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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020
 
Or
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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueMGNew 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
 Emerging Growth Company
 
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).
 Yes  ý No


As of October 31, 2020, the registrant had 29,192,562 shares of common stock outstanding.



Table of Contents
TABLE OF CONTENTS
 
 PAGE
 
  
 
    
  
    
  
Unaudited Condensed Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2020 and September 30, 2019
    
  
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and September 30, 2019
    
Unaudited Condensed Consolidated Statements of Equity for the three and nine months ended September 30, 2020 and September 30, 2019
  
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and September 30, 2019
    
  
    
 
    
 
    
 
  
 
  
 
    
 
    
 
    
 
    
 
    
 
    
 
  
 
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, 2020December 31, 2019
ASSETS(unaudited) 
Current Assets  
Cash and cash equivalents$22,116 $15,016 
Accounts receivable, net114,090 135,997 
Inventories14,902 13,413 
Prepaid expenses and other current assets16,699 14,729 
Total current assets167,807 179,155 
Property, plant and equipment, net91,771 98,607 
Intangible assets, net69,389 109,537 
Goodwill201,623 282,410 
Deferred income taxes1,811 1,786 
Other assets48,374 48,383 
Total assets$580,775 $719,878 
LIABILITIES AND EQUITY  
Current Liabilities  
Accounts payable$12,588 $15,033 
Accrued expenses and other current liabilities78,415 81,389 
Current portion of long-term debt9,889 6,593 
Current portion of finance lease obligations3,651 4,131 
Income taxes payable1,737 2,094 
Total current liabilities106,280 109,240 
Long-term debt, net of current portion226,617 248,120 
Obligations under finance leases, net of current portion11,291 13,043 
Deferred income taxes4,219 21,290 
Other long-term liabilities46,841 42,163 
Total liabilities395,248 433,856 
Commitments and contingencies
Equity  
Preferred stock, 10,000,000 shares authorized
  
Common stock, $0.01 par value, 200,000,000 shares authorized, 29,191,876 and 28,945,472 shares issued and outstanding
292 289 
Additional paid-in capital233,267 229,205 
Retained earnings (deficit)(22,029)77,613 
Accumulated other comprehensive loss(26,209)(21,285)
Total Mistras Group, Inc. stockholders’ equity185,321 285,822 
Non-controlling interests206 200 
Total equity185,527 286,022 
Total liabilities and equity$580,775 $719,878 
 
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income (Loss)
(in thousands, except per share data)

 Three months ended September 30,Nine months ended September 30,
 2020201920202019
  
Revenue$147,894 $192,192 $431,794 $569,595 
Cost of revenue94,930 129,241 286,208 386,721 
Depreciation5,580 5,182 16,400 16,160 
Gross profit47,384 57,769 129,186 166,714 
Selling, general and administrative expenses37,113 42,328 116,278 126,014 
Bad debt provision for troubled customers, net of recoveries   2,798 
Impairment charges  106,062  
Pension withdrawal expense (45) 489 
Research and engineering638 650 2,170 2,261 
Depreciation and amortization3,182 4,089 10,359 12,380 
Acquisition-related expense (benefit), net709 (32)186 970 
Income (loss) from operations5,742 10,779 (105,869)21,802 
Interest expense3,645 2,959 9,410 10,065 
Income (loss) before provision (benefit) for income taxes2,097 7,820 (115,279)11,737 
Provision (benefit) for income taxes544 4,733 (15,645)6,493 
Net income (loss)1,553 3,087 (99,634)5,244 
Less: Net income (loss) attributable to non-controlling interests, net of taxes30 (6)8 13 
Net income (loss) attributable to Mistras Group, Inc.$1,523 $3,093 $(99,642)$5,231 
Earnings (loss) per common share:  
Basic$0.05 $0.11 $(3.43)$0.18 
Diluted$0.05 $0.11 $(3.43)$0.18 
Weighted-average common shares outstanding:  
Basic29,177 28,800 29,086 28,678 
Diluted29,311 29,156 29,086 29,022 
 
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
 
 Three months ended September 30,Nine months ended September 30,
 2020201920202019
Net income (loss)$1,553 $3,087 $(99,634)$5,244 
Other comprehensive income (loss):  
Foreign currency translation adjustments5,963 (5,425)(4,924)355 
Comprehensive income (loss)7,516 (2,338)(104,558)5,599 
Less: comprehensive income (loss) attributable to non-controlling interest34 (8)6 11 
Comprehensive income (loss) attributable to Mistras Group, Inc.$7,482 $(2,330)$(104,564)$5,588 
 
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Equity
(in thousands)
Three months ended
Common StockAdditional
paid-in capital
Retained
earnings
(deficit)
Accumulated
other
comprehensive income (loss)
Total
Mistras Group,
Inc.
Stockholders’ Equity
Noncontrolling Interest 
SharesAmountTotal Equity
Balance at June 30, 202029,110 $291 $231,724 $(23,552)$(32,172)$176,291 $172 $176,463 
Net income— — — 1,523 — 1,523 30 1,553 
Other comprehensive income, net of tax— — — — 5,963 5,963 4 5,967 
Share-based payments— — 1,593 — — 1,593 — 1,593 
Net settlement of restricted stock units82 1 (50)— — (49)— (49)
Balance at September 30, 202029,192 $292 $233,267 $(22,029)$(26,209)$185,321 $206 $185,527 
Balance at June 30, 201928,685 $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 units230 3 (2,278)— — (2,275)— (2,275)
Balance at September 30, 201928,915 $289 $228,287 $76,784 $(27,202)$278,158 $188 $278,346 



Nine months ended
Common StockAdditional paid-in capitalRetained earnings (deficit)Accumulated other comprehensive income (loss)Total Mistras Group, Inc. Stockholders’ EquityNoncontrolling Interest
SharesAmountTotal Equity
Balance at December 31, 201928,945 $289 $229,205 $77,613 $(21,285)$285,822 $200 $286,022 
Net income (loss)— — — (99,642)— (99,642)8 (99,634)
Other comprehensive (loss), net of tax— — — — (4,924)(4,924)(2)(4,926)
Share-based payments— — 4,391 — — 4,391 — 4,391 
Net settlement of restricted stock units247 3 (329)— — (326)— (326)
Balance at September 30, 202029,192 $292 $233,267 $(22,029)$(26,209)$185,321 $206 $185,527 
Balance at December 31, 201828,563 $285 $226,616 $71,553 $(27,557)$270,897 $177 $271,074 
Net income— — — 5,231 — 5,231 13 5,244 
Other comprehensive income (loss), net of tax— — — — 355 355 (2)353 
Share-based payments— — 4,598 — — 4,598 — 4,598 
Net settlement of restricted stock units349 4 (2,959)— — (2,955)— (2,955)
Exercise of stock options3 — 32 — — 32 — 32 
Balance at September 30, 201928,915 $289 $228,287 $76,784 $(27,202)$278,158 $188 $278,346 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands
 Nine months ended September 30,
 20202019
Cash flows from operating activities  
Net income (loss)$(99,634)$5,244 
Adjustments to reconcile net loss to net cash provided by operating activities  
Depreciation and amortization26,759 28,540 
Impairment charges106,062  
Deferred income taxes(16,831)3,151 
Share-based compensation expense4,312 4,598 
Bad debt provision for troubled customers, net of recoveries 2,798 
Fair value adjustments to contingent consideration 186 537 
Foreign currency (gain) loss1,965 (1,010)
Other2,419 (143)
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions 
Accounts receivable20,319 (3,098)
Inventories(1,845)(391)
Prepaid expenses and other assets(2,305)439 
Accounts payable(2,357)(261)
Accrued expenses and other liabilities3,069 (2,465)
Income taxes payable(328)2,537 
Net cash provided by operating activities41,791 40,476 
Cash flows from investing activities  
Purchase of property, plant and equipment(10,676)(17,275)
Purchase of intangible assets(311)(704)
Acquisition of business, net of cash acquired (4,822)
Proceeds from sale of equipment429 1,173 
Net cash used in investing activities(10,558)(21,628)
Cash flows from financing activities  
Repayment of finance lease obligations(3,078)(3,338)
Proceeds from borrowings of long-term debt2,245 684 
Repayment of long-term debt(4,334)(5,189)
Proceeds from revolver27,250 20,500 
Repayment of revolver(44,000)(38,500)
Payment of financing costs(1,497) 
Payment of contingent consideration for business acquisitions(1,337)(755)
Taxes paid related to net share settlement of share-based awards(326)(2,955)
Proceeds from exercise of stock options 32 
Net cash used in financing activities(25,077)(29,521)
Effect of exchange rate changes on cash and cash equivalents944 (499)
Net change in cash and cash equivalents7,100 (11,172)
Cash and cash equivalents at beginning of period15,016 25,544 
Cash and cash equivalents at end of period$22,116 $14,372 
Supplemental disclosure of cash paid  
Interest$9,061 $9,944 
Income taxes, net of refunds$1,633 $4,011 
Noncash investing and financing  
Equipment acquired through finance lease obligations$1,607 $5,536 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
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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)
    

1.    Description of Business and Basis of Presentation
 
Description of Business
 
Mistras Group, Inc. and subsidiaries ("the Company") is a leading “one source” multinational provider of integrated technology-enabled asset protection solutions helping to maximize the safety and operational uptime for civilization’s most critical industrial and civil assets.

Backed by an innovative, data-driven asset protection portfolio, proprietary technologies, and decades-long legacy of industry leadership, the Company helps clients in the oil and gas, aerospace and defense, power generation, infrastructure, and manufacturing industries towards achieving and maintaining operational excellence. By supporting these organizations that help fuel our vehicles and power our society; inspecting components that are trusted for commercial, defense, and space craft; and building real-time monitoring equipment to enable safe travel across bridges, the Company helps the world at large.

The Company enhances value for its clients by integrating asset protection throughout supply chains and centralizing integrity data through a suite of Industrial IoT-connected digital software and monitoring solutions. The company’s core capabilities also include non-destructive testing (“NDT”) field inspections enhanced by advanced robotics, laboratory quality control and assurance testing, sensing technologies and NDT equipment, asset and mechanical integrity engineering services, and light mechanical maintenance and access services.

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.

Recent Developments

In March 2020, the World Health Organization declared the outbreak of the COVID-19 coronavirus (COVID-19) as a pandemic, which continues to infect the population throughout the United States and most other parts of the world. The COVID-19 pandemic has caused significant volatility in domestic and international markets. There is on-going uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies. In addition, oil prices have dropped significantly, and airline traffic has experienced a significant decline. In response to various factors surrounding the COVID-19 pandemic and, in the case of the oil and gas market, other macroeconomic events, companies within the oil and gas and aerospace industries (including our customers) have reduced spending and/or slowed down (or temporarily ceased) production. This, in turn, resulted in decreases in awards of new contracts or adjustments, reductions, suspensions or cancellations of existing contracts.

The COVID-19 pandemic, significant volatility in oil prices and decreased traffic in the aerospace industry have adversely affected the Company's workforce and operations, as well as the operations of the Company's customers, suppliers and contractors. These negative factors have also resulted in significant volatility and uncertainty in the markets in which the Company operates. To successfully navigate through this unprecedented period, the Company continues to focus on the following key priorities:

Ensuring the health and safety of its employees and those of its customers and suppliers;
Maintaining business continuity and financial strength and stability; and
Serving its customers as they provide essential products and services to the world.

While the Company cannot fully assess the impact that the factors discussed above will have on its operations at this time, there are certain impacts that the Company has identified:

The financial market volatility that resulted from COVID-19 and the volatility in oil prices required the Company to reassess the goodwill it had recorded related to various prior acquisitions under the guidance of ASC 350 during 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)
first quarter of 2020. The Company determined that the fair values of various reporting units were less than their carrying values (including goodwill). As a result, the Company recorded an impairment charge related to goodwill of approximately $77.1 million during the three months ended March 31, 2020. See Note 8-Goodwill.
These same events required the Company to reassess the tangible and intangible assets recorded under the guidance of ASC 360 during the first quarter of 2020. The Company determined that the fair values of certain asset groups were less than their carrying values (excluding goodwill). As a result, the Company recorded impairment charges related to intangible assets of approximately $28.8 million and a right-of-use asset of approximately $0.2 million during the three months ended March 31, 2020. See Note 9-Intangible Assets and Note 13-Leases.

To respond to the economic downturn resulting from the factors discussed above, in March 2020 the Company initiated a cost reduction and efficiency program. As part of this program, named executive officers of the Company took voluntarily temporary salary reductions ranging from 25% to 45% of their base salary. In addition, the Company instituted a reduction for certain other salaried employees, at lower percentages, and suspended the Company's voluntary match under the Company sponsored savings plans for its U.S. and Canadian employees. These reductions became effective at the beginning of the second quarter of 2020 and, except for the salary reductions for certain lower salaried employees, continued through the end of the third quarter of 2020. In addition, the Company’s non-employee directors voluntarily agreed to a $3,750 reduction in their second and third quarter 2020 director's fee payments. Beginning in the fourth quarter of 2020, all salary and director fee reductions were removed and pay levels were returned to first quarter levels, though certain other cost reduction measures have remained in place.

The Company is currently unable to predict with certainty the overall impact that the factors discussed above may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine. The Company will continue to monitor market conditions and respond accordingly.

Basis of Presentation
 
The Unaudited Condensed Consolidated Financial Statements contained in this report have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"). In the opinion of management, the Unaudited 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, 2020 and December 31, 2019.

The Company follows guidance on the consolidation of variable interest entities (VIEs) that requires companies to utilize a qualitative approach to determine whether it is the primary beneficiary of a VIE. The process for identifying the primary beneficiary of a VIE requires consideration of the factors that indicate a party has the power to direct the activities that most significantly impact the VIE’s economic performance, including powers granted to the VIE’s program manager, powers contained in the VIE governing board and, to a certain extent, a company’s economic interest in the VIE. The Company analyzes its joint ventures and classifies them as either:
a VIE that must be consolidated because the Company is the primary beneficiary, or the joint venture is not a VIE and the Company holds the majority voting interest with no significant participative rights available to the other partners; or
a VIE that does not require consolidation and is treated as an equity method investment because the Company is not the primary beneficiary or the joint venture is not a VIE and the Company does not hold the majority voting interest.

As part of the above analysis, if it is determined that the Company has the power to direct the activities that most significantly impact the joint venture’s economic performance, the Company considers whether or not it has the obligation to absorb losses or rights to receive benefits of the VIE that could potentially be significant to the VIE.

The Company became the primary beneficiary in July 2020 of a VIE in which the Company has a 49% interest in a limited partnership, and a 49% shareholder in the corporate general partner of the limited partnership. The Company consolidated the financial statements of the VIE with the financial statements of the Company. As of and the for the three months ended September 30, 2020, the VIE had no assets nor did it have any revenue. The Company is the primary sub-contractor of the VIE.

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
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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)
Audited Consolidated Financial Statements contained in the Company's 2019 Annual Report on Form 10-K ("2019 Annual Report").
 
Principles of Consolidation
 
The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of Mistras Group, Inc. as well as its wholly-owned subsidiaries, majority-owned subsidiaries and consolidated VIE. 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.
 
Customers

For each of the nine months ended September 30, 2020 and 2019, 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 2019 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 2019 Annual Report, there have been no material changes to the Company's significant accounting policies.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided if it is more likely than not that some or all of a deferred income tax asset will not be realized. Financial accounting standards prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. These standards also provide guidance on de-recognition, measurement, and classification of amounts relating to uncertain tax positions, accounting for and disclosure of interest and penalties, accounting in interim periods and disclosures required. Interest and penalties related to unrecognized tax positions are recognized as incurred within “provision for income taxes” in the Consolidated Statements of Income (Loss). ASC 740-270, Income Taxes-Interim Reporting, requires the Company to use an estimated annual effective tax rate (EAETR) for calculating its tax provision for interim periods. At each interim period, the Company is required, with certain exceptions and limitations, to estimate its forecasted worldwide EAETR, which is applied to the Company's year-to-date consolidated ordinary income or loss resulting in the year-to-date income tax provision before considering items not included in ordinary income or loss. The tax effects of events or transactions not considered to represent ordinary income or loss are accounted for discretely in the interim period and are not included in the determination of the EAETR.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act, among other things, includes tax provisions relating to deferment of employer’s social security payments, net operating loss utilization and carryback periods, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property (QIP). The ultimate impact of the CARES Act may differ from the estimated impact the Company recorded during this interim period due to changes in interpretations and guidance that may be issued and actions the Company may take in response to the CARES Act. The Company will continue to assess the impact that various provisions of the CARES Act, and how they are interpreted and effected, will have on its business.

The Company continues to evaluate its deferred tax assets each period to determine if a valuation allowance is required based on whether it is more likely than not that some portion of these deferred tax assets will not be realized. As of September 30, 2020, management concluded that it is more likely than not that a substantial portion of the Company's deferred tax assets will
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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)
be realized. As part of the Company's analysis, it considered both positive and negative factors that impact profitability and whether those factors would lead to a change in the estimate of the Company's deferred tax assets that may be realized in the future.

The Company’s effective income tax rate was approximately 26% and 61% for the three months ended September 30, 2020 and 2019, respectively. The Company’s effective income tax rate was approximately 14% and 55% for the nine months ended September 30, 2020 and 2019, respectively. The effective income tax rate for the third quarter of 2020 was greater than the statutory rate due to the unfavorable impact of taxes in other jurisdictions and other permanent book to tax differences offset by the favorable impact of the CARES act. The effective income tax rate for the first nine-months of 2020 was lower than the statutory rate primarily due to impairments for which the Company will not realize income tax benefits, partially offset by income tax benefits of the CARES Act. The CARES Act provides a five-year carryback of net operating losses generated in years 2018 through 2020. As the statutory federal income tax rate applicable to certain years within the carryback period is 35%, carryback to those years of the Company's estimated 2020 annual federal tax loss provides a tax benefit in excess of the current federal statutory rate of 21%, resulting in an increased income tax benefit. The Company projects that the income tax effects of the CARES Act will result in additional income tax benefit recognized throughout the 2020 tax year and a cash refund in 2021 of taxes paid in prior years. The effective income tax rate for the three and nine months ended September 30, 2019 was higher than the statutory rate due to the impact of discrete items, the global intangible low-taxed income (GILTI), executive compensation, other provisions resulting from the December 22, 2017 passage of the Tax Cuts and Jobs Act and foreign tax rates different than statutory rates in the U.S.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities related to outside basis differences. The standard is effective for interim and annual periods beginning January 1, 2021, with certain amendments applied prospectively and others requiring retrospective application. Early adoption is permitted, with any adjustments reflected as of the beginning of the fiscal year of adoption. If early adoption is elected, all changes as a result of the standard must be adopted in the same period. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations, and cash flows.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations, and cash flows.


2.    Revenue

The Company derives the majority of its revenue by providing services on a time and material basis, which are generally short-term in nature. The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.
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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)
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 the Company's 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 the Company's 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 its 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 the Company 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.

The Company's performance obligations are satisfied over time as work progresses or at a point in time. The majority of the Company's revenue recognized over time as work progresses is related to its service deliverables, which includes providing testing, inspection and mechanical services to the Company's 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 the Company's 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 the Company's revenue 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 the Company's 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 the Company's 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 revenue, thus creating a loss, a provision for the total estimated loss is recorded in that period.

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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)
Revenue by Category

The following series of tables present the Company's disaggregated revenue:

Revenue by industry was as follows:

Three Months Ended September 30, 2020ServicesInternationalProductsCorp/ElimTotal
Oil & Gas$72,195 $9,749 $51 $ $81,995 
Aerospace & Defense10,904 3,676 72  14,652 
Industrials 12,209 5,261 442  17,912 
Power generation & Transmission9,053 2,054 390  11,497 
Other Process Industries6,023 2,373 85  8,481 
Infrastructure, Research & Engineering5,309 2,245 1,223  8,777 
Other4,028 1,119 1,669 (2,236)4,580 
Total$119,721 $26,477 $3,932 $(2,236)$147,894 


Three Months Ended September 30, 2019ServicesInternationalProductsCorp/ElimTotal
Oil & Gas$100,927 $11,561 $71 $ $112,559 
Aerospace & Defense12,420 9,626 438  22,484 
Industrials 15,612 5,453 506  21,571 
Power generation & Transmission7,215 3,462 461  11,138 
Other Process Industries6,942 2,674 304  9,920 
Infrastructure, Research & Engineering4,205 1,964 2,964  9,133 
Other5,251 2,310 777 (2,951)