs generally vest ratably on each of the first four anniversary dates upon completion of the performance period, for a total requisite service period of up to five years and have no dividend rights.

PRSUs are equity-classified and compensation costs are initially measured using the fair value of the underlying stock at the date of grant, assuming that the target performance conditions will be achieved. Compensation costs related to the PRSUs are subsequently adjusted for changes in the expected outcomes of the performance conditions.

11

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)



Discretionary PRSUs are liability-classified and adjusted to fair value (with a corresponding adjustment to compensation expense) based upon the targeted number of shares to be awarded and the fair value of the underlying stock each reporting period until approved by the Compensation Committee, at which point they are classified as equity.

A summary of the Company's PRSU activity is as follows:

 
For the three months ended March 31,
 
2019
 
2018
 
Units
 
Weighted
Average
Grant-Date
Fair Value
 
Units
 
Weighted
Average
Grant-Date
Fair Value
Outstanding at beginning of period:
277

 
$
17.80

 
278

 
$
17.00

Granted

 
$

 
123

 
$
19.46

Performance condition adjustments
(3
)
 
$
18.46

 
5

 
$
18.36

Released
(17
)
 
$
20.22

 

 
$

Forfeited

 
$

 
(12
)
 
$
16.16

Outstanding at end of period:
257

 
$
17.35

 
394

 
$
17.71



During the three months ended March 31, 2019 and March 31, 2018, the Compensation Committee approved the final calculation of the award metrics for calendar year 2018 and calendar year 2017, respectively. As a result, the calendar year 2018 PRSUs decreased by approximately 3,000 units and the calendar year 2017 PRSUs increased by approximately 5,000 units.

For the three months ended March 31, 2019 and March 31, 2018, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.2 million and $0.1 million, respectively. At March 31, 2019, there was $1.5 million of total unrecognized compensation costs related to approximately 257,000 non-vested PRSUs, which are expected to be recognized over a remaining weighted average period of 1.8 years.
The Company is still in the process of reviewing the key terms and metrics related to the long-term executive compensation plan for calendar year 2019 PRSUs. As such, no shares have been granted, as noted in the table above. The Company expects these awards to be finalized and approved by its Compensation Committee during the second quarter of 2019.

4.                                      Earnings per Share
 
Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, and (2) the dilutive effect of assumed conversion of equity awards using the treasury stock method. With respect to the number of weighted-average shares outstanding (denominator), diluted shares reflects: (i) the exercise of options to acquire common stock to the extent that the options’ exercise prices are less than the average market price of common shares during the period and (ii) the pro forma vesting of restricted stock units.
 
The following table sets forth the computations of basic and diluted earnings per share:
 

12

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


 
Three months ended
 
March 31, 2019
 
March 31, 2018
 
 
 
 
Basic earnings per share:
 

 
 

Numerator:
 

 
 

Net (loss) income attributable to Mistras Group, Inc.
$
(5,293
)
 
$
2,907

Denominator:
 

 
 

Weighted average common shares outstanding
28,574

 
28,304

Basic earnings per share
$
(0.19
)
 
$
0.10

 
 
 
 
Diluted earnings per share:
 

 
 

Numerator:
 

 
 

Net (loss) income attributable to Mistras Group, Inc.
$
(5,293
)
 
$
2,907

Denominator:
 

 
 

Weighted average common shares outstanding
28,574

 
28,304

Dilutive effect of stock options outstanding
n/a

(1) 
745

Dilutive effect of restricted stock units outstanding
n/a

(2) 
313

 
28,574

 
29,362

Diluted earnings per share
$
(0.19
)
 
$
0.10


(1) - For the three months ended March 31, 2019, 212 shares were excluded from the calculation of diluted EPS due to the net loss for the period.

(2) - For the three months ended March 31, 2019, 168 shares were excluded from the calculation of diluted EPS due to the net loss for the period.



13

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


5.                                      Acquisitions

During the three months ended March 31, 2019 and March 31, 2018, the Company did not complete any acquisitions.

The Company accounts for acquisitions in accordance with the acquisition method of accounting for business combinations. The assets and liabilities of one of the businesses acquired in 2018 were included in the Company's condensed consolidated balance sheet based upon its estimated fair value on the date of acquisition as determined in a preliminary purchase price allocation, using available information and making assumptions management believed were reasonable. The Company is still in the process of completing its valuation of the assets, both tangible and intangible, and liabilities acquired for the acquisition completed during 2018. The results of operations for this acquisition have been included in the Services segment's results from the date of acquisition. Goodwill of $83.2 million primarily relates to expected synergies and assembled workforce, and is not deductible for tax purposes. Other intangible assets, primarily related to technology, customer relationships and covenants not to compete, were $59.6 million.

Acquisition-Related Expense 
 
In the course of its acquisition activities, the Company incurs costs in connection with due diligence, professional fees, and other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a quarterly basis. These amounts are recorded as acquisition-related expense (benefit), net, on the condensed consolidated statements of income and were as follows for the three months ended March 31, 2019 and 2018:

 
Three months ended March 31,
 
2019
 
2018
Due diligence, professional fees and other transaction costs
$
148

 
$
39

Adjustments to fair value of contingent consideration liabilities
305

 
(1,033
)
Acquisition-related expense (benefit), net
$
453

 
$
(994
)

The Company's contingent consideration liabilities are recorded on the balance sheet in accrued expenses and other liabilities.


6.                                      Accounts Receivable, net
 
Accounts receivable consisted of the following:
 
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Trade accounts receivable
$
148,070

 
$
152,511

Allowance for doubtful accounts
(9,565
)
 
(4,187
)
Accounts receivable, net
$
138,505

 
$
148,324

 
The Company had $25.9 million and $16.1 million of unbilled revenues accrued as of March 31, 2019 and December 31, 2018, respectively and such amounts are included within the trade accounts receivable balances above. Unbilled revenues are generally billed in the subsequent quarter to their revenue recognition.

In the fourth quarter of 2018, the Company recorded a reserve of $0.7 million for a renewable energy industry customer of the Company’s Services Division, based in part on the available information about the financial difficulties of the customer.  This customer filed for a voluntary insolvency proceeding on April 9, 2019 at which time payments under the previously agreed upon payment plan ceased. As a result, during the first quarter of 2019, the Company recorded an additional charge of $5.7 million to fully reserve for the amount of the exposure related to this customer.  During the first quarter of 2019 the Company

14

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


also recorded a net $0.2 million recovery of an unrelated bad debt provision which the Company had initially recorded as a charge during the second quarter of 2017.


7.                                      Property, Plant and Equipment, net
 
Property, plant and equipment consisted of the following:
 
 
Useful Life
(Years)
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
 
Land
 
 
$
2,671

 
$
2,680

Buildings and improvements
30-40
 
24,200

 
24,338

Office furniture and equipment
5-8
 
16,427

 
16,170

Machinery and equipment
5-7
 
212,114

 
208,245

 
 
 
255,412

 
251,433

Accumulated depreciation and amortization
 
 
(161,496
)
 
(157,538
)
Property, plant and equipment, net
 
 
$
93,916

 
$
93,895

 
Depreciation expense for both the three months ended March 31, 2019 and March 31, 2018 was approximately $6.1 million.

8.     Goodwill
 
Changes in the carrying amount of goodwill by segment is shown below:
 
Services
 
International
 
Products and Systems
 
Total
Balance at December 31, 2018
$
243,476

 
$
35,783

 
$

 
$
279,259

Goodwill acquired during the period

 

 

 

Adjustments to preliminary purchase price allocations

 

 

 

Foreign currency translation
2,020

 
(583
)
 

 
1,437

Balance at March 31, 2019
$
245,496

 
$
35,200

 
$

 
$
280,696

 
The Company reviews goodwill for impairment on a reporting unit basis on October 1 of each year and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. As of March 31, 2019, the Company did not identify any changes in circumstances that would indicate the carrying value of goodwill may not be recoverable.

The Company's cumulative goodwill impairment as of March 31, 2019 and December 31, 2018 was $23.1 million, of which $13.2 million related to the Products and Systems segment and $9.9 million related to the International segment.


15

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


9.                                      Intangible Assets
 
The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows:
 
 
 
 
March 31, 2019
 
December 31, 2018
 
Useful Life
(Years)
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
5-14
 
$
112,544

 
$
(62,631
)
 
$
49,913

 
$
112,624

 
$
(60,993
)
 
$
51,631

Software/Technology
3-15
 
68,391

 
(14,556
)
 
53,835

 
67,240

 
(13,319
)
 
53,921

Covenants not to compete
2-5
 
12,632

 
(11,055
)
 
1,577

 
12,593

 
(10,825
)
 
1,768

Other
2-12
 
10,344

 
(6,614
)
 
3,730

 
10,317

 
(6,242
)
 
4,075

Total
 
 
$
203,911

 
$
(94,856
)
 
$
109,055

 
$
202,774

 
$
(91,379
)
 
$
111,395

 
Amortization expense for the three months ended March 31, 2019 and March 31, 2018 was approximately $3.6 million and $2.5 million, respectively.

10.                                      Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities consisted of the following:
 
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Accrued salaries, wages and related employee benefits
$
28,688

 
$
29,959

Contingent consideration, current portion
1,997

 
1,687

Accrued workers’ compensation and health benefits
4,750

 
5,086

Deferred revenue
4,963

 
5,046

Pension accrual
4,913

 
5,585

Right-of-use liability - operating
8,700

 

Other accrued expenses
25,630

 
26,532

Total accrued expenses and other current liabilities
$
79,641

 
$
73,895

 
11.                               Long-Term Debt
 
Long-term debt consisted of the following:
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Senior credit facility
$
180,475

 
$
181,656

Senior secured term loan, net of debt issuance costs of $0.1 million
98,652

 
99,897

Notes payable
70

 
68

Other
8,509

 
8,999

Total debt
287,706

 
290,620

Less: Current portion
(6,787
)
 
(6,833
)
Long-term debt, net of current portion
$
280,919

 
$
283,787

 
Senior Credit Facility
 
The Company's revolving credit agreement with its banking group ("Credit Agreement") provides the Company with a $300 million revolving line of credit, which, under certain circumstances, can be increased to $450 million with the approval of the banks. In addition, the Credit Agreement provided the Company with a $100 million senior secured term loan A facility. Both

16

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


the revolving line of credit and the term loan A facility under the Credit Agreement have a maturity date of December 12, 2023. The Company may borrow up to $100 million in non-U.S. Dollar currencies and use up to $20 million of the credit limit for the issuance of letters of credit. As of March 31, 2019, the Company had borrowings of $279.2 million and a total of $5.4 million of letters of credit outstanding under the Credit Agreement. The Company has capitalized costs associated with debt modifications of $1.0 million as of March 31, 2019, which amount is included in other long-term assets within the accompanying condensed consolidated balance sheet.
 
Loans under the Credit Agreement bear interest at the London Interbank Offered Rate ("LIBOR") plus an applicable LIBOR margin ranging from 1% to 2%, or a base rate less a margin of 1.25% to 0.375%, at the option of the Company, based upon the Company’s Funded Debt Leverage Ratio. Funded Debt Leverage Ratio is generally the ratio of (1) all outstanding indebtedness for borrowed money and other interest-bearing indebtedness as of the date of determination to (2) EBITDA (which is (a) net income, less (b) income (or plus loss) from discontinued operations and extraordinary items, plus (c) income tax expenses, plus (d) interest expense, plus (e) depreciation, depletion, and amortization (including non-cash loss on retirement of assets), plus (f) stock compensation expense, less (g) cash expense related to stock compensation, plus (h) certain amounts of EBITDA of acquired business for the prior twelve months, plus (i) certain expenses related to the closing of the Credit Agreement, plus (j) non-cash expenses which do not (in the current or any future period) represent a cash item (excluding non-cash gains which increase net income), plus (k) non-recurring charges (not to exceed $10.0 million in the four consecutive quarters immediately preceding the date of determination) for items such as severance, lease termination charges, asset write-offs and litigation settlements paid, and multi-employer pension plan withdrawal liabilities, all determined for the period of four consecutive fiscal quarters immediately preceding the date of determination of EBITDA. The Company has the benefit of the lowest margin if its Funded Debt Leverage Ratio is equal to or less than 1.0 to 1, and the margin increases as the ratio increases, to the maximum margin if the ratio is greater than 3.25 to 1. The Company will also bear additional costs for market disruption, regulatory changes effecting the lenders’ funding costs, and default pricing of an additional 2% interest rate margin on any amounts not paid when due. Amounts borrowed under the Credit Agreement are secured by liens on substantially all of the assets of the Company and is guaranteed by some of our subsidiaries.
 
The Credit Agreement contains financial covenants requiring that the Company maintain a Funded Debt Leverage Ratio of no greater than 4.25 to 1 through December 31, 2018, reducing to a maximum permitted ratio of 4.0 to 1 as of March 31, 2019 to September 30, 2019, a maximum permitted ratio of 3.75 to 1 as of December 31, 2019 and a maximum permitted ratio of 3.50 to 1 as of March 31, 2020 and all quarterly periods thereafter, and a Fixed Charge Coverage Ratio of at least 1.25 to 1. Fixed Charge Coverage Ratio means the ratio, as of any date of determination, of (a) (i) EBITDA for the 12 month period immediately preceding the date of determination, taken together as one accounting period, less (ii) the aggregate amount of all capital expenditures made during the period, less (iii) taxes paid in cash during the period, less (iv) Restricted Payments (as defined in the Credit Agreement) paid in cash during the period, -to- (b) the sum of (i) all interest, premium payments, debt discount, fees, charges and related expenses of us and our subsidiaries in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case, to the extent treated as interest in accordance with U.S. generally accepted accounting principles ("GAAP") and to the extent paid in cash during the period, (ii) the aggregate principal amount of all redemptions or similar acquisitions for value of outstanding debt for borrowed money or regularly scheduled principal payments made during the period, but excluding any such payments to the extent refinanced through the incurrence of additional Indebtedness otherwise expressly permitted under the Credit Agreement, and (iii) payments made during the period under all leases that have been or should be, in accordance with GAAP as in effect for the Company's 2017 audited financial statement, recorded as capitalized leases. Beginning in 2020, the Company can elect to increase the maximum Funded Debt Leverage Ratio to 4.0 to 1 for four fiscal quarters immediately following the fiscal quarter in which the Company acquires another business, with the maximum permitted ratio reducing back to 3.5 to 1 in the fifth fiscal quarter following such acquisition. The Company can make this election twice during the term of the Credit Agreement.

The Credit Agreement also limits the Company’s ability to, among other things, create liens, make investments, incur more indebtedness, merge or consolidate, make dispositions of property, pay dividends and make distributions to stockholders or repurchase our stock, enter into a new line of business, enter into transactions with affiliates and enter into burdensome agreements. The Credit Agreement does not limit the Company’s ability to acquire other businesses or companies except that the acquired business or company must be in the Company's line of business, the Company must be in compliance with the financial covenants on a pro forma basis after taking into account the acquisition, and, if the acquired business is a separate subsidiary, in certain circumstances the lenders will receive the benefit of a guaranty of the subsidiary and liens on its assets and a pledge of its stock.
 

17

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


As of March 31, 2019, the Company was in compliance with its Fixed Charge Coverage Ratio, but was not in compliance with its Funded Debt Leverage Ratio and obtained a waiver for such non-compliance.

 
Notes Payable and Other
 
In connection with certain of its acquisitions, the Company issued subordinated notes payable to the sellers. The maturity of the notes remain outstanding through June 30, 2019 and bear interest at the prime rate for the Bank of Canada, currently 3.95% as of March 31, 2019. Interest expense is recorded in the condensed consolidated statements of income.

The Company's other debt includes local bank financing provided at the local subsidiary levels used to support working capital requirements and fund capital expenditures. At March 31, 2019, there was approximately $8.5 million outstanding, payable at various times from 2019 to 2029. Monthly payments range from $1 thousand to $17 thousand. Interest rates range from 0.4% to 6.2%.

12.                               Fair Value Measurements
 
The Company performs fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Financial instruments measured at fair value on a recurring basis

The fair value of contingent consideration liabilities was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820. The significant inputs in the Level 3 measurement not supported by market activity include the probability assessments of expected future cash flows related to the acquisitions, appropriately discounted considering the uncertainties associated with the obligation, and as calculated in accordance with the terms of the applicable acquisition agreements.

The following table represents the changes in the fair value of Level 3 contingent consideration:
 
 
 
Three months ended March 31,
 
 
2019
 
2018
Beginning balance
 
$
2,365

 
$
5,508

Acquisitions
 

 

Payments
 

 
(1,503
)
Accretion of liability
 
44

 
65

Revaluation
 
261

 
(1,098
)
Foreign currency translation
 
29

 
(63
)
Ending balance
 
$
2,699

 
$
2,909

 
Financial instruments not measured at fair value on a recurring basis
 
The Company has evaluated current market conditions and borrower credit quality and has determined that the carrying value of its long-term debt approximates fair value. The fair value of the Company’s notes payable and capital lease obligations approximates their carrying amounts based on anticipated interest rates which management believes would currently be available to the Company for similar issuances of debt.

 

18

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


13. Leases

The Company leases certain office and operating facilities, machinery, equipment, and vehicles. Concurrent with the adoption of ASC 842, the Company recognized a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term for each lease agreement. The Company has elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less and will continue to recognize lease expense for these leases on a straight-line basis over the lease term. The Company has leases with both lease components and non-lease components, such as common area maintenance, utilities, or other repairs and maintenance. For all asset classes, the Company decided to utilize the practical expedient to include both fixed lease components and fixed non-lease components in calculating the ROU asset and lease liability. The Company identified variable lease payments, such as maintenance payments based on actual activities performed or costs incurred, at lease commencement by assessing the nature of the payment provisions, including whether the payments are subject to a minimum charge. Many of our leases include one or more options to renew. When it is reasonably certain that we will exercise the option, we include the impact of the option in the lease term for purposes of determining future lease payments. As the Company is unable to determine the discount rate implicit in its lease agreements, the Company uses its incremental borrowing rate on the commencement date to calculate the present value of future payments.
The Company’s Condensed Consolidated Balance Sheet includes the following related to operating leases:
Leases
Classification
As of March 31, 2019
Assets
 
 
Right-of-use assets
Other Assets
$
36,289

 
 
 
Liabilities
 
 
Right-of use liability - current
Accrued and other current liabilities
$
8,700

Right-of-use liability - long term
Other liabilities
28,340

Total right-of-use liabilities
 
$
37,040


Included within the balance of operating leases is a lease for the Company’s headquarters which is with a related party. The right-of use liability for this facility is approximately $5.0 million as of March 31, 2019 and total rent payments made during the quarter ended March 31, 2019 were approximately $0.2 million.
As of March 31, 2019, the total right-of-use assets attributable to finance leases is approximately $14.9 million, which is classified within Property, Plant, & Equipment on the accompanying condensed consolidated balance sheet.
The components of lease costs were as follows:
 
Classification
For the three months ended March 31, 2019
Finance lease expense
 
 
      Amortization of ROU assets
Depreciation and amortization
$
1,292

      Interest on lease liabilities
Interest expense
197

Operating lease expense
Costs of goods sold or Selling, General & Administrative expenses
3,023

Short-term lease expense
Costs of goods sold or Selling, General & Administrative expenses
133

Variable lease expense
Costs of goods sold or Selling, General & Administrative expenses
272

Total
 
$
4,917


Other information related to leases was as follows:

19

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


 
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities for finance leases
 
      Finance - financing cash flows
$
1,249

      Finance - operating cash flows
$
197

     Operating - operating cash flows
$
3,079

ROU assets obtained in the exchange for lease liabilities
 
      Finance leases
$
1,086

      Operating leases
$
1,348

Weighted average remaining lease term (in years)
 
      Finance leases
5.8

      Operating leases
6.0

Weighted average discount rate
 
      Finance leases
6.45
%
      Operating leases
5.97
%

Maturities of lease liabilities as of March 31, 2019 were as follows:
 
Finance
Operating
Remaining of 2019
$
4,916

$
8,212

2020
3,694

9,162

2021
2,415

6,666

2022
1,546

5,064

2023
637

4,526

Thereafter
821

11,003

Total
14,029

44,633

Less: Present value discount
(1,219
)
(7,593
)
Lease liability
$
12,810

$
37,040


Pursuant to the Company’s adoption of the new lease accounting guidance using a modified retrospective transition approach, as permitted, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. As previously disclosed in its 2018 Annual Report, the following table presents the Company’s future minimum operating lease commitments as of December 31, 2018:
2019
$
10,939

2020
8,764

2021
6,327

2022
4,826

2023
4,239

Thereafter
10,667

Total
$
45,762





20

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)




14.                               Commitments and Contingencies
 
Legal Proceedings and Government Investigations
 
The Company is subject to periodic lawsuits, investigations and claims that arise in the ordinary course of business. The Company cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against it. Except possibly for certain of the matters described below, the Company does not believe that any currently pending legal proceeding to which the Company is a party will have a material adverse effect on its business, results of operations, cash flows or financial condition. The costs of defense and amounts that may be recovered against the Company may be covered by insurance for certain matters.

Litigation and Commercial Claims
 
The Company’s subsidiary in France has been involved in a dispute with a former owner of a business purchased by the Company’s French subsidiary. The former owner received a judgment in his favor in the amount of $0.4 million for payment of the contingent consideration portion of the purchase price for the business. The Company recorded an accrual for this judgment during 2016. The Company's subsidiary appealed the judgment and the entire judgment was overturned on appeal. The appeal process was completed in July 2018 in the Company's favor, and accordingly, the Company reversed the accrual as of June 30, 2018.

The Company was a defendant in a lawsuit, Triumph Aerostructures, LLC d/b/a Triumph Aerostructures-Vought Aircraft Division v. Mistras Group, Inc., pending in Texas State district court, 193rd Judicial District, Dallas County, Texas, filed September 2016. The plaintiff alleged that in 2014 Mistras delivered a defective Ultrasonic inspection system and alleged damages of approximately $2.3 million, the amount it paid for the system. In January 2018, the Company agreed to settle this matter for a payment of $1.6 million and Mistras subsequently obtained ownership of the underlying ultrasonic inspection components. A charge for $1.6 million was recorded in 2017 and payment was made in February 2018.

A Company vehicle was involved in an accident in which individuals were injured, property was damaged, and businesses alleged impacted by the accident have claimed economic losses. One lawsuit has been filed by one of the injured individuals in the U.S. District Court for the District of Colorado, McAllister v. Mistras Group, Inc. The Company has insurance for these types of matters and believes its insurance is sufficient to cover all claims resulting from this accident. However, the possibility exists that the insurance ultimately will not be sufficient to satisfy all claims or insurance coverage is denied, in which case the Company would be responsible for the amount of claims in excess of insurance coverage.

Government Investigations

In May 2015, the Company received a notice from the U.S. Environmental Protection Agency (“EPA”) that it performed a preliminary assessment at a leased facility the Company operates in Cudahy, California. Based upon the preliminary assessment, the EPA is conducting an investigation of the site, which includes taking groundwater and soil samples. The purpose of the investigation is to determine whether any hazardous materials were released from the facility. The Company has been informed that certain hazardous materials and pollutants have been found in the ground water in the general vicinity of the site and the EPA is attempting to ascertain the origination or source of these materials and pollutants. Given the historic industrial use of the site, the EPA determined that the site of the Cudahy facility should be examined, along with numerous other sites in the vicinity. In addition, in 2018, the California Department of Toxic Substances Control notified the owner of the property that it will be performing an additional investigation at the property. At this time, the Company is unable to determine whether it has any liability in connection with this matter and if so, the amount or range of any such liability, and accordingly, has not established any accruals for this matter.

Pension Related Contingencies

The workforce of certain of the Company’s subsidiaries are unionized and the terms of employment for these workers are governed by collective bargaining agreements, or CBAs.  Under these CBAs, the Company’s subsidiaries are required to contribute to the national pension funds for the unions representing these employees, which are multi-employer pension plans.

21

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


The Company was notified that a significant project was awarded to another contractor in January 2018, and as a result, one of the Company’s subsidiaries experienced a significant reduction in the number of its employees covered by one of the CBAs. Under certain circumstances, such a reduction in the number of employees participating in multi-employer pension plans pursuant to this CBA could result in a complete or partial withdrawal liability to these multi-employer pension plans under the Employee Retirement Income Security Act of 1974 ("ERISA"). Management has explored options to retain a level of union work that would avoid withdrawal liability to the pension plans, but concluded during the third quarter of 2018 that the Company's subsidiaries probably would not obtain sufficient union work to avoid withdrawal liability.  Therefore, the Company determined that it is probable that its subsidiary will incur a withdrawal liability related to these multi-employer pension plans. Accordingly, the Company recorded a charge of $5.9 million during the third quarter of 2018 and $0.5 million during the three months ended March 31, 2019 for this potential withdrawal liability. The balance of the estimated total amount of this potential liability as of March 31, 2019 is approximately $4.9 million, which is net of $1.5 million of payments made to one of the pension plans.

Severance and labor disputes

During 2018, the Company recorded approximately $1.2 million in charges related to labor claims for its Brazilian subsidiary, which are included within Selling, General and Administrative expenses. These claims related to employees in a company acquired by the Brazilian subsidiary in a prior period. The Company believes it is entitled to indemnification from the sellers of the acquired company for most of these charges, but has not recorded the expected recovery of indemnification for these labor claims as the amount and timing of collection is uncertain as of March 31, 2019.

The Company’s German subsidiary provides employees to customers under temporary staff leasing arrangements. In April 2017, the German Labor Lease Act was passed in Germany limiting the duration of temporary workers to eighteen months, or longer as subsequently agreed with by a customer appropriate authority.  Since the passing of the German Labor Lease Act, the Company explored selling its staff leasing services and concluded during the third quarter of 2018 that a sale would not be probable. As a result, the Company decided that it will not renew several of these leasing services contracts when they expire beginning in 2019. Due to the cap on the length of service allowed under the German Labor Lease Act, employees will have to be transitioned off the customer contracts. It is expected that the German subsidiary then will either terminate these employees, creating a severance obligation to the terminated employees, or transition them to the Company's other customers. As of March 31, 2019, the Company estimated approximately $1.6 million in severance payment obligations, which takes into account the Company's estimate with respect to the employees that would be transitioned to the German subsidiaries' other customers.

Acquisition and disposition related contingencies
 
The Company is liable for contingent consideration in connection with certain of its acquisitions. As of March 31, 2019, total potential acquisition-related contingent consideration ranged from zero to approximately $5.8 million and would be payable upon the achievement of specific performance metrics by certain of the acquired companies over the next 1.3 years of operations. See Note 5 - Acquisitions to these condensed consolidated financial statements for further discussion of the Company’s acquisitions.

During the third quarter of 2018, the Company sold a subsidiary in the Products and Systems segment. As part of the sale, the Company entered into a three-year agreement to purchase products from the buyer, with a cumulative commitment of $2.3 million, of which $2.0 million is remaining as of March 31, 2019. The agreement is based on third party pricing and the Company's planned purchase requirements over the next three years to meet the minimum contractual purchases.
 
15.                               Segment Disclosure
 
The Company’s three operating segments are:
 
Services. This segment provides asset protection solutions predominantly in North America, with the largest concentration in the United States, followed by Canada, consisting primarily of NDT and inspection and engineering services that are used to evaluate the safety, structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components.
 

22

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


International. This segment 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. This segment designs, manufactures, sells, installs and services the Company’s asset protection products and systems, including equipment and instrumentation, predominantly in the United States.
 
Costs incurred for general corporate services, including finance, legal, and certain other costs that are provided to the segments are reported within Corporate and eliminations. Sales to the International segment from the Products and Systems segment and subsequent sales by the International segment of the same items are recorded and reflected in the operating performance of both segments. Additionally, engineering charges and royalty fees charged to the Services and International segments by the Products and Systems segment are reflected in the operating performance of each segment. All such intersegment transactions are eliminated in the Company’s consolidated financial reporting.
 
Selected consolidated financial information by segment for the periods shown was as follows: (intercompany transactions are eliminated in Corporate and eliminations)
 
 
Three months ended
 
March 31, 2019
 
March 31, 2018
Revenues
 

 
 

Services
$
140,298

 
$
145,595

International
35,162

 
38,456

Products and Systems
3,432

 
6,184

Corporate and eliminations
(2,105
)
 
(2,605
)
 
$
176,787

 
$
187,630

 
 
Three months ended
 
March 31, 2019
 
March 31, 2018
Gross profit
 

 
 

Services
$
37,365

 
$
34,710

International
10,360

 
10,707

Products and Systems
1,239

 
2,890

Corporate and eliminations
(90
)
 
(162
)
 
$
48,874

 
$
48,145

 
 
Three months ended
 
March 31, 2019
 
March 31, 2018
Income (loss) from operations
 

 
 

Services
$
4,053

 
$
12,275

International
(215
)
 
920

Products and Systems
(1,328
)
 
273

Corporate and eliminations
(6,906
)
 
(7,069
)
 
$
(4,396
)
 
$
6,399

 
Income (loss) from operations by operating segment includes intercompany transactions, which are eliminated in Corporate and eliminations.
 

23

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)


 
Three months ended
 
March 31, 2019
 
March 31, 2018
Depreciation and amortization
 

 
 

Services
$
7,268

 
$
5,970

International
2,089

 
2,281

Products and Systems
290

 
362

Corporate and eliminations
21

 
35

 
$
9,668

 
$
8,648

 
 
March 31, 2019
 
December 31, 2018
Intangible assets, net
 

 
 

Services
$
96,893

 
$
98,362

International
10,437

 
11,143

Products and Systems
1,317

 
1,438

Corporate and eliminations
408

 
452

 
$
109,055

 
$
111,395

 

 
March 31, 2019
 
December 31, 2018
Total assets
 

 
 

Services
$
536,346

 
$
523,506

International
153,077

 
146,535

Products and Systems
12,832

 
12,264

Corporate and eliminations
23,182

 
11,732

 
$
725,437

 
$
694,037

 
Revenues by geographic area for the three months ended March 31, 2019 and 2018, respectively, were as follows:
 
 
Three months ended
 
March 31, 2019
 
March 31, 2018
Revenues
 

 
 

United States
$
114,100

 
$
125,990

Other Americas
28,947

 
23,513

Europe
31,626

 
34,268

Asia-Pacific
2,114

 
3,859

 
$
176,787

 
$
187,630



24

Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)



16. Repurchase of Common Stock

The Company's Board of Directors approved a $50 million stock repurchase plan in 2015. The Company retired all its repurchased shares during the fourth quarter of 2017. There were no repurchases of common stock during the three months ended March 31, 2019, and the Board of Directors approved the termination of the stock repurchase plan on April 1, 2019.

ITEM 2.                                                Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following Management’s Discussion and Analysis (“MD&A”) includes a narrative explanation and analysis of our results of operations and financial condition for the three months ended March 31, 2019 and March 31, 2018. The MD&A should be read together with our 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, 2018, filed March 15, 2019 (“2018 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 disclosure in the following areas:
 
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 2018 Annual Report as well as those discussed in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (“SEC”).
 
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 safety, structural integrity and reliability of critical energy, industrial and public infrastructure, and commercial aerospace components.

Our asset protections are intended to help maximize safety and uptime of our customers' assets and facilities. 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. We deliver value through a comprehensive “OneSource” portfolio of customized solutions, utilizing a proven systematic method that creates a closed-loop lifecycle for addressing continuous asset protection and improvement.

Our specialized asset protection solutions include:

• Field Inspections

25

Table of Contents

• Consulting
• Maintenance
• Data Management
• Access
• Monitoring
• Laboratory Quality Assurance/Control (QA/QC)
• Equipment

Our OneSource model emphasizes the integration of these solutions to service our customers throughout their assets’ lifetimes. Under this business model, many customers outsource their inspection and other asset protection needs to us on a “run-and maintain” basis to ensure the continued safety and structural and operational integrity of their assets.

We have established long-term relationships as a critical solutions provider to many of the leading companies with assetintensive infrastructure in our target markets. These markets include:

• Oil & Gas (Downstream, Midstream, Upstream and Petrochemical)
• Aerospace & Defense
• Industrial
• Power Generation and Transmission
• Public Infrastructure, Research and Engineering
• Process Industries

Asset protection plays a crucial role in assuring the integrity and reliability of critical infrastructure. As an asset protection solutions provider, MISTRAS seeks to maximize the uptime and safety of critical infrastructure, by helping customers to detect, locate, mitigate and prevent damages such as corrosion, cracks, leaks, manufacturing flaws and other concerns to operating and structural integrity. In addition to these core utilities, the storage and analysis of collected inspection and mechanical integrity data is also a key aspect of asset protection.

NDT has historically been a prominent solution in the asset protection industry due to its capacity to detect defects without compromising the integrity of the tested materials or equipment. The supply of NDT inspection services has traditionally come from many small vendors, who provide services to a small geographic region. A trend has emerged, however, for customers to engage a select few vendors capable of providing a wider spectrum of asset protection solutions for global infrastructure, in addition to an increased demand for advanced non-destructive testing (ANDT) solutions and data acquisition software, both of which require a highly-trained workforce.

Due to these trends, we believe those vendors offering integrated solutions, scalable operations skilled personnel and a global footprint will have a distinct competitive advantage. Moreover, we believe that vendors that are able to effectively deliver both advanced solutions and data analytics, by virtue of their access to customers’ data, create a significant barrier to entry for competitors, leading to the opportunity to further create significant recurring revenues.

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 and inspection, mechanical and engineering services that are used to evaluate the safety, structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components.

International offers services, products and systems similar to those of our Services and Products and Systems 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 our asset protection products and systems, including equipment and instrumentation, predominantly in the United States.
 
Most of our revenues are generated by deploying technicians at our customers' locations. However, the majority of our revenues from aerospace and certain manufacturing clients are generated by performing inspections and testing at our various in-house laboratories.


26

Table of Contents

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 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 also have provided us with additional service lines, technologies, resources and customers that we believe will enhance our advantages over our competition.

Our Onstream acquisition, which was completed in December 2018, helps support many of our Corporate initiatives. Onstream's strong presence in inline inspection provides us with a strong foundation within the midstream oil and gas market, which is an important piece of our overall growth strategy. We expect to generate new business opportunities through introduction of our inline inspection capabilities to existing midstream customers. The acquisition of Onstream also provides us with an additional digital solution for our customers, the Streamview™ software, which is an innovative application of advanced digital technology.

We believe the following represent key dynamics of the asset protection industry, and that the market available to us will continue to grow as these macro-market trends continue to develop:

Extending the Useful Life of Aging Infrastructure While Increasing Utilization. Due to the prohibitive costs and challenges of building new infrastructure, many companies have chosen to extend the useful life of existing assets through enhancements, rather than replacing these assets. This has resulted in the significant aging and increased utilization of existing infrastructure in our target markets. Increasing demand for refined petroleum products, combined with high plant-utilization rates, are driving refineries to upgrade facilities to make them more efficient and expand capacities. Because aging infrastructure requires more frequent inspection and maintenance in comparison to new infrastructure, companies and public authorities continue to spend on asset protection to ensure their aging infrastructure assets continue to operate effectively.

Outsourcing of Non-Core Activities and Technical Resource Constraints. Due to the increasing sophistication and automation of NDT programs, a decreasing supply of skilled professionals and increasing governmental regulations, companies are increasingly outsourcing NDT to third-party providers with advanced solution portfolios, engineering expertise and trained workforces.

Increasing Corrosion from Low-Quality Inputs. The increased availability and low cost of crude oil from areas such as shale plays and oil sands resources have led to the use of lower-grade raw materials and feedstock. This leads to higher rates of corrosion, especially in refining processes involving petroleum with higher sulfur content, which in turn increases the need for asset protection solutions to detect and/or proactively prevent corrosion-related issues.

Increasing Use of Advanced Materials. Customers in various of our target markets, particularly aerospace and defense, are increasingly utilizing advanced materials, such as composites and other unique technologies in their assets. These materials often cannot be tested using traditional NDT techniques. We believe that demand for more advanced testing and assessment solutions will increase along with the demand for these advanced materials during the design, manufacturing, operating and quality control phases.

Meeting Safety Regulations. Owners and operators of refineries, pipelines and petrochemical and chemical plants increasingly face strict government regulations and more stringent process safety enforcement standards. This includes the continued implementation of the Occupational Safety and Health Administration’s (OSHA) National Emphasis Program (NEP). Failure to meet these standards can result in significant financial liabilities, increased scrutiny by government and industry regulators, higher insurance premiums and tarnished corporate brand value. As a result, these owners and operators are seeking highly reliable asset protection suppliers with a track record of assisting organizations in meeting increasingly stringent regulations. Our clients benefit from MISTRAS’ extensive engineering consulting base that supports them in devising mechanical integrity programs that both meet regulatory compliance standards and enable enhanced safety and uptime at their facilities.

Expanding Addressable End-Markets. The continued emergence of and advances in asset protection technologies and software based systems are increasing the demand for asset protection solutions in applications where existing techniques were previously ineffective.

Expanding Aerospace Industry. We believe that increased demand will continue to come from the aerospace industry due to the approximately decade-long backlog for next-generation commercial aircraft to be built, driving the need for advanced solutions that drive cost and quality efficiencies.


27

Table of Contents

Crude Oil Prices. During 2018, crude oil prices rebounded from prior year levels, with exception of the last two months of the year. In 2019, crude oil prices have recovered back to year-ago 2018 levels, and we believe that this present range for crude oil prices is expected to persist for the foreseeable future. As a result, we expect relatively stable oil and gas customer spend for inspection services throughout the remainder of the year, with spending on maintenance shutdowns in 2019 to remain steady with 2018 levels. This demand will be balanced against our continued focus on process efficiencies and cost savings initiatives

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 the Company’s or 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 the Total 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 other companies non-GAAP financial measures.


28

Table of Contents



Results of Operations
 
Condensed consolidated results of operations for the three months ended March 31, 2019 and March 31, 2018 were as follows:
 
Three months ended
 
March 31, 2019
 
March 31, 2018
 
($ in thousands)
Revenues
$
176,787

 
$
187,630

Gross profit
48,874

 
48,145

Gross profit as a % of Revenue
27.6
 %
 
25.7
%
Total operating expenses
53,270

 
41,746

Operating expenses as a % of Revenue
30.1
 %
 
22.2
%
(Loss) income from operations
(4,396
)
 
6,399

(Loss) income from Operations as a % of Revenue
(2.5
)%
 
3.4
%
Interest expense
3,527

 
1,792

(Loss) income before provision for income taxes
(7,923
)
 
4,607

(Benefit) provision for income taxes
(2,637
)
 
1,688

Net (loss) income
(5,286
)
 
2,919

Less: net income attributable to non-controlling interests, net of taxes
7

 
12

Net (loss) income attributable to Mistras Group, Inc.
$
(5,293
)
 
$
2,907

 

 
Revenue
 
Revenues for the three months ended March 31, 2019 were $176.8 million, a decrease of $10.8 million, or 6%, compared with the three months ended March 31, 2018.

Revenues by segment for the three months ended March 31, 2019 and March 31, 2018 were as follows:
 
Three months ended
 
March 31, 2019
 
March 31, 2018
 
($ in thousands)
Revenues
 

 
 

Services
$
140,298

 
$
145,595

International
35,162

 
38,456

Products and Systems
3,432

 
6,184

Corporate and eliminations
(2,105
)
 
(2,605
)
 
$
176,787

 
$
187,630

 
Three Months

In the three months ended March 31, 2019, total revenues decreased 6% due to a combination of mid-single digit organic decline, which was primarily due to a $10 million reduction from a contract that ended after the first quarter of 2018, and a low-single digit unfavorable impact of foreign exchange rates, offset by low-single digit acquisition growth. Services segment revenues decreased 4%, driven by high single digit organic decline from the contract mentioned above, offset by mid-single digit acquisition growth. International segment revenues decreased 9%, driven by high single digit unfavorable impact of foreign exchange rates, as well as a low-single digit organic decline. Products and Systems segment revenues decreased by

29

Table of Contents

45%, due to a combination of less sales volume within the core business and the sale of a subsidiary within the segment during the third quarter of 2018.

Oil and gas customer revenues comprised approximately 57% and 60% of total revenues for the three months ended March 31, 2019 and 2018, respectively. Aerospace and defense customer revenues comprised approximately 14% and 15% of total revenues for the three months ended March 31, 2019 and 2018, respectively. The Company’s top ten customers comprised approximately 38% of total revenues for the three months ended March 31, 2019, as compared to 41% for the three months ended March 31, 2018, with no customer accounting for 10% or more of total revenues in either three-month period.

Gross Profit

Gross profit increased by $0.7 million, or 2%, in the three months ended March 31, 2019, on a sales decrease of 6%.

Gross profit by segment for the three months ended March 31, 2019 and March 31, 2018 was as follows:
 
 
Three months ended
 
March 31, 2019
 
March 31, 2018
 
($ in thousands)
Gross profit
 

 
 

Services
$
37,365

 
$
34,710

   % of segment revenue
26.6
%
 
23.8
%
International
10,360

 
10,707

   % of segment revenue
29.5
%
 
27.8
%
Products and Systems
1,239

 
2,890

   % of segment revenue
36.1
%
 
46.7
%
Corporate and eliminations
(90
)
 
(162
)
 
$
48,874

 
$
48,145

   % of total revenue
27.6
%
 
25.7
%

Three months

Gross profit margin was 27.6% and 25.7% for the three month periods ended March 31, 2019 and 2018, respectively. Services segment gross profit margins had a year-on-year increase of 280 basis points to 26.6% in the three months ended March 31, 2019, which primarily reflected a more favorable sales mix. International segment gross margins had a year-on-year increase of 170 basis points to 29.5% in the three months ended March 31, 2019. This increase was primarily driven by higher utilization of technical labor and overhead as well as a more favorable sales mix. Products and Systems segment gross margin had a year-on-year decrease of 1060 basis points to 36.1% in the three months ended March 31, 2019. This decrease was primarily driven by the reduction in revenues described above.


30

Table of Contents

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 the Company's three segments and for the Company in total:

 
Three months ended
 
March 31, 2019
 
March 31, 2018
 
($ in thousands)
Services:
 

 
 

Income from operations (GAAP)
$
4,053

 
$
12,275

Bad debt provision for troubled customers, net of recoveries
4,755

 

Pension withdrawal expense
534

 

Acquisition-related expense (benefit), net
305

 
(1,033
)
Income before special items (non-GAAP)
9,647

 
11,242

International:
 

 
 

(Loss) income from operations (GAAP)
(215
)
 
920

Reorganization and other costs
156

 
89

Bad debt provision for troubled customers, net of recoveries
736

 

Income before special items (non-GAAP)
677

 
1,009