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 March 31, 2022
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (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 | ||||||||||||
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 | 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).
As of April 29, 2022, the registrant had 29,805,316 shares of common stock outstanding.
TABLE OF CONTENTS
| PAGE | |||||||||||
Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021 | |||||||||||
Unaudited Condensed Consolidated Statements of Loss for the three months ended March 31, 2022 and March 31, 2021 | |||||||||||
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2022 and March 31, 2021 | |||||||||||
Unaudited Condensed Consolidated Statements of Equity for the three months ended March 31, 2022 and March 31, 2021 | |||||||||||
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and March 31, 2021 | |||||||||||
i
PART I—FINANCIAL INFORMATION
ITEM 1. Financial Statements
Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
| March 31, 2022 | December 31, 2021 | ||||||||||
| ASSETS | (unaudited) | ||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Current portion of finance lease obligations | |||||||||||
| Income taxes payable | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net of current portion | |||||||||||
| Obligations under finance leases, net of current portion | |||||||||||
| Deferred income taxes | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Equity | |||||||||||
Preferred stock, | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total Mistras Group, Inc. stockholders’ equity | |||||||||||
| Non-controlling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
1
Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Loss
(in thousands, except per share data)
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | $ | $ | |||||||||
| Cost of revenue | |||||||||||
| Depreciation | |||||||||||
| Gross profit | |||||||||||
| Selling, general and administrative expenses | |||||||||||
| Legal settlement and insurance recoveries, net | ( | ||||||||||
| Research and engineering | |||||||||||
| Depreciation and amortization | |||||||||||
| Acquisition-related expense, net | |||||||||||
| Loss from operations | ( | ( | |||||||||
| Interest expense | |||||||||||
| Loss before benefit for income taxes | ( | ( | |||||||||
| Benefit for income taxes | ( | ( | |||||||||
| Net Loss | ( | ( | |||||||||
| Less: net income attributable to noncontrolling interests, net of taxes | |||||||||||
| Net Loss attributable to Mistras Group, Inc. | $ | ( | $ | ( | |||||||
| Loss per common share | |||||||||||
| Basic | $ | ( | $ | ( | |||||||
| Diluted | $ | ( | $ | ( | |||||||
| Weighted-average common shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
2
Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net Loss | $ | ( | $ | ( | |||||||
| Other comprehensive loss: | |||||||||||
| Foreign currency translation adjustments | $ | $ | ( | ||||||||
| Comprehensive Loss | ( | ( | |||||||||
| Less: net income attributable to noncontrolling interest | |||||||||||
| Comprehensive loss attributable to Mistras Group, Inc. | $ | ( | $ | ( | |||||||
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
3
Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Equity
(in thousands)
| Three months ended | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Total Mistras Group, Inc. Stockholders’ Equity | Noncontrolling Interest | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based payments | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Net settlement of restricted stock units | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based payments | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Net settlement of restricted stock units | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
4
Mistras Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(In Thousands)
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities | |||||||||||
| Depreciation and amortization | |||||||||||
| Deferred income taxes | |||||||||||
| Share-based compensation expense | |||||||||||
| Fair value adjustments to contingent consideration | |||||||||||
| Foreign currency loss | |||||||||||
| Other | ( | ||||||||||
| Changes in operating assets and liabilities, net of effect of acquisitions and dispositions | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Income taxes payable | ( | ||||||||||
| Payment of contingent consideration liability in excess of acquisition-date fair value | ( | ||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities | |||||||||||
| Purchase of property, plant and equipment | ( | ( | |||||||||
| Purchase of intangible assets | ( | ( | |||||||||
| Acquisition of business, net of cash acquired | ( | ||||||||||
| Proceeds from sale of equipment | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Repayment of finance lease obligations | ( | ( | |||||||||
| Repayment of long-term debt | ( | ( | |||||||||
| Proceeds from revolver | |||||||||||
| Repayment of revolver | ( | ( | |||||||||
| Payment of contingent consideration for business acquisitions | ( | ( | |||||||||
| Taxes paid related to net share settlement of share-based awards | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net change in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Supplemental disclosure of cash paid (received) | |||||||||||
| Interest, net | $ | $ | |||||||||
| Income taxes, net of refunds | $ | ( | $ | ||||||||
| Noncash investing and financing | |||||||||||
| Equipment acquired through finance lease obligations | $ | $ | |||||||||
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
5
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
1. Description of Business and Basis of Presentation
Description of Business
Mistras Group, Inc. and subsidiaries (the Company) is a leading “one source” 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 with asset-intensive infrastructure in the oil and gas, aerospace and defense, industrials, power generation, and transmission (including alternative and renewable energy), other process industries and infrastructure, research and engineering and other 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 Internet of Things ("IoT")-connected digital software and monitoring solutions, including OneSuite™, which serves as an ecosystem platform, pulling together all of the Company’s software and data services capabilities, for the benefit of its customers.
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.
Recent Developments
The COVID-19 coronavirus (COVID-19) pandemic has continued to cause disruption and volatility in domestic and international markets although conditions continue to improve during 2022 as compared to 2021. The Company's businesses have been classified as non-healthcare critical infrastructure as defined by the U.S. Centers for Disease Control and Prevention (CDC). Our facilities, and the Company's customers facilities as well, have remained open with staffing modifications and precautionary procedures taken as necessary.
Overall, the Company has taken actions to help ensure the health and safety of Company employees and those of its customers and suppliers; maintain business continuity and financial strength and stability; and serve customers as they provide essential products and services to the world.
The COVID-19 pandemic uncertainty, significant volatility in oil prices, and decreased traffic in the aerospace industry have adversely affected the operations of the Company's customers, suppliers and contractors beginning in the first quarter of 2020, and as a consequence, the Company's results of operations, were adversely impacted. These negative factors continue to cause volatility and uncertainty in the markets in which the Company operates, although the Company in 2022 has nevertheless begun approaching pre-pandemic levels of activity in certain end markets, particularly oil and gas where crude oil prices have exceeded pre-pandemic levels.
The Company has eliminated substantially all of the cost reduction initiatives undertaken in 2020, including re-installment of the savings plan employer match and increasing wages back to pre-pandemic amounts.
The Company is currently unable to predict with certainty the overall impact that the factors discussed above and the effect of the Russian-Ukrainian conflict may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine. To date, the Company's European operations have begun to see increased costs associated with higher energy costs, among others, due in part to the on-going conflict. The Company will continue to monitor market conditions and respond accordingly.
6
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
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") and Securities and Exchange Commission ("SEC") guidance allowing for reduced disclosure for interim periods. 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, 2022 and December 31, 2021.
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 2021 Annual Report on Form 10-K ("2021 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 variable interest entities (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 Loss. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations of companies acquired are included from the date of acquisition.
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 three months ended March 31, 2022 and 2021, 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 2021 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 2021 Annual Report, there have been no material changes to the Company's significant accounting policies.
7
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Income Taxes
Income taxes are accounted for under the asset and liability method. We recognize deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Our net deferred tax assets primarily consist of net operating loss carry forwards, or NOLs. 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. A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current and prior years.
As of March 31, 2022, management concluded that it is more likely than not that a substantial portion of the Company's deferred tax assets will be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
The Company’s effective income tax rate was approximately 19.3 % and 32.7 % for the three months ended March 31, 2022 and 2021, respectively. The effective income tax rate benefit for the three months ended March 31, 2022 was lower than the statutory rate primarily due to the impact of an unfavorable discrete item related to stock compensation. The effective income tax rate for the three months ended March 31, 2021 was higher than the statutory rate due to the capitalization of certain non-US intercompany balances which resulted in a deductible foreign exchange loss in the US.
Recent Accounting Pronouncements
In March 2020 and updated in January 2021, the FASB issued ASU 2020-04 and 2021-01,“Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing 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 applicable contracts and the available expedients provided by the new guidance.
2. Revenue
The Company derives the majority of its revenue by 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.
Performance Obligations
The Company provides highly integrated and bundled inspection services to its customers. 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. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the Company's 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's 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 is recognized over time as work progresses for the Company's 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
8
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
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. For these arrangements, 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 the Company's revenues are short-term in nature. The Company enters into master service agreements (MSAs) with customers that specify an overall framework and contract terms. The actual contracting to provide services or furnish products are triggered by a work order, purchase order, or some similar document issued pursuant to a MSA which sets forth the scope of services and/or identifies the products to be provided. From time-to-time, the Company may enter into longer-term contracts, which can range from several months to several years. Revenue on certain 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 revenues, thus creating a loss, a provision for the total estimated loss is recorded in that period.
9
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 March 31, 2022 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| Oil & Gas | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Aerospace & Defense | |||||||||||||||||||||||||||||
| Industrials | |||||||||||||||||||||||||||||
| Power generation & Transmission | |||||||||||||||||||||||||||||
| Other Process Industries | |||||||||||||||||||||||||||||
| Infrastructure, Research & Engineering | |||||||||||||||||||||||||||||
| Petrochemical | |||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| Three Months Ended March 31, 2021 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| Oil & Gas | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Aerospace & Defense | |||||||||||||||||||||||||||||
| Industrials | |||||||||||||||||||||||||||||
| Power generation & Transmission | |||||||||||||||||||||||||||||
| Other Process Industries | |||||||||||||||||||||||||||||
| Infrastructure, Research & Engineering | |||||||||||||||||||||||||||||
| Petrochemical | |||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
Revenue per key geographic location was as follows:
| Three Months Ended March 31, 2022 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| United States | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| Other Americas | ( | ||||||||||||||||||||||||||||
| Europe | ( | ||||||||||||||||||||||||||||
| Asia-Pacific | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| Three Months Ended March 31, 2021 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| United States | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| Other Americas | ( | ||||||||||||||||||||||||||||
| Europe | ( | ||||||||||||||||||||||||||||
| Asia-Pacific | ( | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||
10
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 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 its customers before revenue is recognized, resulting in contract liabilities. These assets and liabilities are aggregated on an individual contract basis and reported on the Consolidated Balance Sheets at the end of each reporting period within accounts receivable, net or accrued expenses and other current liabilities.
Revenue recognized during the three months ended March 31, 2022 and 2021 that was included in the contract liability balance at the beginning of such year was $2.2 million and $1.9 million for each period. Changes in the contract asset and liability balances during these periods were not materially impacted by any other factors. The Company applies 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, and the remaining stock option award granted under the 2009 Plan expired during the three months ended March 31, 2022. 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. At the annual shareholders meeting on May 19, 2020, the Company’s shareholders approved an amendment to increase the total number of shares that may be issued under the 2016 Plan by 2.0 million, for a total of 3.7 million shares that are authorized for issuance under the 2016 Plan, of which 383,743 shares were available for future grants as of March 31, 2022.
Stock Options
For each of the three months ended March 31, 2022 and 2021, the Company did no one outstanding stock option award was already fully vested. No unrecognized compensation costs remained related to the stock option award as of March 31, 2022.
| Three months ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
Common Stock Options | Weighted Average Exercise Price | Common Stock Options | Weighted Average Exercise Price | ||||||||||||||||||||
| Outstanding at beginning of period: | $ | $ | |||||||||||||||||||||
| Granted | $ | $ | |||||||||||||||||||||
| Exercised | $ | $ | |||||||||||||||||||||
| Expired or forfeited | ( | $ | $ | ||||||||||||||||||||
| Outstanding at end of period: | $ | $ | |||||||||||||||||||||
11
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
Restricted Stock Unit Awards
For the three months ended March 31, 2022 and March 31, 2021, the Company recognized share-based compensation expense related to restricted stock unit awards of $0.9 million and $0.9 million, respectively. As of March 31, 2022, there was $9.6 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 3.1 years. Upon vesting, restricted stock units are generally net share-settled to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock.
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Restricted stock awards vested | |||||||||||
| Fair value of awards vested | $ | $ | |||||||||
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Awards issued | |||||||||||
| Grant date fair value of awards issued | $ | $ | |||||||||
| Three months ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | ||||||||||||||||||||
| Outstanding at beginning of period: | $ | $ | |||||||||||||||||||||
| Granted | $ | $ | |||||||||||||||||||||
| Released | ( | $ | ( | $ | |||||||||||||||||||
| Forfeited | ( | $ | ( | $ | |||||||||||||||||||
| Outstanding at end of period: | $ | $ | |||||||||||||||||||||
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 specific metrics approved by the Compensation Committee of the Board of Directors of the Company.
For 2021, the Compensation Committee made changes to the Company’s equity incentive compensation plan for its executive officers and approved the new target awards for 2021. For 2021, the three metrics were:
1.Free Cash Flow net cash provided by operating activities less purchases of property, plant, equipment and intangible assets and is subject to adjustments approved by the Compensation Committee.
2.Adjusted EBITDA defined as net income attributable to the Company 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).
3.Total Shareholder Return (TSR) measures the total return to shareholders of the Company during 2021 versus the total return to the shareholders of a predefined peer group of companies that provide inspection, testing, certification or similar industrial services. The return will be measured by the year over year percent change in share price. The share prices used to calculate the return are the average share price during the 20 -trading day period ending on the initial
12
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
measurement date (the last 20 trading days of 2020), compared to the average share price during the 20 -trading day period ending on the final measurement date (the last 20 trading days of 2021). Any cash dividends or distributions paid in 2021 will be added to calculate the return to shareholders during the year. TSR is considered a market condition for which the fair value of PRSUs with this condition is determined using a Monte Carlo valuation model. Key assumptions in the Monte Carlo valuation model included:
a.Expected Volatility. Expected volatility of the Company’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate 1-year performance period.
b.Dividend Yield. The dividend yield assumption was based on historical and anticipated dividend payouts (assumed at zero ).
c.Risk-Free Interest Rate. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate 1-year performance measurement period.
For 2022, the Compensation Committee retained the Company's prior year equity incentive compensation plan for its executive officers including utilizing the same metrics, as defined above, and approved the new target awards for 2022.
PRSUs are equity-classified and compensation costs are initially measured using the fair value of the underlying stock at the date of grant. Compensation costs related to the PRSUs are subsequently adjusted for changes in the expected outcomes of the performance conditions. Compensation cost related to the PRSUs with a market condition is not reversed if the market condition is not achieved, provided the employee requisite service has been rendered. 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.
A summary of the Company's PRSU activity is as follows:
| Three months ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | ||||||||||||||||||||
| Outstanding at beginning of period: | $ | $ | |||||||||||||||||||||
| Granted | $ | $ | |||||||||||||||||||||
| Performance condition adjustments | ( | $ | ( | $ | |||||||||||||||||||
| Released | ( | $ | ( | $ | |||||||||||||||||||
| Forfeited | $ | $ | |||||||||||||||||||||
| Outstanding at end of period: | $ | $ | |||||||||||||||||||||
During the three months ended March 31, 2022 and March 31, 2021, the Compensation Committee approved the final calculation of the award metrics for calendar year 2021 and 2020, respectively. As a result, the calendar year 2022 PRSUs decreased by approximately 56,000 units as a result of the final calculation of award metrics.
For the three months ended March 31, 2022 and March 31, 2021, the Company recognized aggregate share-based compensation expense related to the awards described above of approximately $0.3 million and $0.1 million, respectively. At March 31, 2022, there was $2.6 million of total unrecognized compensation costs related to approximately 656,000 non-vested PRSUs, which is expected to be recognized over a remaining weighted-average period of 2.5 years.
4. Earnings (loss) per Share
Basic earnings (loss) per share is computed by dividing net loss by the weighted-average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net loss 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
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 loss per share:
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Basic loss per share | |||||||||||
| Numerator: | |||||||||||
| Net loss attributable to Mistras Group, Inc. | $ | ( | $ | ( | |||||||
| Denominator: | |||||||||||
| Weighted average common shares outstanding | |||||||||||
| Basic loss per share | $ | ( | $ | ( | |||||||
| Diluted loss per share: | |||||||||||
| Numerator: | |||||||||||
| Net loss attributable to Mistras Group, Inc. | $ | ( | $ | ( | |||||||
| Denominator: | |||||||||||
| Weighted average common shares outstanding | |||||||||||
| Dilutive effect of stock options outstanding | |||||||||||
Dilutive effect of restricted stock units outstanding (1) | |||||||||||
| Diluted loss per share | $ | ( | $ | ( | |||||||
_______________
(1) For the three months ended March 31, 2022 and 2021, 1,212,000 and 509,000 shares, respectively, related to restricted stock were excluded from the calculation of diluted EPS due to the net loss for the period.
5. Acquisitions
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, net on the Unaudited Condensed Consolidated Statements of Loss and were as follows for the three months ended March 31, 2022 and 2021:
| Three months ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Due diligence, professional fees and other transaction costs | $ | $ | |||||||||
| Adjustments to fair value of contingent consideration liabilities | |||||||||||
| Acquisition-related expense, net | $ | $ | |||||||||
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.
6. Accounts Receivable, net
14
Mistras Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(tabular dollars and shares in thousands, except per share data)
| March 31, 2022 | December 31, 2021 | ||||||||||
| Trade accounts receivable | $ | $ | |||||||||
| Allowance for credit losses | ( | ( | |||||||||
| Accounts receivable, net | $ | $ | |||||||||
The Company had $23.7 million and $11.9 million of unbilled revenue accrued as of March 31, 2022 and December 31, 2021, respectively. These amounts are included in the trade accounts receivable balances above. Unbilled revenue is generally billed in the subsequent quarter to their revenue recognition. The Company considers unbilled receivables as short-term in nature as they are normally converted to trade receivables within 90 days, thus future changes in economic conditions will not have a significant effect on the credit loss estimate.
The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of December 31, 2019, approximately $1.4
7. Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
Useful Life (Years) | March 31, 2022 | December 31, 2021 | |||||||||||||||
| Land | $ | $ | |||||||||||||||
| Buildings and improvements | |||||||||||||||||
| Office furniture and equipment | |||||||||||||||||