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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 September 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) 
 
 
 

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

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
 
 
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


As of October 31, 2019, the registrant had 28,915,088 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)
 
September 30, 2019
 
December 31, 2018
ASSETS
(unaudited)
 
 

Current Assets
 

 
 

Cash and cash equivalents
$
14,372

 
$
25,544

Accounts receivable, net
148,024

 
148,324

Inventories
13,419

 
13,053

Prepaid expenses and other current assets
17,135

 
15,870

Total current assets
192,950

 
202,791

Property, plant and equipment, net
95,502

 
93,895

Intangible assets, net
106,893

 
111,395

Goodwill
283,121

 
279,259

Deferred income taxes
2,780

 
1,930

Other assets
46,781

 
4,767

Total assets
$
728,027

 
$
694,037

LIABILITIES AND EQUITY
 

 
 

Current Liabilities
 

 
 

Accounts payable
$
13,428

 
$
13,863

Accrued expenses and other current liabilities
86,452

 
73,895

Current portion of long-term debt
6,563

 
6,833

Current portion of finance lease obligations
3,751

 
3,922

Income taxes payable
1,049

 
1,958

Total current liabilities
111,243

 
100,471

Long-term debt, net of current portion
260,753

 
283,787

Obligations under finance leases, net of current portion
10,799

 
9,075

Deferred income taxes
27,458

 
23,148

Other long-term liabilities
39,428

 
6,482

Total liabilities
449,681

 
422,963

Commitments and contingencies


 


Equity
 

 
 

Preferred stock, 10,000,000 shares authorized
—

 
—

Common stock, $0.01 par value, 200,000,000 shares authorized, 28,915,088 and 28,562,608 shares issued
289

 
285

Additional paid-in capital
228,287

 
226,616

Retained earnings
76,784

 
71,553

Accumulated other comprehensive loss
(27,202
)
 
(27,557
)
Total Mistras Group, Inc. stockholders’ equity
278,158

 
270,897

Non-controlling interests
188

 
177

Total equity
278,346

 
271,074

Total liabilities and equity
$
728,027

 
$
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 Income (Loss)
(in thousands, except per share data)
 
Three months ended
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
 
 

 
 

 
 
 
 
Revenue
$
192,192

 
$
182,169

 
$
569,595

 
$
561,592

Cost of revenue
129,241

 
124,260

 
386,721

 
389,131

Depreciation
5,182

 
5,577

 
16,160

 
16,902

Gross profit
57,769

 
52,332

 
166,714

 
155,559

Selling, general and administrative expenses
42,328

 
41,931

 
126,014

 
122,232

Bad debt provision for troubled customers, net of recoveries
—

 
—

 
2,798

 
—

Pension withdrawal expense (benefit)
(45
)
 
5,886

 
489

 
5,886

Gain on sale of subsidiary
—

 
(2,384
)
 
—

 
(2,384
)
Research and engineering
650

 
745

 
2,261

 
2,414

Depreciation and amortization
4,089

 
2,920

 
12,380

 
8,834

Acquisition-related expense (benefit), net
(32
)
 
217

 
970

 
(1,143
)
Income from operations
10,779

 
3,017

 
21,802

 
19,720

Interest expense
2,959

 
1,894

 
10,065

 
5,581

Income before provision for income taxes
7,820

 
1,123

 
11,737

 
14,139

Provision for income taxes
4,733

 
2,133

 
6,493

 
6,229

Net income (loss)
3,087

 
(1,010
)
 
5,244

 
7,910

Less: Net income (loss) attributable to non-controlling interests, net of taxes
(6
)
 
1

 
13

 
13

Net income (loss) attributable to Mistras Group, Inc.
$
3,093

 
$
(1,011
)
 
$
5,231

 
$
7,897

 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 

 
 

 
 
 
 
Basic
$
0.11

 
$
(0.04
)
 
$
0.18

 
$
0.28

Diluted
$
0.11

 
$
(0.04
)
 
$
0.18

 
$
0.27

Weighted-average common shares outstanding:
 

 
 

 
 
 
 
Basic
28,800

 
28,429

 
28,678

 
28,360

Diluted
29,156

 
28,429

 
29,022

 
29,447

 
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 Income (Loss)
(in thousands)
 
 
Three months ended
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
 
 
 
 
 
 
 
 
Net income (loss)
$
3,087

 
$
(1,010
)
 
$
5,244

 
$
7,910

Other comprehensive income:
 

 
 

 
 
 
 
Foreign currency translation adjustments
(5,425
)
 
14

 
355

 
(4,051
)
Comprehensive income (loss)
(2,338
)
 
(996
)
 
5,599

 
3,859

Less: comprehensive income (loss) attributable to non-controlling interest
(8
)
 
—

 
11

 
10

Comprehensive income (loss) attributable to Mistras Group, Inc.
$
(2,330
)
 
$
(996
)
 
$
5,588

 
$
3,849

 
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)
 
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 June 30, 2019
28,685

 
$
286

 
$
228,883

 
$
73,691

 
$
(21,777
)
 
$
281,083

 
$
196

 
$
281,279

Net income
—

 
—

 
—

 
3,093

 
—

 
3,093

 
(6
)
 
3,087

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
(5,425
)
 
(5,425
)
 
(2
)
 
(5,427
)
Share-based payments
—

 
—

 
1,682

 
—

 
—

 
1,682

 
—

 
1,682

Net settlement of options and restricted stock units
230

 
3

 
(2,278
)
 
—

 
—

 
(2,275
)
 
—

 
(2,275
)
Balance at September 30, 2019
28,915

 
$
289

 
$
228,287

 
$
76,784

 
$
(27,202
)
 
$
278,158

 
$
188

 
$
278,346

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2018
28,374

 
$
283

 
$
224,634

 
$
73,624

 
$
(20,870
)
 
$
277,671

 
$
183

 
$
277,854

Net loss
—

 
—

 
—

 
(1,011
)
 
—

 
(1,011
)
 
1

 
(1,010
)
Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
14

 
14

 
(1
)
 
13

Share-based payments
—

 
—

 
1,899

 
—

 
—

 
1,899

 
—

 
1,899

Net settlement of restricted stock units
97

 
1

 
(752
)
 
—

 
—

 
(751
)
 
—

 
(751
)
Exercise of stock options
25

 
—

 
273

 
—

 
—

 
273

 
—

 
—

Balance at September 30, 2018
28,496

 
$
284

 
$
226,054

 
$
72,613

 
$
(20,856
)
 
$
278,095

 
$
183

 
$
278,278



 
Nine 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
—

 
—

 
—

 
5,231

 
—

 
5,231

 
13

 
5,244

Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
355

 
355

 
(2
)
 
353

Share-based payments
—

 
—

 
4,598

 
—

 
—

 
4,598

 
—

 
4,598

Net settlement of options and restricted stock units
349

 
4

 
(2,959
)
 
—

 
—

 
(2,955
)
 
—

 
(2,955
)
Exercise of stock options
3

 
—

 
32

 
—

 
—

 
32

 
—

 
32

Balance at September 30, 2019
28,915

 
$
289

 
$
228,287

 
$
76,784

 
$
(27,202
)
 
$
278,158

 
$
188

 
$
278,346

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
28,295

 
$
282

 
$
222,425

 
$
64,716

 
$
(16,805
)
 
$
270,618

 
$
173

 
$
270,791

Net income
—

 
—

 
—

 
7,897

 
—

 
7,897

 
13

 
7,910

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
(4,051
)
 
(4,051
)
 
(3
)
 
(4,054
)
Share-based payments
—

 
—

 
4,763

 
—

 
—

 
4,763

 
—

 
4,763

Net settlement on vesting of restricted stock units
176

 
2

 
(1,407
)
 
—

 
—

 
(1,405
)
 
—

 
(1,405
)
Exercise of stock options
25

 
—

 
273

 
—

 
—

 
273

 
—

 
273

Balance at September 30, 2018
28,496

 
$
284

 
$
226,054

 
$
72,613

 
$
(20,856
)
 
$
278,095

 
$
183

 
$
278,278



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) 
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
 
 
 
 
Cash flows from operating activities
 

 
 

Net income
$
5,244

 
$
7,910

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

 
 

Depreciation and amortization
28,540

 
25,736

Deferred income taxes
3,151

 
3,188

Share-based compensation expense
4,598

 
4,760

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

 
—

Fair value adjustments to contingent consideration
537

 
(808
)
Foreign currency (gain) loss
(1,010
)
 
618

Gain on sale of subsidiary
—

 
(2,384
)
Other
(143
)
 
207

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

 
 
Accounts receivable
(3,098
)
 
(20,258
)
Inventories
(391
)
 
(1,746
)
Prepaid expenses and other assets
439

 
918

Accounts payable
(261
)
 
3,019

Accrued expenses and other liabilities
(2,465
)
 
7,456

Income taxes payable
2,537

 
(4,432
)
Net cash provided by operating activities
40,476

 
24,184

Cash flows from investing activities
 

 
 

Purchase of property, plant and equipment
(17,275
)
 
(15,386
)
Disposition of business, net of cash sold
—

 
4,800

Purchase of intangible assets
(704
)
 
(385
)
Acquisition of business, net of cash acquired
(4,822
)
 
—

Proceeds from sale of equipment
1,173

 
1,140

Net cash used in investing activities
(21,628
)
 
(9,831
)
Cash flows from financing activities
 

 
 

Repayment of finance lease obligations
(3,338
)
 
(4,464
)
Proceeds from borrowings of long-term debt
684

 
1,743

Repayment of long-term debt
(5,189
)
 
(1,857
)
Proceeds from revolver
20,500

 
28,076

Repayment of revolver
(38,500
)
 
(43,990
)
Payment of contingent consideration for business acquisitions
(755
)
 
(2,282
)
Taxes paid related to net share settlement of share-based awards
(2,955
)
 
(1,404
)
Proceeds from exercise of stock options
32

 
273

Net cash used in financing activities
(29,521
)
 
(23,905
)
Effect of exchange rate changes on cash and cash equivalents
(499
)
 
(916
)
Net change in cash and cash equivalents
(11,172
)
 
(10,468
)
Cash and cash equivalents at beginning of period
25,544

 
27,541

Cash and cash equivalents at end of period
$
14,372

 
$
17,073

Supplemental disclosure of cash paid
 

 
 

Interest
$
9,944

 
$
5,418

Income taxes
$
4,011

 
$
9,658

Noncash investing and financing
 

 
 

Equipment acquired through finance lease obligations
$
5,536

 
$
3,850

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

5
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, 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 results, net of tax, is classified separately in the accompanying Unaudited Condensed Consolidated Statements of Income (Loss). 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 each of the nine months ended September 30, 2019 and 2018, no customer represented 10% or more of the Company's 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.


6
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 September 30, 2019 and September 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 61% and 190% for the three months ended September 30, 2019 and 2018, respectively. The Company's effective income tax rate was approximately 55% and 44% for the nine months ended September 30, 2019 and 2018, respectively. The effective income tax rate for the third quarter and first nine-months of 2019 and 2018 was higher than the statutory rate due to the impact of discrete items, GILTI, executive compensation, and other 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. 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.

7
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.


8
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 September 30, 2019
Services
 
International
 
Products
 
Corp/Elim
 
Total
Oil & Gas
$
100,927

 
$
11,561

 
$
71

 
$
—

 
$
112,559

Aerospace & Defense
12,420

 
9,626

 
438

 
—

 
22,484

Industrials
15,612

 
5,453

 
506

 
—

 
21,571

Power generation & Transmission
7,215

 
3,462

 
461

 
—

 
11,138

Other Process Industries
6,942

 
2,674

 
304

 
—

 
9,920

Infrastructure, Research & Engineering
4,205

 
1,964

 
2,964

 
—

 
9,133

Other
5,251

 
2,310

 
777

 
(2,951
)
 
5,387

Total
$
152,572

 
$
37,050

 
$
5,521

 
$
(2,951
)
 
$
192,192



Three Months Ended September 30, 2018
Services
 
International
 
Products
 
Corp/Elim
 
Total
Oil & Gas
$
90,584

 
$
8,843

 
$
115

 
$
—

 
$
99,542

Aerospace & Defense
12,287

 
13,117

 
400

 
—

 
25,804

Industrials
17,523

 
6,080

 
1,191

 
—

 
24,794

Power generation & Transmission
6,341

 
3,202

 
1,334

 
—

 
10,877

Other Process Industries
6,677

 
1,650

 
11

 
—

 
8,338

Infrastructure, Research & Engineering
2,629

 
1,777

 
1,576

 
—

 
5,982

Other
5,299

 
2,002

 
1,089

 
(1,558
)
 
6,832

Total
$
141,340

 
$
36,671

 
$
5,716

 
$
(1,558
)
 
$
182,169



Nine Months Ended September 30, 2019
Services
 
International
 
Products
 
Corp/Elim
 
Total
Oil & Gas
$
301,696

 
$
33,033

 
$
551

 
$
—

 
$
335,280

Aerospace & Defense
38,725

 
31,783

 
1,060

 
—

 
71,568

Industrials
51,373

 
15,987

 
1,585

 
—

 
68,945

Power generation & Transmission
21,829

 
7,383

 
2,328

 
—

 
31,540

Other Process Industries
19,644

 
7,420

 
376

 
—

 
27,440

Infrastructure, Research & Engineering
9,601

 
7,214

 
4,869

 
—

 
21,684

Other
11,211

 
6,482

 
2,453

 
(7,008
)
 
13,138

Total
$
454,079

 
$
109,302

 
$
13,222

 
$
(7,008
)
 
$
569,595




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)

Nine Months Ended September 30, 2018
Services
 
International
 
Products
 
Corp/Elim
 
Total
Oil & Gas
$
287,620

 
$
27,512

 
$
1,052

 
$
—

 
$
316,184

Aerospace & Defense
38,115

 
42,468

 
1,836

 
—

 
82,419

Industrials
45,847

 
20,298

 
2,656

 
—

 
68,801

Power generation & Transmission
23,378

 
6,728

 
3,444

 
—

 
33,550

Other Process Industries
18,222

 
6,349

 
49

 
—

 
24,620

Infrastructure, Research & Engineering
8,723

 
6,848

 
3,337

 
—

 
18,908

Other
12,748

 
6,035

 
4,912

 
(6,585
)
 
17,110

Total
$
434,653

 
$
116,238

 
$
17,286

 
$
(6,585
)
 
$
561,592



Revenue per key geographic location was as follows:
Three Months Ended September 30, 2019
Services
 
International
 
Products
 
Corp/Elim
 
Total
United States
$
123,585

 
$
128

 
$
3,780

 
$
(1,084
)
 
$
126,409

Other Americas
26,981

 
1,842

 
72

 
32

 
28,927

Europe
1,157

 
31,817

 
513

 
(1,844
)
 
31,643

Asia-Pacific
849

 
3,263

 
1,156

 
(55
)
 
5,213

Total
$
152,572

 
$
37,050

 
$
5,521

 
$
(2,951
)
 
$
192,192



Three Months Ended September 30, 2018
Services
 
International
 
Products
 
Corp/Elim
 
Total
United States
$
118,415

 
$
82

 
$
2,806

 
$
(849
)
 
$
120,454

Other Americas
21,712

 
1,894

 
192

 
(141
)
 
23,657

Europe
748

 
33,654

 
1,184

 
(557
)
 
35,029

Asia-Pacific
465

 
1,041

 
1,534

 
(11
)
 
3,029

Total
$
141,340

 
$
36,671

 
$
5,716

 
$
(1,558
)
 
$
182,169



Nine Months Ended September 30, 2019
Services
 
International
 
Products
 
Corp/Elim
 
Total
United States
$
368,600

 
$
461

 
$
8,727

 
$
(3,638
)
 
$
374,150

Other Americas
82,494

 
5,757

 
209

 
(232
)
 
88,228

Europe
1,855

 
97,098

 
1,370

 
(3,079
)
 
97,244

Asia-Pacific
1,130

 
5,986

 
2,916

 
(59
)
 
9,973

Total
$
454,079

 
$
109,302

 
$
13,222

 
$
(7,008
)
 
$
569,595



Nine Months Ended September 30, 2018
Services
 
International
 
Products
 
Corp/Elim
 
Total
United States
$
364,813

 
$
506

 
$
8,846

 
$
(2,595
)
 
$
371,570

Other Americas
66,170

 
5,751

 
552

 
(1,138
)
 
71,335

Europe
3,037

 
105,499

 
3,118

 
(2,752
)
 
108,902

Asia-Pacific
633

 
4,482

 
4,770

 
(100
)
 
9,785

Total
$
434,653

 
$
116,238

 
$
17,286

 
$
(6,585
)
 
$
561,592



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 Sheets. 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 Sheets at the end of each reporting period within accounts receivables or 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 $3.4 million. Changes in the contract asset and liability balances during the quarter ended September 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 two equity incentive plans: (i) the 2009 Long-Term Incentive Plan (the "2009 Plan") and (ii) the 2016 Long-Term Incentive Plan (the "2016 Plan"). No further awards may be granted under the 2009 Plan, although awards granted under the 2009 Plan 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 nine months ended September 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 September 30, 2019.

The following table sets forth a summary of the stock option activity, weighted-average exercise prices and options outstanding as of September 30, 2019 and September 30, 2018:
 
Nine months ended September 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
(2,093
)
 
$
13.45

 
(25
)
 
$
10.75

Expired or forfeited
(7
)
 
$
10.00

 
—

 
$
—

Outstanding at end of period:
5

 
$
22.35

 
2,105

 
$
13.47

 
Restricted Stock Unit Awards
 
For the three months ended September 30, 2019 and September 30, 2018, the Company recognized share-based compensation expense related to restricted stock unit awards of $1.0 million and $1.3 million, respectively. For the nine months ended September 30, 2019 and September 30, 2018, the Company recognized share-based compensation expense related to restricted stock unit awards of $3.0 million and $3.3 million, respectively. As of September 30, 2019, there was $7.8 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 2.6 years. 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.

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:
 
Nine months ended September 30,
 
2019
 
2018
Restricted stock awards vested
148

 
158

Fair value of awards vested
$
2,168

 
$
3,406


A summary of the fully-vested common stock the Company issued to its six non-employee directors, in connection with its non-employee director compensation plan, is as follows:
 
Nine months ended September 30,
 
2019
 
2018
Awards issued
30

 
19

Grant date fair value of awards issued
$
450

 
$
400


A summary of the Company's outstanding, non-vested restricted share units is as follows:
 
Nine months ended September 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
(148
)
 
$
20.17

 
(158
)
 
$
20.66

Forfeited
(36
)
 
$
18.38

 
(34
)
 
$
20.36

Outstanding at end of period:
593

 
$
17.08

 
551

 
$
20.37


 
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.

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 equity-classified.


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)

A summary of the Company's PRSU activity is as follows:
 
Nine months ended September 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
(36
)
 
$
14.06

 
(28
)
 
$
19.49

Released
(77
)
 
$
15.86

 
(61
)
 
$
15.04

Forfeited
—

 
$
—

 
(12
)
 
$
16.16

Outstanding at end of period:
354

 
$
16.45

 
300

 
$
18.05



During the nine months ended September 30, 2019 and September 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. Calendar year 2019 PRSUs decreased approximately 33,000 units during the nine months ended September 30, 2019 based on forecasted results for calendar year 2019. Calendar year 2018 PRSUs decreased approximately 32,000 units during the nine months ended September 30, 2018 based on forecasted results for calendar year 2018.

As of September 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 Sheets.

For the three months ended September 30, 2019 and September 30, 2018, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.5 million and $0.4 million, respectively. For the nine months ended September 30, 2019 and September 30, 2018, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $1.2 million and $1.0 million, respectively. At September 30, 2019, there was $3.1 million of total unrecognized compensation costs related to approximately 354,000 non-vested PRSUs, which is expected to be recognized over a remaining weighted-average period of 2.3 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
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
 
 
 
 
 
 
 
 
Basic earnings per share:
 

 
 

 
 
 
 
Numerator:
 

 
 

 
 
 
 
Net income (loss) attributable to Mistras Group, Inc.
$
3,093

 
$
(1,011
)
 
$
5,231

 
$
7,897

Denominator:
 

 
 

 
 

 
 

Weighted-average common shares outstanding
28,800

 
28,429

 
28,678

 
28,360

Basic earnings per share
$
0.11

 
$
(0.04
)
 
$
0.18

 
$
0.28

 
 
 
 
 
 
 
 
Diluted earnings per share:
 

 
 

 
 
 
 
Numerator:
 

 
 

 
 
 
 
Net income (loss) attributable to Mistras Group, Inc.
$
3,093

 
$
(1,011
)
 
$
5,231

 
$
7,897

Denominator:
 

 
 

 
 

 
 

Weighted-average common shares outstanding
28,800

 
28,429

 
28,678

 
28,360

Dilutive effect of stock options outstanding(1)
129

 
—

 
147

 
739

Dilutive effect of restricted stock units outstanding(1)
227

 
—

 
197

 
348

 
29,156

 
28,429

 
29,022

 
29,447

Diluted earnings per share
$
0.11

 
$
(0.04
)
 
$
0.18

 
$
0.27


(1) For the three months ended September 30, 2018, 805 and 364 shares related to stock options and restricted stock, respectively, were excluded from the calculation of diluted EPS due to the net loss for the period.

5.                                      Acquisitions and Dispositions

Acquisitions

During the nine months ended September 30, 2019, the Company completed one acquisition that provides pipeline integrity management software and services to energy transportation companies. The Company acquired all the equity interest of the acquiree in exchange for aggregate consideration of $4.8 million in cash, contingent consideration of up to $4.3 million to be earned based upon the acquired business achieving specific performance metrics over the initial three years of operations from the acquisition date and working capital adjustments, which have not been finalized. The Company accounted for this transaction in accordance with the acquisition method of accounting for business combinations.
 

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)

The following table summarizes the allocation of the preliminary purchase price to the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition, with the excess recorded as goodwill:

Cash paid
$
4,843

Contingent consideration
1,081

Total consideration
$
5,924

 
 
Current assets
$
1,282

Property, plant and equipment
65

Intangible assets
3,467

Goodwill
1,753

Current liabilities
(643
)
Net assets acquired
$
5,924


The assets and liabilities of the business acquired in 2019 are included in the Condensed Consolidated Balance Sheets based upon their estimated fair values on the date of acquisition as determined in a preliminary purchase price allocation, using available information and making assumptions management believes are reasonable. The Company is still in the process of completing its valuation of the assets acquired and liabilities assumed. Goodwill primarily relates to expected synergies and is generally fully deductible for tax purposes. Intangible assets primarily relate to technology and customer relationships.

The results of operations of the business acquired in 2019 have been included in the Services segment within the Unaudited Condensed Consolidated Statements of Income (Loss) from the closing date of this transaction and approximates $0.6 million for revenues and $0.1 million operating loss for the three and nine months ended September 30, 2019.

During the nine months ended September 30, 2018, the Company did not complete any acquisitions.

The Company completed one acquisition during the fourth quarter of 2018. The acquired company primarily provides services to the midstream area within the oil and gas industry, with headquarters in Canada and a location in the U.S. The Company acquired 100% of the equity interests of the acquiree's Canadian and U.S. entities in exchange for aggregate consideration of $143.1 million in cash. The Company accounted for this transaction in accordance with the acquisition method of accounting for business combinations.

During the three months ended September 30, 2019, the Company adjusted provisional amounts recorded and related effects as follows:

•
The Company decreased the $8.5 million provisional fair value of property, plant and equipment by $0.6 million with a corresponding increase to goodwill.
•
The Company increased the $5.0 million provisional fair value of debt and other liabilities by $0.4 million with a corresponding increase to goodwill.

The Company is still in the process of completing the remaining valuation of the assets acquired.

The Company has filed a claim with the seller and the Company's insurance carrier through which the Company has representations and warranty insurance with respect to certain matters that may impact the purchase price. This matter is currently being investigated and discussed with the seller and the Company's insurance carrier.

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)


Acquisition-Related Expense 
 
In the course of its acquisition activities, the Company incurs costs in connection with due diligence, such as 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 reported as Acquisition-related expense (benefit), net on the Unaudited Condensed Consolidated Statements of Income (Loss) and were as follows for the three and nine months ended September 30, 2019 and 2018:

 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Due diligence, professional fees and other transaction costs
$
93

 
$
35

 
$
433

 
$
(334
)
Adjustments to fair value of contingent consideration liabilities
(125
)
 
182

 
537

 
(809
)
Acquisition-related expense (benefit), net
$
(32
)
 
$
217

 
$
970

 
$
(1,143
)

The Company's contingent consideration liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheets.

Dispositions

During the third quarter of 2018, substantially all of the assets and liabilities of a subsidiary in the Products and Systems segment were sold for approximately $4.3 million, inclusive of a $0.5 million post-closing adjustment. For the nine months ended September 30, 2018, the Company recognized a gain of approximately $2.4 million related to the sale, which is reported as a Gain on sale of subsidiary on the Unaudited Condensed Consolidated Statement of Income (Loss). The sale also included a three-year agreement to purchase products from the buyer, with a cumulative commitment of $2.3 million (see Note 14–Commitments and Contingencies).


6.                                      Accounts Receivable, net
 
Accounts receivable consisted of the following:
 
 
September 30, 2019
 
December 31, 2018
 
 
 
 
Trade accounts receivable
$
154,250

 
$
152,511

Allowance for doubtful accounts
(6,226
)
 
(4,187
)
Accounts receivable, net
$
148,024

 
$
148,324

 
The Company had $32.3 million and $16.1 million of unbilled revenues accrued as of September 30, 2019 and December 31, 2018, respectively. These amounts are included in 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 of 2019, the Company reversed $1.0 million of this reserve based on additional information obtained during the quarter. There were no changes during the third quarter of 2019.


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)

During 2019, the Company sold to an unaffiliated third party, without recourse, its remaining outstanding receivables owed from a customer which filed for bankruptcy, and for which the Company had initially recorded 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 second quarter of 2019, the Company recorded a recovery $1.7 million, related to a bad debt provision for the receivables due from this customer. This matter is considered fully resolved.


7.                                      Property, Plant and Equipment, net
 
Property, plant and equipment consisted of the following:
 
 
Useful Life
(Years)
 
September 30, 2019
 
December 31, 2018
 
 
 
 
 
 
Land
 
 
$
2,657

 
$
2,680

Buildings and improvements
30-40
 
24,031

 
24,338

Office furniture and equipment
5-8
 
18,037

 
16,170

Machinery and equipment
5-7
 
221,555

 
208,245

 
 
 
266,280

 
251,433

Accumulated depreciation and amortization
 
 
(170,778
)
 
(157,538
)
Property, plant and equipment, net
 
 
$
95,502

 
$
93,895

 
Depreciation expense for each of the three months ended September 30, 2019 and September 30, 2018 was approximately $5.8 million and $6.0 million, respectively.

Depreciation expense for each of the nine months ended September 30, 2019 and September 30, 2018 was approximately $18.0 million and $18.2 million, respectively.


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
1,753

 
—

 
—

 
1,753

Adjustments to preliminary purchase price allocations
923

 
—

 
—

 
923

Foreign currency translation
2,830

 
(1,644
)
 
—

 
1,186

Balance at September 30, 2019
$
248,982

 
$
34,139

 
$
—

 
$
283,121

 
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 September 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 September 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.


17
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)

9.                                      Intangible Assets
 
The gross amount, accumulated amortization and net carrying amount of intangible assets were as follows:
 
 
 
 
September 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
 
$
112,592

 
$
(65,615
)
 
$
46,977

 
$
112,624

 
$
(60,993
)
 
$
51,631

Software/Technology
3-15
 
72,198

 
(17,071
)
 
55,127

 
67,240

 
(13,319
)
 
53,921

Covenants not to compete
2-5
 
12,735

 
(11,416
)
 
1,319

 
12,593

 
(10,825
)
 
1,768

Other
2-12
 
10,726

 
(7,256
)
 
3,470

 
10,317

 
(6,242
)
 
4,075

Total
 
 
$
208,251

 
$
(101,358
)
 
$
106,893

 
$
202,774

 
$
(91,379
)
 
$
111,395

 
Amortization expense for the three months ended September 30, 2019 and September 30, 2018 was approximately $3.4 million and $2.5 million, respectively.

Amortization expense for the nine months ended September 30, 2019 and September 30, 2018 was approximately $10.5 million and $7.5 million, respectively.


10.                                      Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities consisted of the following:
 
 
September 30, 2019
 
December 31, 2018
 
 
 
 
Accrued salaries, wages and related employee benefits
$
34,020

 
$
29,959

Contingent consideration, current portion
2,732

 
1,687

Accrued workers’ compensation and health benefits
4,882

 
5,086

Deferred revenue
5,153

 
5,046

Pension accrual
3,064

 
5,585

Right-of-use liability - operating
9,636

 
—

Other accrued expenses
26,965

 
26,532

Total
$
86,452

 
$
73,895

 
11.                               Long-Term Debt
 
Long-term debt consisted of the following:
 
September 30, 2019
 
December 31, 2018
 
 
 
 
Senior credit facility
$
163,233

 
$
181,656

Senior secured term loan, net of debt issuance costs of $0.1 million
96,163

 
99,897

Notes payable
—

 
68

Other
7,920

 
8,999

Total debt
267,316

 
290,620

Less: Current portion
(6,563
)
 
(6,833
)
Long-term debt, net of current portion
$
260,753

 
$
283,787

 

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)

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 provides 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 September 30, 2019, the Company had borrowings of $259.4 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 $0.9 million as of September 30, 2019, which is included in Other assets on the Condensed Consolidated Balance Sheets.
 
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 certain 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, June 30, and 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 the Company and its 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

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

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 September 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.
 
Notes Payable and Other

The Company's other debt includes local bank financing provided at the local subsidiary level used to support working capital requirements and fund capital expenditures. At September 30, 2019, there was an aggregate of approximately $7.9 million outstanding, payable at various times from 2019 to 2029. Monthly payments range from $1 thousand to $17 thousand and 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:
 
 
 
Nine months ended September 30,
 
 
2019
 
2018
Beginning balance
 
$
2,365

 
$
5,508

Acquisitions
 
1,081

 
—

Payments
 
(755
)
 
(2,282
)
Accretion of liability
 
85

 
149

Revaluation
 
452

 
(957
)
Foreign currency translation
 
50

 
(65
)
Ending balance
 
$
3,278

 
$
2,353

 
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.

 

20
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)

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 Sheets includes the following related to operating leases:
Leases
 
Classification
 
Nine months ended September 30, 2019
Assets
 
 
 
 
Right-of-use assets
 
Other Assets
 
$
42,433

 
 
 
 
 
Liabilities
 
 
 
 
Right-of-use liability - current
 
Accrued and other current liabilities
 
$
9,636

Right-of-use liability - long-term
 
Other liabilities
 
33,531

Total right-of-use liabilities
 
 
 
$
43,167


Included within the balance of operating leases is a lease for the Company’s headquarters which is with a related party. The ROU liability for this facility is approximately $4.7 million as of September 30, 2019 and total rent payments made during the three and nine months ended September 30, 2019 were approximately $0.2 million and $0.7 million, respectively.
As of September 30, 2019, the total ROU assets attributable to finance leases are approximately $16.5 million, which is included in Property, plant, and equipment, net on the Condensed Consolidated Balance Sheets.
The components of lease costs were as follows:
 
 
Classification
 
Three months ended September 30, 2019
 
Nine months ended September 30, 2019
Finance lease expense
 
 
 
 
 
 
      Amortization of ROU assets
 
Depreciation and amortization
 
$
1,205

 
$
3,605

      Interest on lease liabilities
 
Interest expense
 
194

 
578

Operating lease expense
 
Selling, General & Administrative expenses
 
3,230

 
9,453

Short-term lease expense
 
Selling, General & Administrative expenses
 
12

 
18

Variable lease expense
 
Selling, General & Administrative expenses
 
282

 
828

Total
 
 
 
$
4,923

 
$
14,482



21
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)

Additional information related to leases was as follows:
 
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities for finance leases
 
      Finance - financing cash flows
$
3,338

      Finance - operating cash flows
$
578

     Operating - operating cash flows
$
9,361

ROU assets obtained in the exchange for lease liabilities
 
      Finance leases
$
5,536

      Operating leases
$
12,766

Weighted-average remaining lease term (in years)
 
      Finance leases
6.0

      Operating leases
6.1

Weighted-average discount rate
 
      Finance leases
6.2
%
      Operating leases
6.0
%

Maturities of lease liabilities as of September 30, 2019 were as follows:
 
Finance
 
Operating
Remainder of 2019
$
1,761

 
$
3,130

2020
5,119

 
11,431

2021
3,420

 
8,955

2022
2,550

 
6,877

2023
1,661

 
5,976

Thereafter
1,465

 
15,677

Total
15,976

 
52,046

Less: Present value discount
(1,426
)
 
(8,879
)
Lease liability
$
14,550

 
$
43,167


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



22
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)

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 allegedly 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. Most of the claims have been settled, including the claims covered by the McAllister case, and the two remaining unresolved claims are for economic loss and property damage only, and all of the claims, including the two that have not yet been resolved, have been or will be fully covered by the Company's insurance.

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 and would be investigating the site. The purpose of the investigation was 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. The Company has not received any further notices from EPA regarding this matter. 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. 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.

23
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)

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 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 nine months ended September 30, 2019 for this potential withdrawal liability. The Company’s subsidiary reached an agreement with one of the pension funds in September 2019, for a final payment of $0.9 million in complete satisfaction of the withdrawal liability of the subsidiary. This payment was subsequently paid in October 2019. The balance of the estimated total amount of this potential liability as of September 30, 2019 is approximately $3.1 million, which includes the $0.9 million paid in October 2019.

Severance and labor disputes

During the third quarter of 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 September 30, 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 would not renew several of these leasing services contracts when they expire beginning in 2019. Due to the limit 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 September 30, 2019, the Company accrued approximately $1.1 million for estimated 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. The $1.1 million of estimated obligations is net of $0.2 million in payments and $0.2 million in reversals due to employees being transitioned to customer contracts.

Acquisition and disposition related contingencies
 
The Company is liable for contingent consideration in connection with certain of its acquisitions. As of September 30, 2019, total potential acquisition-related contingent consideration ranged from zero to approximately $7.9 million and would be payable upon the achievement of specific performance metrics by certain of the acquired companies over the next year. See Note 5–Acquisitions and Dispositions 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 $1.6 million is remaining as of September 30, 2019. The agreement is based on third party pricing and the Company's planned purchase requirements over the three year purchase period 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.
 

24
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)

•
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: (with intercompany transactions eliminated in Corporate and eliminations)
 
 
Three months ended
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Revenues
 

 
 

 
 
 
 
Services
$
152,572

 
$
141,340

 
$
454,079

 
$
434,653

International
37,050

 
36,671

 
109,302

 
116,238

Products and Systems
5,521

 
5,716

 
13,222

 
17,286

Corporate and eliminations
(2,951
)
 
(1,558
)
 
(7,008
)
 
(6,585
)
 
$
192,192

 
$
182,169

 
$
569,595

 
$
561,592

 
 
Three months ended
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Gross profit
 

 
 

 
 
 
 
Services
$
43,330

 
$
38,838

 
$
127,903

 
$
113,675

International
11,695

 
10,877

 
33,113

 
34,273

Products and Systems
2,739

 
2,604

 
5,803

 
7,707

Corporate and eliminations
5

 
13

 
(105
)
 
(96
)
 
$
57,769

 
$
52,332

 
$
166,714

 
$
155,559

 
 
Three months ended
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Income (loss) from operations
 

 
 

 
 
 
 
Services
$
15,757

 
$
8,289

 
$
40,715

 
$
36,892

International
2,921

 
(662
)
 
5,155

 
2,713

Products and Systems
509

 
2,415

 
(1,224
)
 
2,032

Corporate and eliminations
(8,408
)
 
(7,025
)
 
(22,844
)
 
(21,917
)
 
$
10,779

 
$
3,017

 
$
21,802

 
$
19,720

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

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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
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Depreciation and amortization
 

 
 

 
 

 
 

Services
$
6,882

 
$
5,951

 
$
21,360

 
$
17,892

International
2,027

 
2,179

 
6,158

 
6,720

Products and Systems
312

 
362

 
901

 
1,091

Corporate and eliminations
50

 
5

 
121

 
33

 
$
9,271

 
$
8,497

 
$
28,540

 
$
25,736

 
 
September 30, 2019
 
December 31, 2018
Intangible assets, net
 

 
 

Services
$
95,350

 
$
98,362

International
9,982

 
11,143

Products and Systems
1,247

 
1,438

Corporate and eliminations
314

 
452

 
$
106,893

 
$
111,395

 

 
September 30, 2019
 
December 31, 2018
Total assets
 

 
 

Services
$
545,863

 
$
523,506

International
147,844

 
146,535

Products and Systems
15,029

 
12,264

Corporate and eliminations
19,291

 
11,732

 
$
728,027

 
$
694,037

 
Refer to Note 2–Revenue, for revenues by geographic area for the three and nine months ended September 30, 2019 and 2018.
 

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. The Board of Directors approved the termination of the stock repurchase plan effective on April 1, 2019. There were no repurchases of common stock during 2019.


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Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)


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 and nine months ended September 30, 2019 and September 30, 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, dated 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
• Consulting
• Maintenance
• Data Management
• Access
• Monitoring
• Laboratory Quality Assurance/Control (QA/QC)
• Equipment

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Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)



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 asset intensive infrastructure in our target markets. These markets include:

• Oil & Gas (Downstream, Midstream, Upstream and Petrochemical)
• Aerospace & Defense
• Industrial
• Power Generation and Transmission (including nuclear and renewable)
• 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 have a distinct competitive advantage. We believe these trends also enable us to be opportunistic as we consider strategic acquisitions of smaller providers of inspection services. 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 structural integrity and reliability of critical energy, industrial and materials, 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.


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Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)


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. We believe these actions, including the acquisitions made 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 have already generated 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. Aging infrastructure requires more frequent inspection and maintenance in comparison to new infrastructure,thereby requiring companies and public authorities to 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 customers 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.


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Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)


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.

Crude Oil Prices. We believe that this present range for crude oil prices is expected to persist for the foreseeable future. With the prices lower, we have seen reductions in NDT and maintenance spending, but not to the extent as in recent years due to the price stabilization. We do believe customers will defer inspection or maintenance spending from time to time, which we will see occurring in later 2019 into early 2020.

More Effective NDT Services. We believe customers are constantly looking for ways to reduce their overall inspection and maintenance spending, while maintaining the reliability and safety of their operations. Accordingly, we believe providers of NDT and inspection services that utilize data analytics, risk-based inspection planning and other advanced tools and platforms that can provide customers with effective inspections at an overall lower cost will be more successful and gain market share.


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 the non-GAAP financial measures of other companies.


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Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)


Results of Operations
 
Condensed consolidated results of operations for the nine months ended September 30, 2019 and September 30, 2018 were as follows:
 
Three months ended
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Revenues
$
192,192

 
$
182,169

 
$
569,595

 
$
561,592

Gross profit
57,769

 
52,332

 
166,714

 
155,559

Gross profit as a % of Revenue
30.1
%
 
28.7
%
 
29.3
%
 
27.7
%
Total operating expenses
46,990

 
49,315

 
144,912

 
135,839

Operating expenses as a % of Revenue
24.4
%
 
27.1
%
 
25.4
%
 
24.2
%
Income from operations
10,779

 
3,017

 
21,802

 
19,720

Income from Operations as a % of Revenue
5.6
%
 
1.7
%
 
3.8
%
 
3.5
%
Interest expense
2,959

 
1,894

 
10,065

 
5,581

Income before provision for income taxes
7,820

 
1,123

 
11,737

 
14,139

Provision for income taxes
4,733

 
2,133

 
6,493

 
6,229

Net income (loss)
3,087

 
(1,010
)
 
5,244

 
7,910

Less: Net income (loss) attributable to non-controlling interests, net of taxes
(6
)
 
1

 
13

 
13

Net income (loss) attributable to Mistras Group, Inc.
$
3,093

 
$
(1,011
)
 
$
5,231

 
$
7,897

 
Revenue
 
Revenues for the three months ended September 30, 2019 were $192.2 million, an increase of $10.0 million, or 6%, compared with the three months ended September 30, 2018. Revenues for the nine months ended September 30, 2019 were $569.6 million, an increase of $8.0 million, or 1%, compared with the nine months ended September 30, 2018.

Revenues by segment for the three and nine months ended September 30, 2019 and September 30, 2018 were as follows:
 
Three months ended
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Revenues
 

 
 

 
 
 
 
Services
$
152,572

 
$
141,340

 
$
454,079

 
$
434,653

International
37,050

 
36,671

 
109,302

 
116,238

Products and Systems
5,521

 
5,716

 
13,222

 
17,286

Corporate and eliminations
(2,951
)
 
(1,558
)
 
(7,008
)
 
(6,585
)
 
$
192,192

 
$
182,169

 
$
569,595

 
$
561,592

 
Three Months

In the three months ended September 30, 2019, total revenues increased 6% due to a combination of mid-single-digit acquisition growth and a low single-digit organic growth, partially offset by the unfavorable impact of foreign exchange rates. Services segment revenues increased 8%, driven by mid-single-digit acquisition growth and low single-digit organic growth, partially offset by the low-single digit unfavorable impact of foreign exchange rates. International segment revenues increased 1%, driven by mid-single-digit organic growth, partially offset by the mid-single-digit unfavorable impact of foreign exchange rates. Products and Systems segment revenues decreased by 3%, due primarily to the sale of a subsidiary within the segment during the third quarter of 2018.


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Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)


Oil and gas customer revenues comprised approximately 59% and 55% of total revenues for the three months ended September 30, 2019 and 2018, respectively. Aerospace and defense customer revenues comprised approximately 12% and 14% of total revenues for the three months ended September 30, 2019 and 2018, respectively. This decrease in aerospace and defense customer revenues is attributed to the run-off of the German staff leasing contracts in the International segment, as more fully described in Note 14–Commitments and Contingencies to the condensed consolidated financial statements in this Quarterly Report, and the increase in volume in the oil and gas market is due to the Onstream acquisition completed in the fourth quarter of 2018. The Company’s top ten customers comprised approximately 34% of total revenues for the three months ended September 30, 2019, as compared to 32% for the three months ended September 30, 2018, with no customer accounting for 10% or more of total revenues in either three-month period.

Nine months

In the nine months ended September 30, 2019, total revenues increased 1% due to a combination of mid-single-digit acquisition growth, partially offset by low single-digit organic decline and low single-digit unfavorable impact of foreign exchange rates. Services segment revenues increased 5%, driven by mid-single-digit acquisition growth, partially offset by low single-digit organic decline and the unfavorable impact of foreign exchange rates. International segment revenues decreased 6%, driven by the unfavorable impact of foreign exchange rates. Products and Systems segment revenues decreased by 24% driven by lower sales volume and by the sale of a subsidiary in this segment during the third quarter of 2018.

Oil and gas customer revenues comprised approximately 59% and 56% of total revenues for the nine months ended September 30, 2019 and 2018, respectively. Aerospace and defense customer revenues comprised approximately 13% and 15% of total revenues for the nine months ended September 30, 2019 and 2018, respectively. This decrease in aerospace and defense customer revenues is attributed to the run-off of the German staff leasing contracts in the International segment, as more fully described in Note 14–Commitments and Contingencies to the condensed consolidated financial statements in this Quarterly Report, and the increased volume in the oil and gas market is due to the Onstream acquisition completed in the fourth quarter of 2018. The Company’s top ten customers comprised approximately 35% of total revenues for both the nine months ended September 30, 2019 and the nine months ended September 30, 2018, with no customer accounting for 10% or more of total revenues in either nine-month period.

Gross Profit

Gross profit increased by $5.4 million, or 10%, in the three months ended September 30, 2019, on an increase in sales of 6%. Gross profit increased by $11.2 million, or 7%, in the nine months ended September 30, 2019, on an increase in sales of 1%.

Gross profit by segment for the nine months ended September 30, 2019 and September 30, 2018 was as follows:
 
 
Three months ended
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Gross profit
 

 
 

 
 
 
 
Services
$
43,330

 
$
38,838

 
$
127,903

 
$
113,675

   % of segment revenue
28.4
%
 
27.5
%
 
28.2
%
 
26.2
%
International
11,695

 
10,877

 
33,113

 
34,273

   % of segment revenue
31.6
%
 
29.7
%
 
30.3
%
 
29.5
%
Products and Systems
2,739

 
2,604

 
5,803

 
7,707

   % of segment revenue
49.6
%
 
45.6
%
 
43.9
%
 
44.6
%
Corporate and eliminations
5

 
13

 
(105
)
 
(96
)
 
$
57,769

 
$
52,332

 
$
166,714

 
$
155,559

   % of total revenue
30.1
%
 
28.7
%
 
29.3
%
 
27.7
%


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Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)


Three months

Gross profit margin was 30.1% and 28.7% for the three month periods ended September 30, 2019 and 2018, respectively. Services segment gross profit margins had a year-on-year increase of 90 basis points to 28.4% during the three months ended September 30, 2019, due primarily to mix of sales, increase in sales volume related to the acquisition completed in the fourth quarter of 2018 and favorable operating leverage. International segment gross margins had a year-on-year increase of 190 basis points to 31.6% during the three months ended September 30, 2019, due primarily to favorable sales mix and improved labor utilization. Products and Systems segment gross margin had a year-on-year increase of 400 basis points to 49.6% during the three months ended September 30, 2019 due to a favorable sales mix.

Nine months

Gross profit margin was 29.3% and 27.7% for the nine months ended September 30, 2019 and 2018, respectively. Services segment gross profit margins had a year-on-year increase of 200 basis points to 28.2% during the nine months ended September 30, 2019, due primarily to favorable operating leverage and service mix, and increase in sales volume related the acquisition completed in the fourth quarter of 2018. International segment gross margins had a year-on-year increase of 80 basis points to 30.3% during the nine months ended September 30, 2019 due to a favorable sales mix. Products and Systems segment gross margin had a year-on-year decline of 70 basis points to 43.9% in the nine months ended September 30, 2019. This decrease was primarily driven by a lower sales volume and less favorable sales mix.


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Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)


Income from Operations

The following table shows a reconciliation of the income from operations to income before special items for each of the Company's three segments and for the Company in total:

 
Three months ended
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Services:
 

 
 

 
 
 
 
Income from operations (GAAP)
$
15,757

 
$
8,289

 
$
40,715

 
$
36,892

Bad debt provision for troubled customers, net of recoveries
—

 
—

 
2,778

 
—

Reorganization and other costs
125

 
292

 
202

 
292

Pension withdrawal expense (benefit)
(45
)
 
5,886

 
489

 
5,886

Acquisition-related expense (benefit), net
(125
)
 
181

 
577

 
(809
)
Income before special items (non-GAAP)
15,712

 
14,648

 
44,761

 
42,261

International:
 

 
 

 
 

 
 

Income (loss) from operations (GAAP)
2,921

 
(662
)
 
5,155

 
2,713

Reorganization and other costs
90

 
2,808

 
355

 
3,544

Acquisition-related expense (benefit), net
—

 
—

 
—

 
(409
)
Bad debt provision for troubled customers, net of recoveries
—

 
—

 
20

 
—

Income before special items (non-GAAP)
3,011

 
2,146

 
5,530

 
5,848

Products and Systems:
 

 
 

 
 

 
 

Income (loss) from operations (GAAP)
509

 
2,415

 
(1,224
)
 
2,032

Gain on sale of subsidiary
—

 
(2,384
)
 
—

 
(2,384
)
Reorganization and other costs
218

 
—

 
218

 
29

Income (loss) before special items (non-GAAP)
727

 
31

 
(1,006
)
 
(323
)
Corporate and Eliminations:
 

 
 

 
 

 
 

Loss from operations (GAAP)
(8,408
)
 
(7,025
)
 
(22,844
)
 
(21,917
)
Reorganization and other costs
44

 
305

 
104

 
305

Acquisition-related expense, net
93

 
36

 
393

 
75

Loss before special items (non-GAAP)
(8,271
)
 
(6,684
)
 
(22,347
)
 
(21,537
)
Total Company:
 

 
 

 
 

 
 

Income from operations (GAAP)
$
10,779

 
$
3,017

 
$
21,802

 
$
19,720

Pension withdrawal expense
(45
)
 
5,886

 
489

 
5,886

Gain on sale of subsidiary
—

 
(2,384
)
 
—

 
(2,384
)
Bad debt provision for troubled customers, net of recoveries
—

 
—

 
2,798

 
—

Reorganization and other costs
477

 
3,405

 
879

 
4,170

Acquisition-related expense (benefit), net
(32
)
 
217

 
970

 
(1,143
)
Income before special items (non-GAAP)
$
11,179

 
$
10,141

 
$
26,938

 
$
26,249

 
Three months
For the three months ended September 30, 2019, income from operations (GAAP) increased $7.8 million, or 257%, compared with the three months ended September 30, 2018, while income before special items (non-GAAP) increased $1.0 million, or 10%. As a percentage of revenues, income before special items increased by 20 basis points to 5.8% in the three months ended September 30, 2019 from 5.6% in the three months ended September 30, 2018.

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(tabular dollars are in thousands)


 
Operating expenses (GAAP), as a percentage of revenue, decreased to 24% for the three months ended September 30, 2019 from 27% for the three months ended September 30, 2018. Operating expenses, excluding special items, (non-GAAP), as a percentage of revenues, was 24% of revenue for the three months ended September 30, 2019 compared to 23% for the three months ended September 30, 2018. The table above highlights the special expense items that resulted in a lower GAAP operating expense percentage for 2019 compared to 2018. In addition to the special items, for both GAAP and non-GAAP comparisons, there was $3.3 million of operating expenses relating to the Onstream acquisition, inclusive of depreciation and amortization of $1.3 million for the three months ended September 30, 2019.

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 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 nine months ended September 30, 2019 for this potential withdrawal liability. The Company’s subsidiary reached an agreement with one of the pension funds in September 2019, for a final payment of $0.9 million in complete satisfaction of the withdrawal liability of the subsidiary. This payment was subsequently paid in October 2019. The balance of the estimated total amount of this potential liability as of September 30, 2019 is approximately $3.1 million, which includes the $0.9 million paid in October 2019.

Nine months

For the nine months ended September 30, 2019, income from operations (GAAP) increased $2.1 million, compared with the nine months ended September 30, 2018, while income before special items (non-GAAP) increased $0.7 million, or 3%. As a percentage of revenues, income before special items was consistent at 4.7% for the nine months ended September 30, 2019 and nine months ended September 30, 2018, respectively.

Operating expenses (GAAP), as a percentage of revenue, increased to 25% for the nine months ended September 30, 2019 from 24% for the nine months ended September 30, 2018. Operating expenses, excluding special items (non-GAAP), as a percentage of revenues, increased to 25% of revenues for the nine months ended September 30, 2019 from 23% for the nine months ended September 30, 2018. The chart above highlights the special expense items that resulted in a higher GAAP operating expense percentage for 2019 compared to 2018. In addition to the special items, for both GAAP and non-GAAP comparisons, there was $9.6 million of operating expenses for the Onstream acquisition, inclusive of depreciation and amortization of $3.9 million for the nine months ended September 30, 2019.
  
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 of 2019, the Company reversed $1.0 million of this reserve based on additional information obtained during the quarter. There was no change during the third quarter of 2019.

During 2019, the Company sold to an unaffiliated third party, without recourse, its remaining outstanding receivables from a customer which filed a voluntary 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 second quarter of 2019, the Company recorded a recovery $1.7 million, related to a bad debt provision for the receivables due from this customer. This matter is considered fully resolved.


35
Table of Contents
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)


Interest Expense
 
Interest expense was approximately $3.0 million and $1.9 million for the three months ended September 30, 2019 and 2018, respectively. Interest expense was approximately $10.1 million and $5.6 million for the nine months ended September 30, 2019 and 2018, respectively. The increases were due to higher average levels of borrowing on the Company's Credit Agreement attributable primarily to borrowings for the acquisition completed during the fourth quarter of 2018, and to a lesser extent, from an increase in the base borrowing rate.
 
Income Taxes

The Company’s effective income tax rate was approximately 61% and 190% for the three months ended September 30, 2019 and 2018, respectively. The Company's effective income tax rate was approximately 55% and 44% for the nine months ended September 30, 2019 and 2018, respectively. The effective income tax rate for the three and nine months ended September 30, 2019 and 2018 was higher than the statutory rate due to the impact of discrete items, GILTI and executive compensation, and other provisions resulting from the passage of the Tax Act and foreign tax rates different than statutory rates in the U.S. The discrete items had an impact on our effective tax rate of approximately 17% and 15% for the three and nine months ended September 30, 2019, respectively, and approximately 119% and 12% for the three and nine months ended September 30, 2018, respectively.


Liquidity and Capital Resources
 
Cash flows are summarized in the table below:
 
Nine months ended
 
September 30, 2019
 
September 30, 2018
Net cash provided by (used in):
 

 
 

Operating activities
$
40,476

 
$
24,184

Investing activities
(21,628
)
 
(9,831
)
Financing activities
(29,521
)
 
(23,905
)
Effect of exchange rate changes on cash
(499
)
 
(916
)
Net change in cash and cash equivalents
$
(11,172
)
 
$
(10,468
)
 
Cash Flows from Operating Activities
 
During the nine months ended September 30, 2019, cash provided by operating activities was $40.5 million, representing a year-on-year increase of $16.3 million, or 67%. The increase was primarily attributable to movements in working capital.

Cash Flows from Investing Activities
 
During the nine months ended September 30, 2019, cash used in investing activities was $21.6 million, compared with $9.8 million in 2018. Capital expenditures were $18.0 million for the first nine months of 2019, compared with $15.8 million in the comparable 2018 period. During the nine months ended September 30, 2019, the Company paid $4.8 million for an acquisition. During the nine months ended September 30, 2018, the Company received $4.8 million from the sale of a subsidiary in the Products segment. (see Note 5–Acquisitions and Dispositions to the condensed consolidated financial statements in this Quarterly Report)

Cash Flows from Financing Activities

Net cash used in financing activities was $29.5 million for the nine months ended September 30, 2019. The Company paid down $21.8 million, net, on its Credit Agreement, inclusive of quarterly payments of the Term Loan, as well as payments of $4.1 million of finance lease obligations and other debt. For the comparable period in 2018, net cash used in financing activities was $23.9 million. The Company paid down $15.9 million, net, on its Credit Agreement, inclusive of quarterly payments of the Term Loan, as well as $4.6 million payments of capital lease obligations and other debt.

36
Table of Contents
Mistras Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
(tabular dollars are in thousands)



Effect of Exchange Rate Changes on Cash and Cash Equivalents
 
The effect of exchange rate changes on our cash and cash equivalents was a net impact of $0.5 million in the first nine months of 2019, compared to a net impact of $0.9 million for the first nine months of 2018.

Cash Balance and Credit Facility Borrowings
 
The terms of our Credit Agreement have not changed from those set forth in Part II, Item 7 of our 2018 Annual Report under the Section “Liquidity and Capital Resources”, under the heading “Cash Balance and Credit Facility Borrowings,” and in Note 11–Long-Term Debt to these condensed consolidated financial statements in this Quarterly Report, under the heading “Senior Credit Facility.”
 
As of September 30, 2019, we had cash and cash equivalents totaling $14.4 million and available borrowing capacity of $131.4 million under our Credit Agreement with borrowings of $259.4 million and $5.4 million of letters of credit outstanding. We finance operations primarily through our existing cash balances, cash collected from operations, bank borrowings and capital lease financing. We believe these sources are sufficient to fund our operations for the foreseeable future.
 
As of September 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.

Contractual Obligations

There have been no significant changes in our contractual obligations and outstanding indebtedness as disclosed in the 2018 Annual Report.

Off-balance Sheet Arrangements
 
During the nine months ended September 30, 2019, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the 2018 Annual Report.
 
ITEM 3.                                                Quantitative and Qualitative Disclosures about Market Risk
 
There have been no significant changes to the Company’s quantitative and qualitative disclosures about market risk as discussed in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” included in the 2018 Annual Report.
 
ITEM 4.                                                Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As of September 30, 2019, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Exchange Act. Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
 

37
Table of Contents

Changes in Internal Control Over Financial Reporting
 
There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

38
Table of Contents

PART II—OTHER INFORMATION
 
ITEM 1.                                                Legal Proceedings
 
See Note 14–Commitments and Contingencies to the condensed consolidated financial statements included in this Quarterly Report for a description of our legal proceedings. There have been no material developments with regard to any matters disclosed under Part I, Item 3 "Legal Proceedings" in our 2018 Annual Report, except as disclosed in such Note 14–Commitments and Contingencies.
 
ITEM 1.A.                                    Risk Factors
 
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors discussed under the “Risk Factors” section included in our 2018 Annual Report. There have been no material changes to the risk factors previously disclosed in the 2018 Annual Report.

 
ITEM 2.                                                Unregistered Sale of Equity Securities and Use of Proceeds
 
(a) Sales of Unregistered Securities
 
None.
 
(b) Use of Proceeds from Public Offering of Common Stock
 
None.
 
(c) Repurchases of Our Equity Securities
 
The following table sets forth the shares of our common stock we acquired during the quarter as a result of the surrender of shares by employees to satisfy tax withholding obligations in connection with the vesting of restricted stock units.
 
Month Ending
Total Number of Shares (or
Units) Purchased
 
Average Price Paid per
Share (or Unit)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 31, 2019
4,831

 
$
15.02

 
—

 
$
—

August 31, 2019
140,680

 
$
15.65

 
—

 
$
—

September 30, 2019
—

 
$
—

 
—

 
$
—


(1) - On October 7, 2015, the Company announced that its Board of Directors approved a share repurchase plan, which authorized the expenditure of up to $50.0 million for the purchase of the Company's common stock. Effective April 1, 2019, the Company's Board of Directors terminated its share repurchase plan, of which $25.1 million was remaining before the aforementioned termination of the plan.

ITEM 3.                                                Defaults Upon Senior Securities
 
None.
 
ITEM 4.                                                Mine Safety Disclosures
 
Not applicable.
 
ITEM 5.                                                Other Information
 
None.
 

39
Table of Contents

ITEM 6.                                                Exhibits
 
Exhibit No.
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Schema Document
 
 
 
101.CAL
 
XBRL Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Labels Linkbase Document
 
 
 
101.PRE
 
XBRL Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Definition Linkbase Document



40
Table of Contents

Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
MISTRAS GROUP, INC.
 
 
 
 
By:
/s/ Edward J. Prajzner
 
 
Edward J. Prajzner
 
 
Senior Vice President, Chief Financial Officer and Treasurer
 
 
(Principal Financial and Accounting Officer and duly authorized officer)
 
Date: November 6, 2019


41
Exhibit


Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13A-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
I, Dennis Bertolotti, certify that:
1.
I have reviewed this report on Form 10-Q of Mistras Group, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2019
 
/s/ Dennis Bertolotti
 
Dennis Bertolotti
 
President and Chief Executive Officer
 
(Principal Executive Officer)




Exhibit


Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13A-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
I, Edward J. Prajzner, certify that:
1.
I have reviewed this report on Form 10-Q of Mistras Group, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2019
 
/s/ Edward J. Prajzner
 
Edward J. Prajzner
 
Senior Vice President, Chief Financial Officer and Treasurer
 
(Principal Financial Officer)



Exhibit


Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, for the purposes of section 1350 of chapter 63 of title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Mistras Group, Inc. (the “Company”), that, to his knowledge, the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This written statement is being furnished to the Securities and Exchange Commission as an exhibit to the Report.

Dated: November 6, 2019

 
/s/ Dennis Bertolotti
 
Dennis Bertolotti
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
/s/ Edward J. Prajzner
 
Edward J. Prajzner
 
Senior Vice President, Chief Financial Officer and Treasurer
 
(Principal Financial Officer)