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 June 30, 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 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 August 2, 2019, the registrant had 28,694,680 shares of common stock outstanding.
 
 
 
 
 



Table of Contents

TABLE OF CONTENTS
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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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)
 
June 30, 2019
 
December 31, 2018
ASSETS
(unaudited)
 
 

Current Assets
 

 
 

Cash and cash equivalents
$
12,501

 
$
25,544

Accounts receivable, net
155,043

 
148,324

Inventories
13,685

 
13,053

Prepaid expenses and other current assets
16,765

 
15,870

Total current assets
197,994

 
202,791

Property, plant and equipment, net
95,442

 
93,895

Intangible assets, net
107,753

 
111,395

Goodwill
283,017

 
279,259

Deferred income taxes
2,882

 
1,930

Other assets
46,385

 
4,767

Total assets
$
733,473

 
$
694,037

LIABILITIES AND EQUITY
 

 
 

Current Liabilities
 

 
 

Accounts payable
$
18,840

 
$
13,863

Accrued expenses and other current liabilities
82,897

 
73,895

Current portion of long-term debt
7,056

 
6,833

Current portion of finance lease obligations
3,680

 
3,922

Income taxes payable
2,497

 
1,958

Total current liabilities
114,970

 
100,471

Long-term debt, net of current portion
263,381

 
283,787

Obligations under finance leases, net of current portion
9,826

 
9,075

Deferred income taxes
25,041

 
23,148

Other long-term liabilities
38,976

 
6,482

Total liabilities
452,194

 
422,963

Commitments and contingencies


 


Equity
 

 
 

Preferred stock, 10,000,000 shares authorized

 

Common stock, $0.01 par value, 200,000,000 shares authorized, 28,685,486 and 28,562,608 shares issued
286

 
285

Additional paid-in capital
228,883

 
226,616

Retained earnings
73,691

 
71,553

Accumulated other comprehensive loss
(21,777
)
 
(27,557
)
Total Mistras Group, Inc. stockholders’ equity
281,083

 
270,897

Non-controlling interests
196

 
177

Total equity
281,279

 
271,074

Total liabilities and equity
$
733,473

 
$
694,037

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


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Table of Contents

Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
(in thousands, except per share data)
 
Three months ended
 
Six months ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
 
 

 
 

 
 
 
 
Revenue
$
200,616

 
$
191,793

 
$
377,403

 
$
379,423

Cost of revenue
135,063

 
131,084

 
257,480

 
264,872

Depreciation
5,482

 
5,626

 
10,978

 
11,323

Gross profit
60,071

 
55,083

 
108,945

 
103,228

Selling, general and administrative expenses
41,923

 
41,267

 
83,686

 
80,301

Bad debt provision for troubled customers, net of recoveries
(2,693
)
 

 
2,798

 

Pension withdrawal expense

 

 
534

 

Research and engineering
754

 
913

 
1,611

 
1,669

Depreciation and amortization
4,119

 
2,965

 
8,291

 
5,916

Acquisition-related expense (benefit), net
549

 
(366
)
 
1,002

 
(1,360
)
Income from operations
15,419

 
10,304

 
11,023

 
16,702

Interest expense
3,579

 
1,895

 
7,106

 
3,686

Income before provision for income taxes
11,840

 
8,409

 
3,917

 
13,016

Provision for income taxes
4,397

 
2,409

 
1,760

 
4,096

Net income
7,443

 
6,000

 
2,157

 
8,920

Less: net income attributable to non-controlling interests, net of taxes
12

 

 
19

 
12

Net income attributable to Mistras Group, Inc.
$
7,431

 
$
6,000

 
$
2,138

 
$
8,908

Earnings per common share:
 

 
 

 
 
 
 
Basic
$
0.26

 
$
0.21

 
$
0.07

 
$
0.31

Diluted
$
0.26

 
$
0.20

 
$
0.07

 
$
0.30

Weighted average common shares outstanding:
 

 
 

 
 
 
 
Basic
28,657

 
28,346

 
28,616

 
28,325

Diluted
28,862

 
29,334

 
28,918

 
29,349

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


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Table of Contents

Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income
(in thousands)
 
 
Three months ended
 
Six months ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
 
 
 
 
 
 
 
 
Net income
$
7,443

 
$
6,000

 
$
2,157

 
$
8,920

Other comprehensive income:
 

 
 

 
 
 
 
Foreign currency translation adjustments
3,649

 
(5,565
)
 
5,780

 
(4,065
)
Comprehensive income
11,092

 
435

 
7,937

 
4,855

Less: comprehensive income (loss) attributable to non-controlling interest
10

 
(4
)
 
19

 
10

Comprehensive income attributable to Mistras Group, Inc.
$
11,082

 
$
439

 
$
7,918

 
$
4,845

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


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Table of Contents

Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Equity
(in thousands)
 
Three months ended
 
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 March 31, 2019
28,627

 
$
286

 
$
227,790

 
$
66,260

 
$
(25,426
)
 
$
268,910

 
$
186

 
$
269,096

Net income

 

 

 
7,431

 

 
7,431

 
12

 
7,443

Other comprehensive income, net of tax

 

 

 

 
3,649

 
3,649

 
(2
)
 
3,647

Share-based payments
58

 

 
1,490

 

 

 
1,490

 

 
1,490

Net settlement on vesting of restricted stock units

 

 
(397
)
 

 

 
(397
)
 

 
(397
)
Balance at June 30, 2019
28,685

 
$
286

 
$
228,883

 
$
73,691

 
$
(21,777
)
 
$
281,083

 
$
196

 
$
281,279

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2018
28,314

 
$
282

 
$
223,576

 
$
67,624

 
$
(15,305
)
 
$
276,177

 
$
187

 
$
276,364

Net income

 

 

 
6,000

 

 
6,000

 

 
6,000

Other comprehensive loss, net of tax

 

 

 

 
(5,565
)
 
(5,565
)
 
(4
)
 
(5,569
)
Share-based payments
60

 
1

 
1,670

 

 

 
1,671

 

 
1,671

Net settlement on vesting of restricted stock units

 

 
(612
)
 

 

 
(612
)
 

 
(612
)
Balance at June 30, 2018
28,374

 
$
283

 
$
224,634

 
$
73,624

 
$
(20,870
)
 
$
277,671

 
$
183

 
$
277,854



 
Six months ended
 
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 income

 

 

 
2,138

 

 
2,138

 
19

 
2,157

Other comprehensive income, net of tax

 

 

 

 
5,780

 
5,780

 

 
5,780

Share-based payments
119

 
1

 
2,916

 

 

 
2,917

 

 
2,917

Net settlement on vesting of restricted stock units

 

 
(681
)
 

 

 
(681
)
 

 
(681
)
Exercise of stock options
3

 

 
32

 

 

 
32

 

 
32

Balance at June 30, 2019
28,685

 
$
286

 
$
228,883

 
$
73,691

 
$
(21,777
)
 
$
281,083

 
$
196

 
$
281,279

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
28,295

 
$
282

 
$
222,425

 
$
64,716

 
$
(16,805
)
 
$
270,618

 
$
173

 
$
270,791

Net income

 

 

 
8,908

 

 
8,908

 
12

 
8,920

Other comprehensive loss, net of tax

 

 

 

 
(4,065
)
 
(4,065
)
 
(2
)
 
(4,067
)
Share-based payments
79

 
1

 
2,864

 

 

 
2,865

 

 
2,865

Net settlement on vesting of restricted stock units

 

 
(655
)
 

 

 
(655
)
 

 
(655
)
Balance at June 30, 2018
28,374

 
$
283

 
$
224,634

 
$
73,624

 
$
(20,870
)
 
$
277,671

 
$
183

 
$
277,854



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


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Table of Contents


Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands) 
 
Six months ended
 
June 30, 2019
 
June 30, 2018
 
 
 
 
Cash flows from operating activities
 

 
 

Net income
$
2,157

 
$
8,920

Adjustments to reconcile net income to net cash provided by operating activities
 

 
 

Depreciation and amortization
19,269

 
17,239

Deferred income taxes
420

 
601

Share-based compensation expense
2,867

 
2,829

Bad debt provision for troubled customers, net of recoveries
2,798

 

Fair value adjustments to contingent consideration
672

 
(990
)
Foreign currency (gain) loss
(1,218
)
 
372

Other
(395
)
 
164

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions
 

 
 
Accounts receivable
(8,792
)
 
(8,405
)
Inventories
(594
)
 
(1,171
)
Prepaid expenses and other assets
(625
)
 
(1,248
)
Accounts payable
4,945

 
4,475

Accrued expenses and other liabilities
(988
)
 
(78
)
Income taxes payable
589

 
(2,613
)
Net cash provided by operating activities
21,105

 
20,095

Cash flows from investing activities
 

 
 

Purchase of property, plant and equipment
(11,562
)
 
(10,963
)
Purchase of intangible assets
(441
)
 
(265
)
Proceeds from sale of equipment
955

 
941

Net cash used in investing activities
(11,048
)
 
(10,287
)
Cash flows from financing activities
 

 
 

Repayment of finance lease obligations
(2,411
)
 
(3,109
)
Proceeds from borrowings of long-term debt
566

 
1,334

Repayment of long-term debt
(3,445
)
 
(1,322
)
Proceeds from revolver
10,000

 
19,100

Repayment of revolver
(27,200
)
 
(33,100
)
Payment of contingent consideration for business acquisitions

 
(1,506
)
Taxes paid related to net share settlement of share-based awards
(681
)
 
(655
)
Proceeds from exercise of stock options
32

 

Net cash used in financing activities
(23,139
)
 
(19,258
)
Effect of exchange rate changes on cash and cash equivalents
39

 
(561
)
Net change in cash and cash equivalents
(13,043
)
 
(10,011
)
Cash and cash equivalents at beginning of period
25,544

 
27,541

Cash and cash equivalents at end of period
$
12,501

 
$
17,530

Supplemental disclosure of cash paid
 

 
 

Interest
$
7,016

 
$
3,456

Income taxes
$
2,565

 
$
7,011

Noncash investing and financing
 

 
 

Equipment acquired through finance lease obligations
$
2,887

 
$
2,546

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

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Table of Contents
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 materials and public infrastructure and commercial aerospace components. 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, dated 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

For the three and six months ended June 30, 2019 and 2018, there were no customers that represented 10% or more of revenue.

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.


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Table of Contents
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 June 30, 2019 and June 30, 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 37% and 29% for the three months ended June 30, 2019 and 2018, respectively. The Company's effective income tax rate was approximately 45% and 31% for the six months ended June 30, 2019 and 2018, respectively. The effective income tax rate for the second quarter and first six-months 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, foreign tax rates different than statutory rates in the U.S., and an increase in the reserve for uncertain income tax provision.
The Company has completed the accounting for the adoption of the Tax Act. 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 has 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 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 their 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.

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

Performance Obligations
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 contract terms when the Company and customers agree upon services or products to be provided. The actual contracting to provide services or furnish products is 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.


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

Revenue by Category

The following series of tables present our disaggregated revenues:

Revenue by industry was as follows:

Three Months Ended June 30, 2019
Services
 
International
 
Products
 
Corp/Elim
 
Total
Oil & Gas
$
109,103

 
$
11,767

 
$
465

 
$

 
$
121,335

Aerospace & Defense
13,511

 
10,504

 
315

 

 
24,330

Industrials
19,638

 
5,459

 
647

 

 
25,744

Power generation & Transmission
8,352

 
2,499

 
619

 

 
11,470

Other Process Industries
6,384

 
2,504

 
68

 

 
8,956

Infrastructure, Research & Engineering
2,806

 
2,517

 
1,059

 

 
6,382

Other
1,416

 
1,840

 
1,096

 
(1,953
)
 
2,399

Total
$
161,210

 
$
37,090

 
$
4,269

 
$
(1,953
)
 
$
200,616



Three Months Ended June 30, 2018
Services
 
International
 
Products
 
Corp/Elim
 
Total
Oil & Gas
$
95,288

 
$
9,716

 
$
375

 
$

 
$
105,379

Aerospace & Defense
13,371

 
14,086

 
770

 

 
28,227

Industrials
16,607

 
6,942

 
925

 

 
24,474

Power generation & Transmission
9,137

 
2,806

 
554

 

 
12,497

Other Process Industries
6,138

 
2,909

 
33

 

 
9,080

Infrastructure, Research & Engineering
3,914

 
2,552

 
1,261

 

 
7,727

Other
3,263

 
2,100

 
1,468

 
(2,422
)
 
4,409

Total
$
147,718

 
$
41,111

 
$
5,386

 
$
(2,422
)
 
$
191,793



Six Months Ended June 30, 2019
Services
 
International
 
Products
 
Corp/Elim
 
Total
Oil & Gas
$
200,769

 
$
21,472

 
$
480

 
$

 
$
222,721

Aerospace & Defense
26,305

 
22,158

 
622

 

 
49,085

Industrials
35,762

 
10,534

 
1,079

 

 
47,375

Power generation & Transmission
14,614

 
3,921

 
2,000

 

 
20,535

Other Process Industries
12,702

 
4,746

 
73

 

 
17,521

Infrastructure, Research & Engineering
5,396

 
5,250

 
1,905

 

 
12,551

Other
5,959

 
4,171

 
1,542

 
(4,057
)
 
7,615

Total
$
301,507

 
$
72,252

 
$
7,701

 
$
(4,057
)
 
$
377,403




9

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

Six Months Ended June 30, 2018
Services
 
International
 
Products
 
Corp/Elim
 
Total
Oil & Gas
$
197,036

 
$
17,844

 
$
937

 
$

 
$
215,817

Aerospace & Defense
25,828

 
28,551

 
1,436

 

 
55,815

Industrials
28,324

 
13,342

 
1,465

 

 
43,131

Power generation & Transmission
17,038

 
3,526

 
2,110

 

 
22,674

Other Process Industries
11,545

 
4,699

 
38

 

 
16,282

Infrastructure, Research & Engineering
6,094

 
5,071

 
1,761

 

 
12,926

Other
7,448

 
6,534

 
3,823

 
(5,027
)
 
12,778

Total
$
293,313

 
$
79,567

 
$
11,570

 
$
(5,027
)
 
$
379,423



Revenue per key geographic location was as follows:
Three Months Ended June 30, 2019
Services
 
International
 
Products
 
Corp/Elim
 
Total
United States
$
131,880

 
$
57

 
$
2,977

 
$
(1,274
)
 
$
133,640

Other Americas
28,804

 
1,686

 
71

 
(207
)
 
30,354

Europe
271

 
33,740

 
436

 
(472
)
 
33,975

Asia-Pacific
255

 
1,607

 
785

 

 
2,647

Total
$
161,210

 
$
37,090

 
$
4,269

 
$
(1,953
)
 
$
200,616



Three Months Ended June 30, 2018
Services
 
International
 
Products
 
Corp/Elim
 
Total
United States
$
122,835

 
$
157

 
$
2,782

 
$
(649
)
 
$
125,125

Other Americas
22,676

 
1,955

 
278

 
(743
)
 
24,166

Europe
2,133

 
37,645

 
815

 
(969
)
 
39,624

Asia-Pacific
74

 
1,354

 
1,511

 
(61
)
 
2,878

Total
$
147,718

 
$
41,111

 
$
5,386

 
$
(2,422
)
 
$
191,793



Six Months Ended June 30, 2019
Services
 
International
 
Products
 
Corp/Elim
 
Total
United States
$
245,015

 
$
334

 
$
4,947

 
$
(2,554
)
 
$
247,742

Other Americas
55,513

 
3,915

 
137

 
(264
)
 
59,301

Europe
698

 
65,280

 
857

 
(1,235
)
 
65,600

Asia-Pacific
281

 
2,723

 
1,760

 
(4
)
 
4,760

Total
$
301,507

 
$
72,252

 
$
7,701

 
$
(4,057
)
 
$
377,403



Six Months Ended June 30, 2018
Services
 
International
 
Products
 
Corp/Elim
 
Total
United States
$
246,398

 
$
424

 
$
6,040

 
$
(1,746
)
 
$
251,116

Other Americas
44,459

 
3,857

 
360

 
(996
)
 
47,680

Europe
2,288

 
71,845

 
1,934

 
(2,195
)
 
73,872

Asia-Pacific
168

 
3,441

 
3,236

 
(90
)
 
6,755

Total
$
293,313

 
$
79,567

 
$
11,570

 
$
(5,027
)
 
$
379,423



10

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

Contract Balances
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 receives 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 $2.7 million. Changes in the contract asset and liability balances during the quarter ended June 30, 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 and six months ended June 30, 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 June 30, 2019.
 
The following table sets forth a summary of the stock option activity, weighted average exercise prices and options outstanding as of June 30, 2019 and June 30, 2018:
 
Six months ended June 30,
 
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
(7
)
 
$
10.00

 

 
$

Outstanding at end of period:
2,094

 
$
13.48

 
2,130

 
$
13.43

 
Restricted Stock Unit Awards
 
For the three months ended June 30, 2019 and June 30, 2018, the Company recognized share-based compensation expense related to restricted stock unit awards of $1.1 million and $1.2 million, respectively. For the six months ended June 30, 2019 and June 30, 2018, the Company recognized share-based compensation expense related to restricted stock unit awards of $2.0 million and $2.0 million, respectively. As of June 30, 2019, there was $8.8 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which is expected to be recognized over a remaining weighted average period of 2.7 years.


11

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

A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows:

 
Six months ended June 30,
 
2019
 
2018
Restricted stock awards vested
77

 
35

Fair value of awards vested
$
1,052

 
$
704


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:

 
Six months ended June 30,
 
2019
 
2018
Awards issued
15

 
10

Grant date fair value of awards issued
$
210

 
$
200


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

 
Six months ended June 30,
 
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
(77
)
 
$
19.88

 
(35
)
 
$
21.44

Forfeited
(23
)
 
$
19.35

 
(24
)
 
$
20.17

Outstanding at end of period:
677

 
$
17.46

 
684

 
$
20.49


 
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 (defined as net income attributable to MISTRAS Group, Inc. plus: interest expense, provision for income taxes, depreciation and amortization, share-based compensation expense and certain acquisition related costs (including transaction due diligence costs and adjustments to the fair value of contingent consideration), foreign exchange (gain) loss and, if applicable, certain special items which are noted) and (3) Revenue. There also is a discretionary portion of the PRSUs based on individual performance, granted 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.

12

Table of Contents
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:

 
Six months ended June 30,
 
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
190

 
$
13.63

 
123

 
$
19.46

Performance condition adjustments
(3
)
 
$
18.46

 
(4
)
 
$
19.67

Released
(77
)
 
$
15.86

 
(61
)
 
$
15.04

Forfeited

 
$

 
(12
)
 
$
16.16

Outstanding at end of period:
387

 
$
15.94

 
324

 
$
18.15



During the six months ended June 30, 2019 and June 30, 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 4,000 units. There was a decrease of approximately 8,000 units for the six months ended June 30, 2018 based on forecasted results for calendar year 2018. These adjustments comprise the performance condition adjustments for the six months ended June 30, 2018 noted above.

As of June 30, 2019, the liability related to Discretionary PRSUs was less than $0.1 million and is classified within accrued expenses and other current liabilities on the condensed consolidated balance sheet.

For the three months ended June 30, 2019 and June 30, 2018, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.4 million and $0.5 million, respectively. For the six months ended June 30, 2019 and June 30, 2018, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.7 million and $0.6 million, respectively. At June 30, 2019, there was $3.7 million of total unrecognized compensation costs related to approximately 387,000 non-vested PRSUs, which is expected to be recognized over a remaining weighted average period of 2.6 years.


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.
 

13

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

The following table sets forth the computations of basic and diluted earnings per share:
 
 
Three months ended
 
Six months ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
 
 
 
 
 
 
 
 
Basic earnings per share:
 

 
 

 
 
 
 
Numerator:
 

 
 

 
 
 
 
Net income attributable to Mistras Group, Inc.
$
7,431

 
$
6,000

 
$
2,138

 
$
8,908

Denominator:
 

 
 

 
 

 
 

Weighted average common shares outstanding
28,657

 
28,346

 
28,616

 
28,325

Basic earnings per share
$
0.26

 
$
0.21

 
$
0.07

 
$
0.31

 
 
 
 
 
 
 
 
Diluted earnings per share:
 

 
 

 
 
 
 
Numerator:
 

 
 

 
 
 
 
Net income attributable to Mistras Group, Inc.
$
7,431

 
$
6,000

 
$
2,138

 
$
8,908

Denominator:
 

 
 

 
 

 
 

Weighted average common shares outstanding
28,657

 
28,346

 
28,616

 
28,325

Dilutive effect of stock options outstanding
46

 
660

 
131

 
702

Dilutive effect of restricted stock units outstanding
159

 
328

 
171

 
322

 
28,862

 
29,334

 
28,918

 
29,349

Diluted earnings per share
$
0.26

 
$
0.20

 
$
0.07

 
$
0.30



5.                                      Acquisitions

During the six months ended June 30, 2019 and June 30, 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 the one business acquired in the fourth quarter of 2018 was 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 the 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.


14

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

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 and six months ended June 30, 2019 and 2018:

 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Due diligence, professional fees and other transaction costs
$
182

 
$
(409
)
 
$
330

 
$
(370
)
Adjustments to fair value of contingent consideration liabilities
367

 
43

 
672

 
(990
)
Acquisition-related expense (benefit), net
$
549

 
$
(366
)
 
$
1,002

 
$
(1,360
)

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:
 
 
June 30, 2019
 
December 31, 2018
 
 
 
 
Trade accounts receivable
$
160,978

 
$
152,511

Allowance for doubtful accounts
(5,935
)
 
(4,187
)
Accounts receivable, net
$
155,043

 
$
148,324

 
The Company had $25.6 million and $16.1 million of unbilled revenues accrued as of June 30, 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, 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 second quarter, the Company reversed $1.0 million of this reserve based on additional information obtained during the quarter.  

During the first six months of 2019, the Company sold to an unaffiliated third party, without recourse, its remaining outstanding receivables in an unrelated bankruptcy proceeding, which the Company had initially recorded as a charge during the second quarter of 2017. During the first quarter of 2019, the Company recorded a recovery of $0.2 million and during the six months ending June 30, 2019, the Company recorded a recovery $1.9 million, related to a bad debt provision related to this customer.



15

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

7.                                      Property, Plant and Equipment, net
 
Property, plant and equipment consisted of the following:
 
 
Useful Life
(Years)
 
June 30, 2019
 
December 31, 2018
 
 
 
 
 
 
Land
 
 
$
2,680

 
$
2,680

Buildings and improvements
30-40
 
24,408

 
24,338

Office furniture and equipment
5-8
 
16,791

 
16,170

Machinery and equipment
5-7
 
218,281

 
208,245

 
 
 
262,160

 
251,433

Accumulated depreciation and amortization
 
 
(166,718
)
 
(157,538
)
Property, plant and equipment, net
 
 
$
95,442

 
$
93,895

 
Depreciation expense for each of the three months ended June 30, 2019 and June 30, 2018 was approximately $6.1 million.

Depreciation expense for each of the six months ended June 30, 2019 and June 30, 2018 was approximately $12.2 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
3,963

 
(205
)
 

 
3,758

Balance at June 30, 2019
$
247,439

 
$
35,578

 
$

 
$
283,017

 
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 June 30, 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 June 30, 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.

9.                                      Intangible Assets
 
The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows:
 
 
 
 
June 30, 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
 
$
113,154

 
$
(64,632
)
 
$
48,522

 
$
112,624

 
$
(60,993
)
 
$
51,631

Software/Technology
3-15
 
70,348

 
(15,896
)
 
54,452

 
67,240

 
(13,319
)
 
53,921

Covenants not to compete
2-5
 
12,669

 
(11,277
)
 
1,392

 
12,593

 
(10,825
)
 
1,768

Other
2-12
 
10,381

 
(6,994
)
 
3,387

 
10,317

 
(6,242
)
 
4,075

Total
 
 
$
206,552

 
$
(98,799
)
 
$
107,753

 
$
202,774

 
$
(91,379
)
 
$
111,395


16

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

 
Amortization expense for the three months ended June 30, 2019 and June 30, 2018 was approximately $3.5 million and $2.5 million, respectively.

Amortization expense for the six months ended June 30, 2019 and June 30, 2018 was approximately $7.1 million and $5.0 million, respectively.


10.                                      Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities consisted of the following:
 
 
June 30, 2019
 
December 31, 2018
 
 
 
 
Accrued salaries, wages and related employee benefits
$
30,367

 
$
29,959

Contingent consideration, current portion
3,095

 
1,687

Accrued workers’ compensation and health benefits
4,859

 
5,086

Deferred revenue
4,067

 
5,046

Pension accrual
4,009

 
5,585

Right-of-use liability - operating
9,575

 

Other accrued expenses
26,925

 
26,532

Total accrued expenses and other current liabilities
$
82,897

 
$
73,895

 
11.                               Long-Term Debt
 
Long-term debt consisted of the following:
 
June 30, 2019
 
December 31, 2018
 
 
 
 
Senior credit facility
$
164,397

 
$
181,656

Senior secured term loan, net of debt issuance costs of $0.1 million
97,407

 
99,897

Notes payable
71

 
68

Other
8,562

 
8,999

Total debt
270,437

 
290,620

Less: Current portion
(7,056
)
 
(6,833
)
Long-term debt, net of current portion
$
263,381

 
$
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 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 June 30, 2019, the Company had borrowings of $261.8 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 June 30, 2019, which is included in other long-term assets within the accompanying condensed consolidated balance sheet.
 

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

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.
 
As of June 30, 2019, the Company was in compliance with the terms of the Credit Agreement and will continuously monitor its compliance with the covenants contained in its Credit Agreement.
 

18

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

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 June 30, 2019. The balance outstanding at June 30, 2019 was paid in July 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 June 30, 2019, there was approximately $8.6 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% and is recorded in the condensed consolidated statements of income.

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:
 
 
 
Six months ended June 30,
 
 
2019
 
2018
Beginning balance
 
$
2,365

 
$
5,508

Acquisitions
 

 

Payments
 

 
(1,506
)
Accretion of liability
 
75

 
108

Revaluation
 
597

 
(1,098
)