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 systems to help avoid catastrophic incidents, 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 IIoT - 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
Issues related to the COVID-19 coronavirus (COVID-19) pandemic have subsided significantly during 2022 as compared to 2021. The Russian-Ukrainian war is creating disruption in the oil and gas market and the supply chain in general, which is resulting in some disruption to our business operations. With oil prices high, refineries are working at full capacity and are deferring maintenance and inspection work as much as possible, which is impacting our business as well.
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.
Earlier in 2022, the Company eliminated substantially all of the COVID related 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 inflationary pressures may have on its business, results of operations or liquidity or in other ways which the Company cannot yet determine. The Company’s European operations are currently experiencing increased costs associated with higher energy costs, among others, due in part to the Russian-Ukrainian war. The Company will continue to monitor market conditions and respond accordingly.
Principles of Consolidation
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 for the year ended December 31, 2022, the VIE had immaterial assets and had approximately $4.7 million revenue. The Company is the primary sub-contractor of the VIE.
The accompanying audited 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 Consolidated Balance Sheets. The non-controlling interests in net results, net of tax, is classified separately in the accompanying Consolidated Statements of Income (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.
Reclassifications
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.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") requires that the Company make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date of the financial statements. The Company bases its estimates and assumptions on historical experience, known or expected trends and various other assumptions that it believes to be reasonable. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates, which may cause the Company’s future results to be significantly affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Credit Losses
The Company maintains an allowance for credit losses on its accounts receivable balances, which represents its best estimate of current expected credit losses over the contractual life of the accounts receivable. When evaluating the adequacy of its allowance for credit losses each reporting period, the Company analyzes accounts receivable balances with similar risk characteristics on a collective basis, considering factors such as the aging of receivable balances, payment terms (primarily with 30 day terms), geographic location, historical loss experience, current information and future expectations (generally considered one year which is consistent with expected collectability of the Company's trade receivables).
The Company monitors and considers whether historical loss rates are consistent with expectation of supportable forward-looking estimates for its trade receivables noting any current or future economic considerations that would require adjusting the Company’s historical loss experience. Each reporting period, the Company reassesses whether any accounts receivable no longer share similar risk characteristics and should instead be evaluated as part of another pool or on an individual basis. Changes to the allowance for credit losses are adjusted through credit loss expense, which is presented within Selling, general and administrative expenses in the Consolidated Statements of Income (Loss).
Concentration of Credit Risk
For each of the years ended December 31, 2022 and 2021, no customer represented 10% or more of the Company's revenue.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At times, cash deposits may exceed the limits insured by the Federal Deposit Insurance Corporation. The Company believes it is not exposed to any significant credit risk or risk of nonperformance of financial institutions.
Inventories
Inventories are stated at the lower of cost or net realizable value, as determined by using the first-in, first-out method, or market. Work in process and finished goods inventory include material, direct labor, variable costs and overhead.
Purchased and Internal-Use Software
The Company capitalizes certain costs that are incurred to purchase or to create and implement internal-use software, which includes software coding, installation and testing. Capitalized costs are amortized on a straight-line basis over three years, the estimated useful life of the software.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is computed utilizing the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed utilizing the straight-line method over the shorter of the remaining lease term or estimated useful life. Repairs and maintenance costs are expensed as incurred.
Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets. The Company tests goodwill for impairment at a “reporting unit” level (which for the Company is represented by (i) its Services segment, (ii) its Products and Systems segment, (iii) the European component of its International segment and (iv) the Brazilian component of its International segment). The Company's annual impairment test is conducted on the first day of the Company's fourth quarter, which is October 1. Goodwill is also tested for impairment whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative impairment test is not necessary. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test.
If the fair value of a reporting unit is less than its carrying value, this is an indicator that the goodwill assigned to that reporting unit may be impaired. An impairment will be recorded in the amount that the fair value is less than the carrying value. The Company considers the income and market approaches to estimating the fair value of its reporting units, which requires significant judgment in evaluation of economic and industry trends, estimated future cash flows, discount rates and other factors.
See Note 8-Goodwill for additional information related to the Company's goodwill impairment test during 2022.
Impairment of Long-lived Assets
The Company reviews the recoverability of its long-lived assets (or asset groups) whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset (group) might not be recoverable. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future undiscounted cash flows. If the total expected future undiscounted cash flows are less than the carrying amount of the assets, a loss is recognized for the difference between fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets.
Acquisitions
The Company allocates the purchase price of acquired businesses to their identifiable tangible assets and liabilities as well as identifiable intangible assets, such as customer relationships, technology, non-compete agreements and trade names. Certain estimates and judgments are required in the application of the fair value techniques, including estimates of the respective acquisition's future performance and related cash flows, selection of a discount rate and economic lives, and use of Level 3 measurements as defined in ASC No. 820, Fair Value Measurements and Disclosure. Deferred taxes are recorded for any differences between the assigned values and tax bases of assets and liabilities.
Research and Engineering
Research and product development costs are expensed as incurred.
Advertising, Promotions and Marketing
The costs for advertising, promotion and marketing programs are expensed as incurred and are included in selling, general and administrative expenses. Advertising expense was approximately $2.0 million, $1.0 million and $0.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other financial current assets and liabilities approximate fair value based on the short-term nature of the items.
Foreign Currency Translation
The financial position and results of operations of the Company’s foreign subsidiaries are measured using their functional currencies, which are their local currencies. Assets and liabilities of foreign subsidiaries are translated into the U.S. Dollar at the exchange rates in effect at the balance sheet date. Income and expenses are translated at the average exchange rate during the period. Translation gains and losses are reported as a component of other comprehensive income (loss) for the period and included in accumulated other comprehensive income (loss) within stockholders’ equity.
Foreign currency (gains) losses arising from transactions denominated in currencies other than the functional currency are included in net income, reported in selling, general and administrative expenses, and were approximately $(0.2) million, $0.4 million, and $3.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Self-Insurance
The Company is self-insured for certain losses relating to workers’ compensation and health benefit claims. The Company maintains third-party excess insurance coverage for all workers' compensation and health benefit claims in excess of approximately $0.3 million per occurrence to reduce its exposure from such claims. Self-insured losses are accrued when it is probable that an uninsured claim has been incurred but not reported and the amount of the loss can be reasonably estimated at the balance sheet date.
Share-based Compensation
The value of services received from employees and directors in exchange for an award of an equity instrument is measured based on the grant-date fair value of the award. Such value is recognized as a non-cash expense on a straight-line basis over the minimum period the individual provides services, which is typically the vesting period of the award with the exception of awards with graded vesting that contain an internal performance measure where each tranche is recognized on a straight-line basis over its vesting period subject to the probability of meeting the performance requirements and adjusted for the number of shares expected to be earned. Awards to certain employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. As share-based compensation expense is based on awards ultimately expected to vest, the amount of expense is reduced for estimated forfeitures. The cost of these awards is recorded in selling, general and administrative expenses in the Company’s Consolidated Statements of Income (Loss).
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.
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.
Recent Accounting Pronouncements
In March 2020 and updated in January 2021, the FASB issued Accounting Standards Update ("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, 2024. The Company is currently evaluating applicable contracts and the available expedients provided by the new guidance.
Principles of Consolidation
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 for the year ended December 31, 2022, the VIE had immaterial assets and had approximately $4.7 million revenue. The Company is the primary sub-contractor of the VIE.
The accompanying audited 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 Consolidated Balance Sheets. The non-controlling interests in net results, net of tax, is classified separately in the accompanying Consolidated Statements of Income (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.
Reclassifications
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.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") requires that the Company make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date of the financial statements. The Company bases its estimates and assumptions on historical experience, known or expected trends and various other assumptions that it believes to be reasonable. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates, which may cause the Company’s future results to be significantly affected.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Credit Losses
The Company maintains an allowance for credit losses on its accounts receivable balances, which represents its best estimate of current expected credit losses over the contractual life of the accounts receivable. When evaluating the adequacy of its allowance for credit losses each reporting period, the Company analyzes accounts receivable balances with similar risk characteristics on a collective basis, considering factors such as the aging of receivable balances, payment terms (primarily with 30 day terms), geographic location, historical loss experience, current information and future expectations (generally considered one year which is consistent with expected collectability of the Company's trade receivables).
The Company monitors and considers whether historical loss rates are consistent with expectation of supportable forward-looking estimates for its trade receivables noting any current or future economic considerations that would require adjusting the Company’s historical loss experience. Each reporting period, the Company reassesses whether any accounts receivable no longer share similar risk characteristics and should instead be evaluated as part of another pool or on an individual basis. Changes to the allowance for credit losses are adjusted through credit loss expense, which is presented within Selling, general and administrative expenses in the Consolidated Statements of Income (Loss).Concentration of Credit Risk
For each of the years ended December 31, 2022 and 2021, no customer represented 10% or more of the Company's revenue.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. At times, cash deposits may exceed the limits insured by the Federal Deposit Insurance Corporation. The Company believes it is not exposed to any significant credit risk or risk of nonperformance of financial institutions.
Inventories
Inventories are stated at the lower of cost or net realizable value, as determined by using the first-in, first-out method, or market. Work in process and finished goods inventory include material, direct labor, variable costs and overhead.
Purchased and Internal-Use Software
The Company capitalizes certain costs that are incurred to purchase or to create and implement internal-use software, which includes software coding, installation and testing. Capitalized costs are amortized on a straight-line basis over three years, the estimated useful life of the software.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is computed utilizing the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is computed utilizing the straight-line method over the shorter of the remaining lease term or estimated useful life. Repairs and maintenance costs are expensed as incurred.
Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair values attributed to underlying net tangible assets and identifiable intangible assets. The Company tests goodwill for impairment at a “reporting unit” level (which for the Company is represented by (i) its Services segment, (ii) its Products and Systems segment, (iii) the European component of its International segment and (iv) the Brazilian component of its International segment). The Company's annual impairment test is conducted on the first day of the Company's fourth quarter, which is October 1. Goodwill is also tested for impairment whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative impairment test is not necessary. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test.
If the fair value of a reporting unit is less than its carrying value, this is an indicator that the goodwill assigned to that reporting unit may be impaired. An impairment will be recorded in the amount that the fair value is less than the carrying value. The Company considers the income and market approaches to estimating the fair value of its reporting units, which requires significant judgment in evaluation of economic and industry trends, estimated future cash flows, discount rates and other factors.Impairment of Long-lived Assets
The Company reviews the recoverability of its long-lived assets (or asset groups) whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset (group) might not be recoverable. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future undiscounted cash flows. If the total expected future undiscounted cash flows are less than the carrying amount of the assets, a loss is recognized for the difference between fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets.
Research and Engineering
Research and product development costs are expensed as incurred.
Advertising, Promotions and Marketing
Fair Value of Financial Instruments
Foreign Currency Translation
The financial position and results of operations of the Company’s foreign subsidiaries are measured using their functional currencies, which are their local currencies. Assets and liabilities of foreign subsidiaries are translated into the U.S. Dollar at the exchange rates in effect at the balance sheet date. Income and expenses are translated at the average exchange rate during the period. Translation gains and losses are reported as a component of other comprehensive income (loss) for the period and included in accumulated other comprehensive income (loss) within stockholders’ equity.
Self-Insurance
The Company is self-insured for certain losses relating to workers’ compensation and health benefit claims. The Company maintains third-party excess insurance coverage for all workers' compensation and health benefit claims in excess of approximately $0.3 million per occurrence to reduce its exposure from such claims. Self-insured losses are accrued when it is probable that an uninsured claim has been incurred but not reported and the amount of the loss can be reasonably estimated at the balance sheet date.
Share-based Compensation
The value of services received from employees and directors in exchange for an award of an equity instrument is measured based on the grant-date fair value of the award. Such value is recognized as a non-cash expense on a straight-line basis over the minimum period the individual provides services, which is typically the vesting period of the award with the exception of awards with graded vesting that contain an internal performance measure where each tranche is recognized on a straight-line basis over its vesting period subject to the probability of meeting the performance requirements and adjusted for the number of shares expected to be earned. Awards to certain employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. As share-based compensation expense is based on awards ultimately expected to vest, the amount of expense is reduced for estimated forfeitures. The cost of these awards is recorded in selling, general and administrative expenses in the Company’s Consolidated Statements of Income (Loss).
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.
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.
Recent Accounting Pronouncements
In March 2020 and updated in January 2021, the FASB issued Accounting Standards Update ("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, 2024. The Company is currently evaluating applicable contracts and the available expedients provided by the new guidance.
The Company derives the majority of its revenue by providing services on a time and material basis that 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 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. For these arrangements, 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 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 an 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.
The Company derives the majority of its revenue by providing services on a time and material basis that 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 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. For these arrangements, 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 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 an 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.
Revenue by Category
The following series of tables present the Company's disaggregated revenue:
Revenue by industry was as follows (in thousands):
| Year ended December 31, 2022 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| Oil & Gas | $ | 356,763 | $ | 30,654 | $ | 335 | $ | — | $ | 387,752 | |||||||||||||||||||
| Aerospace & Defense | 61,475 | 18,763 | 314 | — | $ | 80,552 | |||||||||||||||||||||||
| Industrials | 38,197 | 23,703 | 2,083 | — | $ | 63,983 | |||||||||||||||||||||||
| Power Generation and Transmission | 31,197 | 8,304 | 2,603 | — | $ | 42,104 | |||||||||||||||||||||||
| Other Process Industries | 40,778 | 14,021 | 28 | — | $ | 54,827 | |||||||||||||||||||||||
| Infrastructure, Research & Engineering | 15,283 | 7,946 | 3,994 | — | $ | 27,223 | |||||||||||||||||||||||
| Petrochemical | 15,360 | 536 | — | — | $ | 15,896 | |||||||||||||||||||||||
| Other | 14,283 | 8,498 | 3,370 | (11,115) | $ | 15,036 | |||||||||||||||||||||||
| Total | $ | 573,336 | $ | 112,425 | $ | 12,727 | $ | (11,115) | $ | 687,373 | |||||||||||||||||||
| Year ended December 31, 2021 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| Oil & Gas | $ | 330,880 | $ | 35,232 | $ | 808 | $ | — | $ | 366,920 | |||||||||||||||||||
| Aerospace & Defense | 51,593 | 16,513 | 286 | — | $ | 68,392 | |||||||||||||||||||||||
| Industrials | 41,873 | 24,000 | 1,842 | — | $ | 67,715 | |||||||||||||||||||||||
| Power Generation and Transmission | 39,966 | 9,927 | 2,853 | — | $ | 52,746 | |||||||||||||||||||||||
| Other Process Industries | 38,742 | 12,593 | 64 | — | $ | 51,399 | |||||||||||||||||||||||
| Infrastructure, Research & Engineering | 16,809 | 11,496 | 3,985 | — | $ | 32,290 | |||||||||||||||||||||||
| Petrochemical | 19,378 | 227 | — | — | 19,605 | ||||||||||||||||||||||||
| Other | 16,146 | 7,257 | 3,993 | (9,332) | $ | 18,064 | |||||||||||||||||||||||
| Total | $ | 555,387 | $ | 117,245 | $ | 13,831 | $ | (9,332) | $ | 677,131 | |||||||||||||||||||
| Year ended December 31, 2020 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| Oil & Gas | $ | 279,723 | $ | 39,383 | $ | 377 | $ | — | $ | 319,483 | |||||||||||||||||||
| Aerospace & Defense | 50,813 | 18,166 | 1,292 | — | $ | 70,271 | |||||||||||||||||||||||
| Industrials | 44,919 | 19,657 | 1,852 | — | $ | 66,428 | |||||||||||||||||||||||
| Power Generation and Transmission | 30,005 | 7,559 | 2,323 | — | $ | 39,887 | |||||||||||||||||||||||
| Other Process Industries | 24,671 | 10,029 | 171 | — | $ | 34,871 | |||||||||||||||||||||||
| Infrastructure, Research & Engineering | 17,070 | 10,353 | 6,364 | — | $ | 33,787 | |||||||||||||||||||||||
| Petrochemical | 18,882 | 345 | 53 | — | 19,280 | ||||||||||||||||||||||||
| Other | 10,081 | 2,064 | 4,017 | (7,598) | $ | 8,564 | |||||||||||||||||||||||
| Total | 476,164 | 107,556 | 16,449 | $ | (7,598) | $ | 592,571 | ||||||||||||||||||||||
Revenue per key geographic location was as follows (in thousands):
| Year ended December 31, 2022 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| United States | $ | 485,551 | $ | 910 | $ | 6,495 | $ | (3,083) | $ | 489,873 | |||||||||||||||||||
| Other Americas | 83,877 | 9,076 | 406 | (4,105) | 89,254 | ||||||||||||||||||||||||
| Europe | 2,811 | 99,714 | 1,896 | (3,502) | 100,919 | ||||||||||||||||||||||||
| Asia-Pacific | 1,097 | 2,725 | 3,930 | (425) | 7,327 | ||||||||||||||||||||||||
| Total | $ | 573,336 | $ | 112,425 | $ | 12,727 | $ | (11,115) | $ | 687,373 | |||||||||||||||||||
| Year ended December 31, 2021 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| United States | $ | 472,125 | $ | 912 | $ | 6,469 | $ | (4,284) | $ | 475,222 | |||||||||||||||||||
| Other Americas | 80,013 | 5,003 | 395 | (1,768) | 83,643 | ||||||||||||||||||||||||
| Europe | 1,841 | 108,411 | 2,174 | (2,812) | 109,614 | ||||||||||||||||||||||||
| Asia-Pacific | 1,408 | 2,919 | 4,793 | (468) | 8,652 | ||||||||||||||||||||||||
| Total | $ | 555,387 | $ | 117,245 | $ | 13,831 | $ | (9,332) | $ | 677,131 | |||||||||||||||||||
| Year ended December 31, 2020 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| United States | $ | 406,437 | $ | 911 | $ | 7,551 | $ | (3,410) | $ | 411,489 | |||||||||||||||||||
| Other Americas | $ | 68,150 | $ | 4,581 | $ | 550 | $ | (446) | 72,835 | ||||||||||||||||||||
| Europe | $ | 904 | $ | 99,953 | $ | 3,154 | $ | (3,470) | 100,541 | ||||||||||||||||||||
| Asia-Pacific | $ | 673 | $ | 2,111 | $ | 5,194 | $ | (272) | 7,706 | ||||||||||||||||||||
| Total | $ | 476,164 | $ | 107,556 | $ | 16,449 | $ | (7,598) | $ | 592,571 | |||||||||||||||||||
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 for 2022 and 2021, that was included in the contract liability balance at the beginning of the year was $4.7 million and $4.6 million, respectively. Changes in the contract asset and liability balances during the years ended December 31, 2022 and 2021, were not impacted by any other factors. The Company applies the practical expedient to expense incremental costs incurred related to obtaining a contract when the amortization period of the asset that the Company otherwise would have recognized is one year or less.The following series of tables present the Company's disaggregated revenue:
Revenue by industry was as follows (in thousands):
| Year ended December 31, 2022 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| Oil & Gas | $ | 356,763 | $ | 30,654 | $ | 335 | $ | — | $ | 387,752 | |||||||||||||||||||
| Aerospace & Defense | 61,475 | 18,763 | 314 | — | $ | 80,552 | |||||||||||||||||||||||
| Industrials | 38,197 | 23,703 | 2,083 | — | $ | 63,983 | |||||||||||||||||||||||
| Power Generation and Transmission | 31,197 | 8,304 | 2,603 | — | $ | 42,104 | |||||||||||||||||||||||
| Other Process Industries | 40,778 | 14,021 | 28 | — | $ | 54,827 | |||||||||||||||||||||||
| Infrastructure, Research & Engineering | 15,283 | 7,946 | 3,994 | — | $ | 27,223 | |||||||||||||||||||||||
| Petrochemical | 15,360 | 536 | — | — | $ | 15,896 | |||||||||||||||||||||||
| Other | 14,283 | 8,498 | 3,370 | (11,115) | $ | 15,036 | |||||||||||||||||||||||
| Total | $ | 573,336 | $ | 112,425 | $ | 12,727 | $ | (11,115) | $ | 687,373 | |||||||||||||||||||
| Year ended December 31, 2021 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| Oil & Gas | $ | 330,880 | $ | 35,232 | $ | 808 | $ | — | $ | 366,920 | |||||||||||||||||||
| Aerospace & Defense | 51,593 | 16,513 | 286 | — | $ | 68,392 | |||||||||||||||||||||||
| Industrials | 41,873 | 24,000 | 1,842 | — | $ | 67,715 | |||||||||||||||||||||||
| Power Generation and Transmission | 39,966 | 9,927 | 2,853 | — | $ | 52,746 | |||||||||||||||||||||||
| Other Process Industries | 38,742 | 12,593 | 64 | — | $ | 51,399 | |||||||||||||||||||||||
| Infrastructure, Research & Engineering | 16,809 | 11,496 | 3,985 | — | $ | 32,290 | |||||||||||||||||||||||
| Petrochemical | 19,378 | 227 | — | — | 19,605 | ||||||||||||||||||||||||
| Other | 16,146 | 7,257 | 3,993 | (9,332) | $ | 18,064 | |||||||||||||||||||||||
| Total | $ | 555,387 | $ | 117,245 | $ | 13,831 | $ | (9,332) | $ | 677,131 | |||||||||||||||||||
| Year ended December 31, 2020 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| Oil & Gas | $ | 279,723 | $ | 39,383 | $ | 377 | $ | — | $ | 319,483 | |||||||||||||||||||
| Aerospace & Defense | 50,813 | 18,166 | 1,292 | — | $ | 70,271 | |||||||||||||||||||||||
| Industrials | 44,919 | 19,657 | 1,852 | — | $ | 66,428 | |||||||||||||||||||||||
| Power Generation and Transmission | 30,005 | 7,559 | 2,323 | — | $ | 39,887 | |||||||||||||||||||||||
| Other Process Industries | 24,671 | 10,029 | 171 | — | $ | 34,871 | |||||||||||||||||||||||
| Infrastructure, Research & Engineering | 17,070 | 10,353 | 6,364 | — | $ | 33,787 | |||||||||||||||||||||||
| Petrochemical | 18,882 | 345 | 53 | — | 19,280 | ||||||||||||||||||||||||
| Other | 10,081 | 2,064 | 4,017 | (7,598) | $ | 8,564 | |||||||||||||||||||||||
| Total | 476,164 | 107,556 | 16,449 | $ | (7,598) | $ | 592,571 | ||||||||||||||||||||||
Revenue per key geographic location was as follows (in thousands):
| Year ended December 31, 2022 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| United States | $ | 485,551 | $ | 910 | $ | 6,495 | $ | (3,083) | $ | 489,873 | |||||||||||||||||||
| Other Americas | 83,877 | 9,076 | 406 | (4,105) | 89,254 | ||||||||||||||||||||||||
| Europe | 2,811 | 99,714 | 1,896 | (3,502) | 100,919 | ||||||||||||||||||||||||
| Asia-Pacific | 1,097 | 2,725 | 3,930 | (425) | 7,327 | ||||||||||||||||||||||||
| Total | $ | 573,336 | $ | 112,425 | $ | 12,727 | $ | (11,115) | $ | 687,373 | |||||||||||||||||||
| Year ended December 31, 2021 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| United States | $ | 472,125 | $ | 912 | $ | 6,469 | $ | (4,284) | $ | 475,222 | |||||||||||||||||||
| Other Americas | 80,013 | 5,003 | 395 | (1,768) | 83,643 | ||||||||||||||||||||||||
| Europe | 1,841 | 108,411 | 2,174 | (2,812) | 109,614 | ||||||||||||||||||||||||
| Asia-Pacific | 1,408 | 2,919 | 4,793 | (468) | 8,652 | ||||||||||||||||||||||||
| Total | $ | 555,387 | $ | 117,245 | $ | 13,831 | $ | (9,332) | $ | 677,131 | |||||||||||||||||||
| Year ended December 31, 2020 | Services | International | Products | Corp/Elim | Total | ||||||||||||||||||||||||
| United States | $ | 406,437 | $ | 911 | $ | 7,551 | $ | (3,410) | $ | 411,489 | |||||||||||||||||||
| Other Americas | $ | 68,150 | $ | 4,581 | $ | 550 | $ | (446) | 72,835 | ||||||||||||||||||||
| Europe | $ | 904 | $ | 99,953 | $ | 3,154 | $ | (3,470) | 100,541 | ||||||||||||||||||||
| Asia-Pacific | $ | 673 | $ | 2,111 | $ | 5,194 | $ | (272) | 7,706 | ||||||||||||||||||||
| Total | $ | 476,164 | $ | 107,556 | $ | 16,449 | $ | (7,598) | $ | 592,571 | |||||||||||||||||||
Basic earnings (loss) per share is computed by dividing net income (loss) 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 (i) the weighted average number of shares of common stock outstanding during the period and (ii) 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 stock during the period and (ii) the pro forma vesting of restricted stock units.
The following table sets forth the computations of basic and diluted earnings (loss) per share (in thousands except share data):
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Basic earnings (loss) per share: | |||||||||||||||||
| Numerator: | |||||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | 6,499 | $ | 3,860 | $ | (99,461) | |||||||||||
| Denominator | |||||||||||||||||
| Weighted average common shares outstanding | 29,901 | 29,572 | 29,147 | ||||||||||||||
| Basic earnings (loss) per share | $ | 0.22 | $ | 0.13 | $ | (3.41) | |||||||||||
| Diluted earnings (loss) per share: | |||||||||||||||||
| Numerator: | |||||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | 6,499 | $ | 3,860 | $ | (99,461) | |||||||||||
| Denominator | |||||||||||||||||
| Weighted average common shares outstanding | 29,901 | 29,572 | 29,147 | ||||||||||||||
| Dilutive effect of stock options outstanding | — | 558 | — | ||||||||||||||
| Dilutive effect of restricted stock units outstanding | 328 | — | — | ||||||||||||||
| 30,229 | 30,130 | 29,147 | |||||||||||||||
| Diluted earnings (loss) per share | $ | 0.21 | $ | 0.13 | $ | (3.41) | |||||||||||
The following potential common stock were excluded from the computation of diluted earnings per share, as the effect would have been anti-dilutive:
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
Potential common stock attributable to restricted stock units (RSUs) and performance stock units (PSUs) outstanding (1) | 1,005 | 109 | 790 | ||||||||||||||
| Potential common stock attributable to stock options outstanding | 1 | 5 | 5 | ||||||||||||||
| Total | 1,006 | 114 | 795 | ||||||||||||||
(1) For the year ended December 31, 2020, 254 shares related to RSUs/PSUs, were excluded from the calculation of diluted EPS due to the net loss for the period.
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Basic earnings (loss) per share: | |||||||||||||||||
| Numerator: | |||||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | 6,499 | $ | 3,860 | $ | (99,461) | |||||||||||
| Denominator | |||||||||||||||||
| Weighted average common shares outstanding | 29,901 | 29,572 | 29,147 | ||||||||||||||
| Basic earnings (loss) per share | $ | 0.22 | $ | 0.13 | $ | (3.41) | |||||||||||
| Diluted earnings (loss) per share: | |||||||||||||||||
| Numerator: | |||||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | 6,499 | $ | 3,860 | $ | (99,461) | |||||||||||
| Denominator | |||||||||||||||||
| Weighted average common shares outstanding | 29,901 | 29,572 | 29,147 | ||||||||||||||
| Dilutive effect of stock options outstanding | — | 558 | — | ||||||||||||||
| Dilutive effect of restricted stock units outstanding | 328 | — | — | ||||||||||||||
| 30,229 | 30,130 | 29,147 | |||||||||||||||
| Diluted earnings (loss) per share | $ | 0.21 | $ | 0.13 | $ | (3.41) | |||||||||||
The following potential common stock were excluded from the computation of diluted earnings per share, as the effect would have been anti-dilutive:
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
Potential common stock attributable to restricted stock units (RSUs) and performance stock units (PSUs) outstanding (1) | 1,005 | 109 | 790 | ||||||||||||||
| Potential common stock attributable to stock options outstanding | 1 | 5 | 5 | ||||||||||||||
| Total | 1,006 | 114 | 795 | ||||||||||||||
(1) For the year ended December 31, 2020, 254 shares related to RSUs/PSUs, were excluded from the calculation of diluted EPS due to the net loss for the period.
Accounts receivable consist of the following (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Trade accounts receivable | $ | 127,767 | $ | 112,739 | |||||||
| Allowance for credit losses | (4,110) | (3,228) | |||||||||
| Accounts receivable, net | $ | 123,657 | $ | 109,511 | |||||||
The Company had $13.5 million and $11.9 million of unbilled revenues accrued as of December 31, 2022 and December 31, 2021, respectively, which is included within the trade accounts receivable balance 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 million of past due receivables were outstanding from this customer. The Company received notice from the customer in December 2019, alleging that the work performed was not in compliance with the contract. The Company filed a lawsuit to recover the $1.4 million and other amounts due to the Company and the customer filed a counterclaim, alleging breach of contract and seeking its damages. The Company recorded a full reserve for this receivable during 2019 and the status of this situation has not changed since 2019. See Note 18-Commitments and Contingencies for additional details.
During the fourth quarter of 2021, the Company wrote off approximately $5 million of past due receivables related to work performed during 2019. The Company recorded a full reserve for these receivables in the prior years.Accounts receivable consist of the following (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Trade accounts receivable | $ | 127,767 | $ | 112,739 | |||||||
| Allowance for credit losses | (4,110) | (3,228) | |||||||||
| Accounts receivable, net | $ | 123,657 | $ | 109,511 | |||||||
Inventories consist of the following (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Raw materials | $ | 5,351 | $ | 4,794 | |||||||
| Work in progress | 336 | 551 | |||||||||
| Finished goods | 5,475 | 4,621 | |||||||||
| Consumable supplies | 2,394 | 2,720 | |||||||||
| Inventories | $ | 13,556 | $ | 12,686 | |||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Raw materials | $ | 5,351 | $ | 4,794 | |||||||
| Work in progress | 336 | 551 | |||||||||
| Finished goods | 5,475 | 4,621 | |||||||||
| Consumable supplies | 2,394 | 2,720 | |||||||||
| Inventories | $ | 13,556 | $ | 12,686 | |||||||
Property, plant and equipment consist of the following:
| December 31, | |||||||||||||||||
| Useful Life | 2022 | 2021 | |||||||||||||||
| (Years) | (in thousands) | ||||||||||||||||
| Land | $ | 2,529 | $ | 2,762 | |||||||||||||
| Building and improvements | 30-40 | 24,800 | 24,787 | ||||||||||||||
| Office furniture and equipment | 5-8 | 18,057 | 16,620 | ||||||||||||||
| Machinery and equipment | 5-7 | 251,282 | 250,166 | ||||||||||||||
| 296,668 | 294,335 | ||||||||||||||||
| Accumulated depreciation and amortization | (219,107) | (207,757) | |||||||||||||||
| Property, plant and equipment, net | $ | 77,561 | $ | 86,578 | |||||||||||||
Depreciation expense was approximately $24.1 million, $25.2 million, and $24.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
| December 31, | |||||||||||||||||
| Useful Life | 2022 | 2021 | |||||||||||||||
| (Years) | (in thousands) | ||||||||||||||||
| Land | $ | 2,529 | $ | 2,762 | |||||||||||||
| Building and improvements | 30-40 | 24,800 | 24,787 | ||||||||||||||
| Office furniture and equipment | 5-8 | 18,057 | 16,620 | ||||||||||||||
| Machinery and equipment | 5-7 | 251,282 | 250,166 | ||||||||||||||
| 296,668 | 294,335 | ||||||||||||||||
| Accumulated depreciation and amortization | (219,107) | (207,757) | |||||||||||||||
| Property, plant and equipment, net | $ | 77,561 | $ | 86,578 | |||||||||||||
Acquisitions
During the year ended December 31, 2021, the Company completed one acquisition for a small NDT services company in Canada. The Company acquired 100% of the common stock in exchange for approximately $0.4 million during the first quarter of 2021. The results of the acquisition's operations are included within the Services segment and are not material to the consolidated financial statements. The Company completed its acquisition accounting for this transaction in accordance with the acquisition method of accounting for business combinations during the year ended December 31, 2021.
Assets and liabilities of the acquired business were included in the Consolidated Balance Sheet based on their respective estimated fair value on the date of acquisition as determined in a purchase price allocation, using available information and making assumptions management believes are reasonable.
Acquisition-Related expense
In the course of its acquisition activities, the Company incurs costs in connection with due diligence, professional fees, and other expenses. Additionally, the Company adjusts the fair value of acquisition-related contingent consideration liabilities on a quarterly basis. These amounts are recorded as acquisition-related expense, net, on the Consolidated Statements of Income (Loss) and were as follows for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Due diligence, professional fees and other transaction costs | $ | 31 | $ | 5 | $ | — | |||||||||||
| Adjustments to fair value of contingent consideration liabilities | 45 | 1,128 | 337 | ||||||||||||||
| Acquisition-related expense, net | $ | 76 | $ | 1,133 | $ | 337 | |||||||||||
As of December 31, 2022, the Company’s contingent consideration liabilities are recorded on the Consolidated Balance Sheet in accrued expenses and other current liabilities.
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Due diligence, professional fees and other transaction costs | $ | 31 | $ | 5 | $ | — | |||||||||||
| Adjustments to fair value of contingent consideration liabilities | 45 | 1,128 | 337 | ||||||||||||||
| Acquisition-related expense, net | $ | 76 | $ | 1,133 | $ | 337 | |||||||||||
The changes in the carrying amount of goodwill by segment is shown below (in thousands):
| Services | International | Products and Systems | Total | ||||||||||||||||||||
| Balance at December 31, 2020 | $ | 190,112 | $ | 15,896 | $ | — | $ | 206,008 | |||||||||||||||
| Adjustments to preliminary purchase price allocations | 280 | — | — | 280 | |||||||||||||||||||
| Foreign currency translation | 264 | (1,113) | — | (849) | |||||||||||||||||||
| Balance at December 31, 2021 | $ | 190,656 | $ | 14,783 | $ | — | $ | 205,439 | |||||||||||||||
| Foreign currency translation | (4,946) | (858) | — | (5,804) | |||||||||||||||||||
| Balance at December 31, 2022 | $ | 185,710 | $ | 13,925 | $ | — | $ | 199,635 | |||||||||||||||
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.
During the first quarter of 2020, the Company’s market capitalization declined significantly compared to the fourth quarter of 2019. Over the same period, the equity value of the Company’s peer group, and the overall U.S. stock market also declined significantly amid market volatility. In addition, oil prices had dropped significantly. These declines were driven in large part by the uncertainty surrounding the COVID-19 pandemic and other macroeconomic events such as the geopolitical tensions between OPEC and Russia. Based on these factors, the Company concluded that multiple triggering events occurred and, accordingly, an interim quantitative goodwill impairment test was performed for each reporting unit as of March 31, 2020 ("testing date"). During the first quarter of 2020, the Company also performed an analysis to determine any impairment of long-lived assets (see Note 9-Intangible Assets) based on the triggering events noted above.
Based upon the results of the interim quantitative goodwill impairment test during the first quarter of 2020, the Company recorded an aggregate impairment charge of $77.1 million, which consisted of $57.2 million in the services reporting unit within the Services segment, and $19.3 million in the European reporting unit and $0.6 million in the Brazilian reporting unit, both within the International segment. The impairment was calculated based on the difference between the estimated fair value and the carrying value of the reporting units and are included in Impairment charges on the Consolidated Statements of Income (Loss) for the year ended December 31, 2020. The Company performed a quantitative annual impairment test as of October 1, 2022 and 2021 and the Company did not identify any changes in circumstances that would indicate the carrying value of goodwill may not be recoverable. Additionally, through December 31, 2022, the Company did not identify any changes in circumstances that would indicate the carrying value of goodwill may not be recoverable. Significant adverse changes in future periods could negatively affect the Company's key assumptions and may result in future goodwill impairment charges which could be material.
The Company's cumulative goodwill impairment as of December 31, 2022 was $100.2 million, of which $57.2 million related to the Services segment, $29.8 million related to the International segment and $13.2 million related to the Products and Systems segment.| Services | International | Products and Systems | Total | ||||||||||||||||||||
| Balance at December 31, 2020 | $ | 190,112 | $ | 15,896 | $ | — | $ | 206,008 | |||||||||||||||
| Adjustments to preliminary purchase price allocations | 280 | — | — | 280 | |||||||||||||||||||
| Foreign currency translation | 264 | (1,113) | — | (849) | |||||||||||||||||||
| Balance at December 31, 2021 | $ | 190,656 | $ | 14,783 | $ | — | $ | 205,439 | |||||||||||||||
| Foreign currency translation | (4,946) | (858) | — | (5,804) | |||||||||||||||||||
| Balance at December 31, 2022 | $ | 185,710 | $ | 13,925 | $ | — | $ | 199,635 | |||||||||||||||
The gross carrying amount and accumulated amortization of intangible assets were as follows (in thousands):
| December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
Useful Life (Years) | Gross Amount | Accumulated Amortization | Net Carrying Amount | Gross Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Customer relationships | 5-18 | $ | 109,683 | $ | (84,130) | $ | 25,553 | $ | 112,109 | $ | (80,319) | $ | 31,790 | |||||||||||||||||||||||||||||||||||||
| Software/Technology | 3-15 | 51,028 | (28,669) | 22,359 | 52,265 | (26,415) | 25,850 | |||||||||||||||||||||||||||||||||||||||||||
| Covenants not to compete | 2-5 | 12,488 | (12,416) | 72 | 12,623 | (12,390) | 233 | |||||||||||||||||||||||||||||||||||||||||||
| Other | 2-12 | 10,389 | (9,358) | 1,031 | 10,574 | (9,066) | 1,508 | |||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 183,588 | $ | (134,573) | $ | 49,015 | $ | 187,571 | $ | (128,190) | $ | 59,381 | ||||||||||||||||||||||||||||||||||||||
As described in Note 8- Goodwill, during the first quarter of 2020, there were negative market indicators that were determined to be triggering events indicating a potential impairment of certain long-lived assets within asset groups in the Services, International, and Products and Systems segments, as well as Corporate and Eliminations. The asset groups are groupings of assets and liabilities determined at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability testing indicated that certain intangible assets and right of use assets (See Note 17-Leases) were potentially impaired. For asset groups that required an impairment measurement, similar to the valuations performed to determine the goodwill impairment, the Company used income and market approaches to estimate the fair value of the long-lived assets, which requires significant judgment in evaluation of the useful lives of the assets, economic and industry trends, estimated future cash flows, discount rates, and other factors. The result of the analysis was an aggregate impairment charge of $28.8 million, which consisted of $25.9 million to software/technology, $2.2 million to customer relationships, $0.5 million to other intangibles and $0.2 million to covenants not to compete, all of which are in the Services reporting unit within the Services segment and are included in Impairment charges on the Consolidated Statements of Income (Loss) for the year ended December 31, 2020.
Amortization expense for the years ended December 31, 2022, 2021 and 2020, was approximately $9.1 million, $9.7 million, and $11.0 million, respectively, including amortization of software/technology for these periods of $2.9 million, $3.0 million, and $3.6 million, respectively.
Amortization expense in each of the five years and thereafter subsequent to December 31, 2022 related to the Company’s intangible assets is expected to be as follows (in thousands):
Expected Amortization Expense | |||||
| 2023 | $ | 8,915 | |||
| 2024 | 7,633 | ||||
| 2025 | 5,796 | ||||
| 2026 | 4,988 | ||||
| 2027 | 4,664 | ||||
| Thereafter | 17,019 | ||||
| Total | $ | 49,015 | |||
The gross carrying amount and accumulated amortization of intangible assets were as follows (in thousands):
| December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
Useful Life (Years) | Gross Amount | Accumulated Amortization | Net Carrying Amount | Gross Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Customer relationships | 5-18 | $ | 109,683 | $ | (84,130) | $ | 25,553 | $ | 112,109 | $ | (80,319) | $ | 31,790 | |||||||||||||||||||||||||||||||||||||
| Software/Technology | 3-15 | 51,028 | (28,669) | 22,359 | 52,265 | (26,415) | 25,850 | |||||||||||||||||||||||||||||||||||||||||||
| Covenants not to compete | 2-5 | 12,488 | (12,416) | 72 | 12,623 | (12,390) | 233 | |||||||||||||||||||||||||||||||||||||||||||
| Other | 2-12 | 10,389 | (9,358) | 1,031 | 10,574 | (9,066) | 1,508 | |||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 183,588 | $ | (134,573) | $ | 49,015 | $ | 187,571 | $ | (128,190) | $ | 59,381 | ||||||||||||||||||||||||||||||||||||||
Expected Amortization Expense | |||||
| 2023 | $ | 8,915 | |||
| 2024 | 7,633 | ||||
| 2025 | 5,796 | ||||
| 2026 | 4,988 | ||||
| 2027 | 4,664 | ||||
| Thereafter | 17,019 | ||||
| Total | $ | 49,015 | |||
Accrued expenses and other current liabilities consist of the following (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Accrued salaries, wages and related employee benefits | $ | 26,684 | $ | 33,816 | |||||||
| Contingent consideration | 937 | 1,830 | |||||||||
| Accrued workers' compensation and health benefits | 3,660 | 3,994 | |||||||||
| Deferred revenues | 7,521 | 6,202 | |||||||||
| Right-of-use liability - Operating | 10,376 | 10,040 | |||||||||
| Pension accrual | 2,519 | 2,519 | |||||||||
| Other accrued expenses | 26,147 | 25,462 | |||||||||
| Total accrued expenses and other current liabilities | $ | 77,844 | $ | 83,863 | |||||||
Accrued expenses and other current liabilities consist of the following (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Accrued salaries, wages and related employee benefits | $ | 26,684 | $ | 33,816 | |||||||
| Contingent consideration | 937 | 1,830 | |||||||||
| Accrued workers' compensation and health benefits | 3,660 | 3,994 | |||||||||
| Deferred revenues | 7,521 | 6,202 | |||||||||
| Right-of-use liability - Operating | 10,376 | 10,040 | |||||||||
| Pension accrual | 2,519 | 2,519 | |||||||||
| Other accrued expenses | 26,147 | 25,462 | |||||||||
| Total accrued expenses and other current liabilities | $ | 77,844 | $ | 83,863 | |||||||
Long-term debt consisted of the following (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Senior credit facility | $ | 65,250 | $ | 119,500 | |||||||
Senior secured term loan, net of unamortized debt issuance costs of $0.5 million and $0.2 million | 121,399 | 76,673 | |||||||||
| Other | 4,602 | 6,392 | |||||||||
| Total debt | 191,251 | 202,565 | |||||||||
| Less: Current portion | (7,425) | (20,162) | |||||||||
| Long-term debt, net of current portion | $ | 183,826 | $ | 182,403 | |||||||
Senior Credit Facility
Prior to entering into the New Credit Agreement (defined and described below), the Company had a credit agreement with its banking group (the "Credit Agreement") which provided the Company with a $150 million revolving credit facility and a $100 million term loan. The Credit Agreement was most recently amended on May 19, 2021 and had a maturity date of December 12, 2023.
On August 1, 2022, the Company entered into a new credit agreement (the “New Credit Agreement”) which replaced the prior Credit Agreement and provides the Company with a $190 million 5-year committed revolving credit facility and a $125 million term loan with a balance of $121.4 million as of December 31, 2022. The New Credit Agreement permits the Company to borrow up to $100 million in non-US dollar currencies and to use up to $20 million of the credit limit for the issuance of letters of credit. Both the revolving line of credit and the term loan under the New Credit Agreement have a maturity date of July 30, 2027.
The New Credit Agreement has the following key terms, conditions and financial covenants:
•Borrowings bear interest at Secured Overnight Financing Rate ("SOFR") plus a credit spread adjustment and applicable SOFR margin ranging from 1.25% to 2.75%, based upon our Total Consolidated Debt Leverage Ratio (defined below); under the Credit Agreement, the margin was based upon the LIBOR margin.
◦Total Consolidated Debt Leverage Ratio means the ratio of (a) Total Consolidated Debt to (b) EBITDA (as defined in the New Credit Agreement) for the trailing four consecutive fiscal quarters.
◦Total Consolidated Debt means all indebtedness (including subordinated debt) of the Company on a consolidated basis.
•The Company has the benefit of the lowest SOFR margin if its Total Consolidated Debt Leverage Ratio is equal to or less than 1.25 to 1.0, and the margin increases as the ratio increases, to the maximum margin if the ratio is greater than 3.75 to 1.0. The New Credit Agreement is secured by liens on substantially all the assets of the Company and certain of its U.S subsidiaries and is guaranteed by those U.S subsidiaries.
•The Company has to maintain a Total Consolidated Debt Leverage Ratio of no more than 4.0 to 1.0 at the end of each quarter through June 30, 2023 and stepping down to a maximum permitted ratio of no more than 3.75 to 1.0 for the remainder of the term.
•The Company has to maintain a Fixed Charge Coverage Ratio of 1.25 to 1.0 for the duration of the New Credit Agreement, as defined in the New Credit Agreement.
•The New Credit Agreement 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, 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 New Credit Agreement does not limit the Company’s ability to acquire other businesses or companies except that the acquired business or company must be in the Company's line of business, the Company must be in compliance with the financial covenants on a pro forma basis after taking into account the acquisition, and the Company must provide written notice at least five business days prior to the date of an acquisition of $10 million or more.
•Quarterly payments on the term loan of $1.56 million through June 30, 2024, then increasing to $2.34 million through June 30, 2025, and to $3.12 million for each quarterly payment thereafter through maturity.
The New Credit Agreement was accounted for as a modification and the Company expensed $0.8 million in unamortized capitalized debt issuance costs and fees during the three months ended September 30, 2022, which was included in selling, general and administrative expenses on the Consolidated Statements of Income (Loss). The Company incurred $1.6 million in financing costs for the New Credit Agreement, of which $0.2 million of third party costs were expensed and included in selling, general and administrative expenses on the Consolidated Statements of Income (Loss).
As of December 31, 2022, the Company had borrowings of $186.6 million and a total of $3.0 million of letters of credit outstanding under the New Credit Agreement. The Company has capitalized costs associated with debt modifications of $1.4 million as of December 31, 2022, which is included in Other assets on the Consolidated Balance Sheet and will be amortized into interest expense over the remaining term of the Credit Agreement through July 30, 2027.
As of December 31, 2022, the Company was in compliance with the terms of the New Credit Agreement. The Company continuously monitors compliance with the covenants contained in the New Credit Agreement. The Company believes that it is probable that the Company will be able to comply with the financial covenants in the New Credit Agreement and that sufficient credit remains available under the New Credit Agreement to meet the Company's liquidity needs. However, such matters cannot be predicted with certainty.
Other Debt
The Company's other debt includes bank financing provided at the local subsidiary level used to support working capital requirements and fund capital expenditures. At December 31, 2022, there was an aggregate of approximately $4.6 million outstanding, payable at various times through 2030. Monthly payments range from $1 thousand to $15 thousand and interest rates range from 0.4% to 3.5%.
Scheduled principal payments due under all borrowing agreements in each of the five years and thereafter subsequent to December 31, 2022 are as follows (in thousands):
| 2023 | $ | 7,526 | |||
| 2024 | 9,711 | ||||
| 2025 | 11,623 | ||||
| 2026 | 12,864 | ||||
| 2027 | 148,728 | ||||
| Thereafter | 799 | ||||
| Total | $ | 191,251 | |||
Long-term debt consisted of the following (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Senior credit facility | $ | 65,250 | $ | 119,500 | |||||||
Senior secured term loan, net of unamortized debt issuance costs of $0.5 million and $0.2 million | 121,399 | 76,673 | |||||||||
| Other | 4,602 | 6,392 | |||||||||
| Total debt | 191,251 | 202,565 | |||||||||
| Less: Current portion | (7,425) | (20,162) | |||||||||
| Long-term debt, net of current portion | $ | 183,826 | $ | 182,403 | |||||||
Scheduled principal payments due under all borrowing agreements in each of the five years and thereafter subsequent to December 31, 2022 are as follows (in thousands):
| 2023 | $ | 7,526 | |||
| 2024 | 9,711 | ||||
| 2025 | 11,623 | ||||
| 2026 | 12,864 | ||||
| 2027 | 148,728 | ||||
| Thereafter | 799 | ||||
| Total | $ | 191,251 | |||
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. It also establishes a three level hierarchy that prioritizes the inputs used to measure fair value. The three levels of the hierarchy are defined as follows:
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 — Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.
Level 3 — Unobservable inputs reflecting the Company’s own assumptions about inputs that market participants would use in pricing the asset or liability based on the best information available.
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 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. It also establishes a three level hierarchy that prioritizes the inputs used to measure fair value. The three levels of the hierarchy are defined as follows:
Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 — Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.
Level 3 — Unobservable inputs reflecting the Company’s own assumptions about inputs that market participants would use in pricing the asset or liability based on the best information available.
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 (in thousands):
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Balance at the beginning of the period: | $ | 1,830 | $ | 1,640 | ||||||||||
| Acquisitions | — | — | ||||||||||||
| Payments | (938) | (938) | ||||||||||||
| Accretion of liability | — | — | ||||||||||||
| Revaluation | 45 | 1,128 | ||||||||||||
| Foreign currency translation | — | — | ||||||||||||
| Balance at the end of the period: | $ | 937 | $ | 1,830 | ||||||||||
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 finance 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.
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Balance at the beginning of the period: | $ | 1,830 | $ | 1,640 | ||||||||||
| Acquisitions | — | — | ||||||||||||
| Payments | (938) | (938) | ||||||||||||
| Accretion of liability | — | — | ||||||||||||
| Revaluation | 45 | 1,128 | ||||||||||||
| Foreign currency translation | — | — | ||||||||||||
| Balance at the end of the period: | $ | 937 | $ | 1,830 | ||||||||||
The Company grants share-based incentive awards 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 stockholders meeting on May 23, 2022, the Company’s stockholders approved an amendment to increase the total number of shares that may be issued under the 2016 Plan by 1.2 million, for a total of 4.9 million shares that are authorized for issuance under the 2016 plan, of which approximately 1,900,000 shares were available for future grants as of December 31, 2022.
Stock Options
For each of the years ended December 31, 2022, 2021 and 2020, the Company did not recognize any share-based compensation expense related to the stock option award, as the one outstanding stock option award was already fully vested. No unrecognized compensation costs remained related to the stock option awards. In addition, there were no stock options exercised during the years ended December 31, 2022, 2021 and 2020.
The following table sets forth a summary of the stock option activity, weighted-average exercise prices and options outstanding as of December 31, 2022, 2021 and 2020 as follows (in thousands, except per share amounts and years):
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Common Stock Options | Weighted Average Exercise Price | Common Stock Options | Weighted Average Exercise Price | Common Stock Options | Weighted Average Exercise Price | ||||||||||||||||||||||||||||||
| Outstanding at beginning of year: | 5 | $ | 22.35 | 5 | $ | 22.35 | 5 | $ | 22.35 | ||||||||||||||||||||||||||
| Granted | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||||||||
| Exercised | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||||||||
| Expired or forfeited | (5) | $ | 22.35 | — | $ | — | — | $ | — | ||||||||||||||||||||||||||
| Outstanding at end of year: | — | $ | — | 5 | $ | 22.35 | 5 | $ | 22.35 | ||||||||||||||||||||||||||
Restricted Stock Unit Awards
Restricted Stock Units generally vest ratably on each of the first four anniversary dates of issuance. The Company recognized approximately $3.7 million, $3.5 million and $4.4 million of share-based compensation for the years ended December 31, 2022, 2021 and 2020, respectively, related to restricted stock unit awards. As of December 31, 2022, there were approximately $6.6 million of unrecognized compensation costs, net of estimated forfeitures, related to restricted stock unit awards, which are expected to be recognized over a remaining weighted average period of 2.6 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.
A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows (in thousands):
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Restricted stock awards vested | 401 | 317 | 208 | ||||||||||||||
| Fair value of awards vested | $ | 2,524 | $ | 3,434 | $ | 837 | |||||||||||
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 (in thousands):
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Awards issued | 70 | 51 | 68 | ||||||||||||||
| Grant date fair value of awards issued | $ | 450 | $ | 525 | $ | 326 | |||||||||||
A summary of the Company's outstanding, non-vested restricted share units is as follows (in thousands, except per share amounts and years):
| For the year ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | ||||||||||||||||||||||||||||||
| Outstanding at beginning of period: | 1,208 | $ | 7.96 | 1,076 | $ | 7.41 | 559 | $ | 16.92 | ||||||||||||||||||||||||||
| Granted | 687 | $ | 7.59 | 528 | $ | 10.07 | 782 | $ | 3.79 | ||||||||||||||||||||||||||
| Released | (401) | $ | 6.63 | (317) | $ | 10.77 | (208) | $ | 18.71 | ||||||||||||||||||||||||||
| Forfeited | (79) | $ | 14.23 | (79) | $ | 8.82 | (57) | $ | 9.62 | ||||||||||||||||||||||||||
| Outstanding at end of period: | 1,415 | $ | 6.66 | 1,208 | $ | 7.96 | 1,076 | $ | 7.41 | ||||||||||||||||||||||||||
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 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 presented as follows (in thousands, except per share amounts and years):
| For the year ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | ||||||||||||||||||||||||||||||
| Outstanding at beginning of period: | 388 | $ | 10.07 | 333 | $ | 8.84 | 260 | $ | 16.77 | ||||||||||||||||||||||||||
| Granted | 341 | $ | 6.55 | 189 | $ | 12.59 | 292 | $ | 3.68 | ||||||||||||||||||||||||||
| Performance condition adjustments, net | (376) | $ | 7.71 | (56) | $ | 9.27 | (99) | $ | 3.82 | ||||||||||||||||||||||||||
| Released | (73) | $ | 5.17 | (78) | $ | 8.15 | (120) | $ | 17.29 | ||||||||||||||||||||||||||
| Forfeited | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||||||||
| Outstanding at end of period: | 280 | $ | 9.96 | 388 | $ | 10.07 | 333 | $ | 8.84 | ||||||||||||||||||||||||||
For the year ended December 31, 2022, 341,000 PRSUs were granted. There was a 376,000 net unit reduction to these awards, which represents Company performance below target, during the year ended December 31, 2022.
For the year ended December 31, 2021, 189,000 PRSUs were granted. There was a 56,000 unit reduction to these awards, which represents Company performance against target, during the year ended December 31, 2021.
For the year ended December 31, 2020, 292,000 PRSUs were granted. There was a 99,000 unit reduction to these awards, which represents Company performance against target, (including an increase of 1,000 units due to the Compensation Committee approving the final calculation of the award metrics for calendar year 2019), during the year ended December 31, 2020.
Compensation expense related to all PRSUs described above was $1.2 million, $1.4 million, and $1.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. At December 31, 2022, there was $1.2 million of total unrecognized compensation costs related to approximately 280,000 unvested performance restricted stock units. These costs are expected to be recognized over a weighted-average period of approximately 1.3 years.
For the years ended December 31, 2022, 2021 and 2020, the income tax benefit recognized on all share based compensation arrangements referenced above was approximately $1.6 million, $1.4 million, and $0.6 million, respectively.The following table sets forth a summary of the stock option activity, weighted-average exercise prices and options outstanding as of December 31, 2022, 2021 and 2020 as follows (in thousands, except per share amounts and years):
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Common Stock Options | Weighted Average Exercise Price | Common Stock Options | Weighted Average Exercise Price | Common Stock Options | Weighted Average Exercise Price | ||||||||||||||||||||||||||||||
| Outstanding at beginning of year: | 5 | $ | 22.35 | 5 | $ | 22.35 | 5 | $ | 22.35 | ||||||||||||||||||||||||||
| Granted | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||||||||
| Exercised | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||||||||
| Expired or forfeited | (5) | $ | 22.35 | — | $ | — | — | $ | — | ||||||||||||||||||||||||||
| Outstanding at end of year: | — | $ | — | 5 | $ | 22.35 | 5 | $ | 22.35 | ||||||||||||||||||||||||||
A summary of the vesting activity of restricted stock unit awards, with the respective fair value of the awards, is as follows (in thousands):
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Restricted stock awards vested | 401 | 317 | 208 | ||||||||||||||
| Fair value of awards vested | $ | 2,524 | $ | 3,434 | $ | 837 | |||||||||||
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 (in thousands):
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Awards issued | 70 | 51 | 68 | ||||||||||||||
| Grant date fair value of awards issued | $ | 450 | $ | 525 | $ | 326 | |||||||||||
A summary of the Company's outstanding, non-vested restricted share units is as follows (in thousands, except per share amounts and years):
| For the year ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | ||||||||||||||||||||||||||||||
| Outstanding at beginning of period: | 1,208 | $ | 7.96 | 1,076 | $ | 7.41 | 559 | $ | 16.92 | ||||||||||||||||||||||||||
| Granted | 687 | $ | 7.59 | 528 | $ | 10.07 | 782 | $ | 3.79 | ||||||||||||||||||||||||||
| Released | (401) | $ | 6.63 | (317) | $ | 10.77 | (208) | $ | 18.71 | ||||||||||||||||||||||||||
| Forfeited | (79) | $ | 14.23 | (79) | $ | 8.82 | (57) | $ | 9.62 | ||||||||||||||||||||||||||
| Outstanding at end of period: | 1,415 | $ | 6.66 | 1,208 | $ | 7.96 | 1,076 | $ | 7.41 | ||||||||||||||||||||||||||
A summary of the Company's PRSU activity is presented as follows (in thousands, except per share amounts and years):
| For the year ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | Units | Weighted Average Grant-Date Fair Value | ||||||||||||||||||||||||||||||
| Outstanding at beginning of period: | 388 | $ | 10.07 | 333 | $ | 8.84 | 260 | $ | 16.77 | ||||||||||||||||||||||||||
| Granted | 341 | $ | 6.55 | 189 | $ | 12.59 | 292 | $ | 3.68 | ||||||||||||||||||||||||||
| Performance condition adjustments, net | (376) | $ | 7.71 | (56) | $ | 9.27 | (99) | $ | 3.82 | ||||||||||||||||||||||||||
| Released | (73) | $ | 5.17 | (78) | $ | 8.15 | (120) | $ | 17.29 | ||||||||||||||||||||||||||
| Forfeited | — | $ | — | — | $ | — | — | $ | — | ||||||||||||||||||||||||||
| Outstanding at end of period: | 280 | $ | 9.96 | 388 | $ | 10.07 | 333 | $ | 8.84 | ||||||||||||||||||||||||||
Income (loss) before provision (benefit) for income taxes is as follows (in thousands):
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Income (loss) before provision (benefit) for income taxes from: | |||||||||||||||||
| U.S. operations | $ | 439 | $ | 1,527 | $ | (54,190) | |||||||||||
| Foreign operations | 8,855 | 5,761 | (59,982) | ||||||||||||||
| Income (loss) before provision (benefit) for income taxes | $ | 9,294 | $ | 7,288 | $ | (114,172) | |||||||||||
The provision (benefit) for income taxes consists of the following (in thousands):
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Current | |||||||||||||||||
| Federal | $ | (644) | $ | (182) | $ | (6,278) | |||||||||||
| States and local | 464 | 246 | 528 | ||||||||||||||
| Foreign | 3,251 | 3,641 | 4,006 | ||||||||||||||
| Reserve for uncertain tax positions | 136 | (186) | (28) | ||||||||||||||
| Total current provision (benefit) | 3,207 | 3,519 | (1,772) | ||||||||||||||
| Deferred | |||||||||||||||||
| Federal | (435) | (309) | (2,781) | ||||||||||||||
| States and local | 242 | (138) | (1,244) | ||||||||||||||
| Foreign | (1,614) | (1,884) | (10,045) | ||||||||||||||
| Reserve for uncertain tax positions | — | 155 | — | ||||||||||||||
| Total deferred benefit | (1,807) | (2,176) | (14,070) | ||||||||||||||
| Net change in valuation allowance | 1,320 | 2,052 | 1,136 | ||||||||||||||
| Net deferred benefit | (487) | (124) | (12,934) | ||||||||||||||
| Total provision (benefit) for income taxes | $ | 2,720 | $ | 3,395 | $ | (14,706) | |||||||||||
The provision (benefit) for income taxes differs from the amount computed by applying the statutory federal tax rate to income tax as follows (in thousands):
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Federal tax at statutory rate | $ | 1,952 | 21.0 | % | $ | 1,527 | 21.0 | % | $ | (23,976) | 21.0 | % | |||||||||||||||||||||||
| State taxes, net of federal benefit | 622 | 6.7 | % | 75 | 1.0 | % | (1,175) | 1.0 | % | ||||||||||||||||||||||||||
| Foreign tax | 218 | 2.3 | % | 380 | 5.2 | % | (815) | 0.7 | % | ||||||||||||||||||||||||||
| Goodwill impairment | — | — | % | — | — | % | 10,003 | (8.8) | % | ||||||||||||||||||||||||||
| Nondeductible compensation | — | — | % | 119 | 1.6 | % | 975 | (0.9) | % | ||||||||||||||||||||||||||
| US taxation of foreign earnings | 100 | 1.1 | % | (1,041) | (14.3) | % | 56 | — | % | ||||||||||||||||||||||||||
| Permanent differences | 363 | 3.9 | % | 373 | 5.1 | % | 944 | (0.8) | % | ||||||||||||||||||||||||||
| Research and Development Credit | (1,716) | (18.5) | % | (214) | 2.9 | % | (236) | 0.2 | % | ||||||||||||||||||||||||||
| Federal loss carryback | — | — | % | — | — | % | (1,938) | 1.7 | % | ||||||||||||||||||||||||||
| Change in valuation allowance | 1,320 | 14.2 | % | 2,052 | 28.2 | % | 1,136 | (1.0) | % | ||||||||||||||||||||||||||
| Impact of foreign tax rate changes | (246) | (2.6) | % | 49 | 0.7 | % | 392 | (0.3) | % | ||||||||||||||||||||||||||
| Other | 107 | 1.2 | % | 75 | 1.0 | % | (72) | 0.1 | % | ||||||||||||||||||||||||||
| Total provision (benefit) for income taxes | $ | 2,720 | 29.3 | % | $ | 3,395 | 52.4 | % | $ | (14,706) | 12.9 | % | |||||||||||||||||||||||
The permanent differences identified above include normal recurring differences, such as meals, entertainment, and parking fringe benefits as well as a portion of the goodwill impairment charge.
On June 28, 2019, the Canadian province of Alberta enacted the Job Creation Tax Cut which reduced the Alberta corporate income tax rate from 12% to 11% starting in 2019 with further annual reductions to 10% in 2020, 9% in 2021, and 8% in 2022. This rate reduction had a favorable impact of approximately $1.9 million on the Company’s net deferred tax liabilities in this jurisdiction in 2019. As part of Alberta’s Recovery plan associated with the COVID-19 pandemic, Alberta accelerated the decrease in income tax rates from 10% in 2020 to 8% effective July 1, 2020. The accelerated tax rate reduction did not have a material impact on the Company’s net deferred tax liabilities but did reduce current taxes.
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act is an approximately $2 trillion emergency economic stimulus package in response to the Coronavirus outbreak, which among other things contains numerous income tax provisions. Some of these tax provisions are effective retroactively for years ending before the date of enactment. 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 our 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 of $1.9 million. The income tax effects of the CARES Act resulted in a cash refund of approximately $4.9 million in 2021 of taxes paid in prior years.
On December 27, 2020, the United States enacted the Consolidated Appropriations Act, 2021, (the "Appropriations Act") an additional stimulus package providing financial relief for individuals and small business. The Appropriations Act contains a variety of tax provisions, including full expensing of business meals in 2021 and 2022, and expansion of the employee retention tax credit. The Appropriations Act did not have a material impact on our consolidated financial position, results of operations, and cash flows.
In response to the COVID-19 pandemic, the American Rescue Plan Act was signed into law on March 11, 2021. This act, among other things, provides economic relief provisions to individuals and funding to certain businesses and programs. This guidance did not have a material impact on our consolidated financial position, results of operations, and cash flows.
In August 2022 the United States enacted the Inflation Reduction Act (“IRA”) of 2022 (Public Law No. 117-169), which includes a 15% book minimum tax on corporations with financial accounting profits over 1 billion US dollars (USD) and a 1% excise tax on certain stock buybacks. The IRA also contains numerous clean energy tax incentives related to electricity production, carbon sequestration, alternative vehicles and fuels, and residential and commercial energy efficiency. The company does not expect this act to have a material impact.
Deferred income tax attributes resulting from differences between financial accounting amounts and income tax basis of assets and liabilities are as follows (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Deferred income tax assets | |||||||||||
| Allowance for doubtful accounts | $ | 826 | $ | 677 | |||||||
| Inventory | 806 | 567 | |||||||||
| Intangible assets | 1,178 | 1,733 | |||||||||
| Accrued expenses | 4,365 | 5,662 | |||||||||
| Net operating loss carryforward | 4,985 | 6,303 | |||||||||
| Finance lease obligations | 463 | 741 | |||||||||
| Deferred stock based compensation | 1,152 | 996 | |||||||||
| Interest carryforward | 1,501 | 618 | |||||||||
| Right-of-use liability | 9,886 | 10,786 | |||||||||
| R&D Expense | 2,836 | — | |||||||||
| Credits | 490 | 409 | |||||||||
| Other | 1,495 | 1,353 | |||||||||
| Deferred income tax assets | 29,983 | 29,845 | |||||||||
| Valuation allowance | (7,787) | (6,340) | |||||||||
| Net deferred income tax assets | 22,196 | 23,505 | |||||||||
| Deferred income tax liabilities | |||||||||||
| Property and equipment | (6,493) | (8,157) | |||||||||
| Goodwill | (7,645) | (5,819) | |||||||||
| Intangible assets | (3,601) | (4,935) | |||||||||
| Right-of-use asset | (9,841) | (10,738) | |||||||||
| Other | (122) | (67) | |||||||||
| Deferred income tax liabilities | (27,702) | (29,716) | |||||||||
| Net deferred income taxes | (5,506) | (6,211) | |||||||||
As of December 31, 2022, the Company had no federal net operating loss carry forwards (NOLs). In addition, as of December 31, 2022, the Company had state and foreign NOLs of $20.6 million and $14.1 million, respectively. Approximately $6.6 million of the state NOLs expire at various times from 2031 to 2040, while the remainder of the Company's state NOLs do not expire. Approximately $1.8 million of the foreign NOLs expire at various times from 2023 to 2041, while the remainder of the Company's foreign NOLs do not expire.
In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Valuation allowances are provided when management believes the Company's deferred tax assets are not recoverable based on future reversals of existing taxable temporary differences, taxable income in prior carryback year(s) if carryback is permitted under the tax law, and an assessment of estimated future taxable income, exclusive of reversing temporary differences and carryforwards, that incorporates ongoing, prudent and feasible tax planning strategies. At December 31, 2022 and December 31, 2021, the Company has a valuation allowance of approximately $7.8 million and $6.3 million, respectively, primarily against certain state and foreign NOLs and other specific deferred tax assets. The net increase in the valuation allowance of approximately $0.1 million is primarily attributable to state and foreign net operating losses and changes in foreign exchange rates, offset by a reduction of expiring losses. Except for those deferred tax assets subject to the valuation allowance, management believes that it will realize all deferred tax assets as a result of sufficient future taxable income in each tax jurisdiction in which the Company has deferred tax assets. .
The following table summarizes the changes in the Company’s gross unrecognized tax benefits, excluding interest and penalties (in thousands):
| For the year ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Balance at beginning of period | $ | 300 | $ | 347 | |||||||
| Additions for tax positions related to the current fiscal period | — | 155 | |||||||||
| Additions for tax positions related to prior years | 1 | 1 | |||||||||
| Reductions related to the expiration of statutes of limitations | (43) | (203) | |||||||||
| Balance at end of period | $ | 258 | $ | 300 | |||||||
The Company has recorded the unrecognized tax benefits in other long-term liabilities in the consolidated balance sheets. As of December 31, 2022 and December 31, 2021, there were approximately $0.3 million and $0.3 million of unrecognized tax benefits, respectively, including penalties and interest. If the Company recognized these unrecognized tax benefits, approximately $0.3 million and $0.3 million would favorably affect the effective tax rate for both December 31, 2022 and December 31, 2021, respectively. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense and are not significant for the years ended December 31, 2022, 2021 and 2020. The Company anticipates a decrease to its unrecognized tax benefits of $0.1 million excluding interest and penalties within the next 12 months.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years ending before December 31, 2017 and generally is no longer subject to state, local or foreign income tax examinations by tax authorities for years ending before December 31, 2016.
Net income (loss) of foreign subsidiaries was $5.8 million, $3.7 million, and $(55.7) million for the years ended December 31, 2022, 2021 and 2020, respectively. Generally, it has been the Company's practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations. As previously noted, the Tax Act made significant changes to the taxation of undistributed earnings, requiring that all previously untaxed earnings and profits of the Company's controlled foreign operations be subjected to the transition tax. Since these earnings have now been subjected to U.S. federal tax, they would only be potentially subject to limited other taxes, including foreign withholding and certain state taxes. As of December 31, 2022, the Company has not recognized a deferred tax liability for foreign withholdings and state taxes on its undistributed international earnings or losses of its foreign subsidiaries since it intends to indefinitely reinvest the earnings outside the United States. The Company has estimated that the amount of the unrecorded deferred tax liability related to undistributed international earnings is approximately $1.8 million.
Income (loss) before provision (benefit) for income taxes is as follows (in thousands):
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Income (loss) before provision (benefit) for income taxes from: | |||||||||||||||||
| U.S. operations | $ | 439 | $ | 1,527 | $ | (54,190) | |||||||||||
| Foreign operations | 8,855 | 5,761 | (59,982) | ||||||||||||||
| Income (loss) before provision (benefit) for income taxes | $ | 9,294 | $ | 7,288 | $ | (114,172) | |||||||||||
The provision (benefit) for income taxes consists of the following (in thousands):
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Current | |||||||||||||||||
| Federal | $ | (644) | $ | (182) | $ | (6,278) | |||||||||||
| States and local | 464 | 246 | 528 | ||||||||||||||
| Foreign | 3,251 | 3,641 | 4,006 | ||||||||||||||
| Reserve for uncertain tax positions | 136 | (186) | (28) | ||||||||||||||
| Total current provision (benefit) | 3,207 | 3,519 | (1,772) | ||||||||||||||
| Deferred | |||||||||||||||||
| Federal | (435) | (309) | (2,781) | ||||||||||||||
| States and local | 242 | (138) | (1,244) | ||||||||||||||
| Foreign | (1,614) | (1,884) | (10,045) | ||||||||||||||
| Reserve for uncertain tax positions | — | 155 | — | ||||||||||||||
| Total deferred benefit | (1,807) | (2,176) | (14,070) | ||||||||||||||
| Net change in valuation allowance | 1,320 | 2,052 | 1,136 | ||||||||||||||
| Net deferred benefit | (487) | (124) | (12,934) | ||||||||||||||
| Total provision (benefit) for income taxes | $ | 2,720 | $ | 3,395 | $ | (14,706) | |||||||||||
The provision (benefit) for income taxes differs from the amount computed by applying the statutory federal tax rate to income tax as follows (in thousands):
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Federal tax at statutory rate | $ | 1,952 | 21.0 | % | $ | 1,527 | 21.0 | % | $ | (23,976) | 21.0 | % | |||||||||||||||||||||||
| State taxes, net of federal benefit | 622 | 6.7 | % | 75 | 1.0 | % | (1,175) | 1.0 | % | ||||||||||||||||||||||||||
| Foreign tax | 218 | 2.3 | % | 380 | 5.2 | % | (815) | 0.7 | % | ||||||||||||||||||||||||||
| Goodwill impairment | — | — | % | — | — | % | 10,003 | (8.8) | % | ||||||||||||||||||||||||||
| Nondeductible compensation | — | — | % | 119 | 1.6 | % | 975 | (0.9) | % | ||||||||||||||||||||||||||
| US taxation of foreign earnings | 100 | 1.1 | % | (1,041) | (14.3) | % | 56 | — | % | ||||||||||||||||||||||||||
| Permanent differences | 363 | 3.9 | % | 373 | 5.1 | % | 944 | (0.8) | % | ||||||||||||||||||||||||||
| Research and Development Credit | (1,716) | (18.5) | % | (214) | 2.9 | % | (236) | 0.2 | % | ||||||||||||||||||||||||||
| Federal loss carryback | — | — | % | — | — | % | (1,938) | 1.7 | % | ||||||||||||||||||||||||||
| Change in valuation allowance | 1,320 | 14.2 | % | 2,052 | 28.2 | % | 1,136 | (1.0) | % | ||||||||||||||||||||||||||
| Impact of foreign tax rate changes | (246) | (2.6) | % | 49 | 0.7 | % | 392 | (0.3) | % | ||||||||||||||||||||||||||
| Other | 107 | 1.2 | % | 75 | 1.0 | % | (72) | 0.1 | % | ||||||||||||||||||||||||||
| Total provision (benefit) for income taxes | $ | 2,720 | 29.3 | % | $ | 3,395 | 52.4 | % | $ | (14,706) | 12.9 | % | |||||||||||||||||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Deferred income tax assets | |||||||||||
| Allowance for doubtful accounts | $ | 826 | $ | 677 | |||||||
| Inventory | 806 | 567 | |||||||||
| Intangible assets | 1,178 | 1,733 | |||||||||
| Accrued expenses | 4,365 | 5,662 | |||||||||
| Net operating loss carryforward | 4,985 | 6,303 | |||||||||
| Finance lease obligations | 463 | 741 | |||||||||
| Deferred stock based compensation | 1,152 | 996 | |||||||||
| Interest carryforward | 1,501 | 618 | |||||||||
| Right-of-use liability | 9,886 | 10,786 | |||||||||
| R&D Expense | 2,836 | — | |||||||||
| Credits | 490 | 409 | |||||||||
| Other | 1,495 | 1,353 | |||||||||
| Deferred income tax assets | 29,983 | 29,845 | |||||||||
| Valuation allowance | (7,787) | (6,340) | |||||||||
| Net deferred income tax assets | 22,196 | 23,505 | |||||||||
| Deferred income tax liabilities | |||||||||||
| Property and equipment | (6,493) | (8,157) | |||||||||
| Goodwill | (7,645) | (5,819) | |||||||||
| Intangible assets | (3,601) | (4,935) | |||||||||
| Right-of-use asset | (9,841) | (10,738) | |||||||||
| Other | (122) | (67) | |||||||||
| Deferred income tax liabilities | (27,702) | (29,716) | |||||||||
| Net deferred income taxes | (5,506) | (6,211) | |||||||||
The following table summarizes the changes in the Company’s gross unrecognized tax benefits, excluding interest and penalties (in thousands):
| For the year ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Balance at beginning of period | $ | 300 | $ | 347 | |||||||
| Additions for tax positions related to the current fiscal period | — | 155 | |||||||||
| Additions for tax positions related to prior years | 1 | 1 | |||||||||
| Reductions related to the expiration of statutes of limitations | (43) | (203) | |||||||||
| Balance at end of period | $ | 258 | $ | 300 | |||||||
The Company provides a 401(k) savings plan for eligible U.S. based employees. Employee contributions are discretionary up to the IRS limits each year and catch up contributions are allowed for employees 50 years of age or older. Under the 401(k) plan, employees become eligible to participate on the first day of the month after three months of continuous service. Under this plan, the Company matches 50% of the employee’s contributions up to 4% of the employee’s annual compensation, as defined by the plan. There is a five-year vesting schedule for the Company match.
During the third quarter of 2021, the Company re-installed the employer match which was previously suspended as part of the Company's cost reduction initiatives undertaken in 2020 due to the COVID-19 pandemic. The Company’s contribution to the plan was $3.0 million, $1.2 million, and $1.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The Company's subsidiary participated with other employers in contributing to the Boilermaker-Blacksmith National Pension Trust (EIN 48-6168020) (“Boilermakers”) and Plumbers and Pipefitters National Pension Fund (EIN 52-6152779) (“Pipefitters”), multi-employer defined benefit pension plans, which covers certain U.S. based union employees. The plans provide multiple plan benefits with corresponding contribution rates that are collectively bargained between participating employers and their affiliated Boilermakers and Pipefitters local unions. Both the Boilermakers and Pipefitters plans are approximately 70 percent funded as of the latest Form 5500 filed, respectively. The Company did not make any contributions to the Boilermakers during the years ended December 31, 2022 and 2021 while making de minimis contributions to the Pipefitters plan during the same periods. See Note 18-Commitments and Contingencies, Pension Related Contingencies, for additional detail.
The Company has other benefit plans covering certain employees throughout the Company. Amounts charged to expense under these plans were not significant in any year.
The Company leases its headquarters under an operating lease from a stockholder and director of the Company. On August 1, 2014, the Company extended its lease at its headquarters requiring monthly payments through October 2024. Total rent payments made during the year ended December 31, 2022 were approximately $1.0 million. See Note 17-Leases for further detail.
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 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 the Company's leases include one or more options to renew. When it is reasonably certain that the Company will exercise the option, the Company will 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 Consolidated Balance Sheets include the following related to operating leases as of December 31, 2022 and 2021 (in thousands):
| Leases | Classification | 2022 | 2021 | |||||||||||||||||
| Assets: | ||||||||||||||||||||
| ROU assets | Other Assets | $ | 36,946 | $ | 42,451 | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| ROU liability - current | Accrued expenses and other current liabilities | $ | 10,376 | $ | 10,040 | |||||||||||||||
| ROU liability - long-term | Other long-term liabilities | 28,066 | 34,030 | |||||||||||||||||
| Total ROU liabilities | $ | 38,442 | $ | 44,070 | ||||||||||||||||
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 $1.8 million as of December 31, 2022 and $2.9 million as of December 31, 2021. Total rent payments for this facility were approximately $1.0 million and $1.3 million during the years ended December 31, 2022 and 2021. An agreement was reached with the related party to reduce rental payments by 12.5% for the lease of the Company’s headquarters, effective February 2022 as part of a voluntary reduction.
As of December 31, 2022 and 2021, the total ROU assets attributable to finance leases are approximately $13.0 million and $13.8 million, respectively, which is included in Property, plant, and equipment, net on the Consolidated Balance Sheets.
The components of lease costs for the year ended December 31, 2022 and 2021 are as follows (in thousands):
| Classification | 2022 | 2021 | ||||||||||||||||||
| Finance lease expense: | ||||||||||||||||||||
| Amortization of ROU assets | Depreciation and amortization | $ | 4,068 | $ | 4,111 | |||||||||||||||
| Interest on lease liabilities | Interest expense | 624 | 721 | |||||||||||||||||
| Operating lease expense | Cost of revenue; Selling, general & administrative expenses | 12,783 | 13,042 | |||||||||||||||||
| Short-term lease expense | Cost of revenue; Selling, general & administrative expenses | 77 | 27 | |||||||||||||||||
| Variable lease expense | Cost of revenue; Selling, general & administrative expenses | 2,141 | 2,507 | |||||||||||||||||
| Total | $ | 19,693 | $ | 20,408 | ||||||||||||||||
Additional information related to leases as of December 31, 2022 and 2021 is as follows:
| 2022 | 2021 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities for finance and operating leases (in thousands): | ||||||||||||||
| Finance - financing cash flows | $ | 4,140 | $ | 4,060 | ||||||||||
| Finance - operating cash flows | 624 | 721 | ||||||||||||
| Operating - operating cash flows | 12,502 | 13,098 | ||||||||||||
| ROU assets obtained in the exchange for lease liabilities: | ||||||||||||||
| Finance leases | $ | 5,076 | 2,923 | |||||||||||
| Operating leases | 6,067 | 7,021 | ||||||||||||
| Weighted-average remaining lease term (in years): | ||||||||||||||
| Finance leases | 5.1 | 5.4 | ||||||||||||
| Operating leases | 4.7 | 5.3 | ||||||||||||
| Weighted-average discount rate: | ||||||||||||||
| Finance leases | 5.5 | % | 5.3 | % | ||||||||||
| Operating leases | 5.6 | % | 5.7 | % | ||||||||||
Maturities of lease liabilities as of December 31, 2022 is as follows (in thousands):
| Finance | Operating | ||||||||||
| 2023 | $ | 6,131 | $ | 12,109 | |||||||
| 2024 | 3,970 | 9,869 | |||||||||
| 2025 | 2,448 | 7,304 | |||||||||
| 2026 | 1,747 | 5,272 | |||||||||
| 2027 | 842 | 4,119 | |||||||||
| Thereafter | 255 | 5,089 | |||||||||
| Total | 15,393 | 43,762 | |||||||||
| Less: Present value discount | 1,147 | 5,320 | |||||||||
| Lease liability | $ | 14,246 | $ | 38,442 | |||||||
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 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 the Company's leases include one or more options to renew. When it is reasonably certain that the Company will exercise the option, the Company will 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 Consolidated Balance Sheets include the following related to operating leases as of December 31, 2022 and 2021 (in thousands):
| Leases | Classification | 2022 | 2021 | |||||||||||||||||
| Assets: | ||||||||||||||||||||
| ROU assets | Other Assets | $ | 36,946 | $ | 42,451 | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| ROU liability - current | Accrued expenses and other current liabilities | $ | 10,376 | $ | 10,040 | |||||||||||||||
| ROU liability - long-term | Other long-term liabilities | 28,066 | 34,030 | |||||||||||||||||
| Total ROU liabilities | $ | 38,442 | $ | 44,070 | ||||||||||||||||
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 $1.8 million as of December 31, 2022 and $2.9 million as of December 31, 2021. Total rent payments for this facility were approximately $1.0 million and $1.3 million during the years ended December 31, 2022 and 2021. An agreement was reached with the related party to reduce rental payments by 12.5% for the lease of the Company’s headquarters, effective February 2022 as part of a voluntary reduction.
As of December 31, 2022 and 2021, the total ROU assets attributable to finance leases are approximately $13.0 million and $13.8 million, respectively, which is included in Property, plant, and equipment, net on the Consolidated Balance Sheets.
The components of lease costs for the year ended December 31, 2022 and 2021 are as follows (in thousands):
| Classification | 2022 | 2021 | ||||||||||||||||||
| Finance lease expense: | ||||||||||||||||||||
| Amortization of ROU assets | Depreciation and amortization | $ | 4,068 | $ | 4,111 | |||||||||||||||
| Interest on lease liabilities | Interest expense | 624 | 721 | |||||||||||||||||
| Operating lease expense | Cost of revenue; Selling, general & administrative expenses | 12,783 | 13,042 | |||||||||||||||||
| Short-term lease expense | Cost of revenue; Selling, general & administrative expenses | 77 | 27 | |||||||||||||||||
| Variable lease expense | Cost of revenue; Selling, general & administrative expenses | 2,141 | 2,507 | |||||||||||||||||
| Total | $ | 19,693 | $ | 20,408 | ||||||||||||||||
Additional information related to leases as of December 31, 2022 and 2021 is as follows:
| 2022 | 2021 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities for finance and operating leases (in thousands): | ||||||||||||||
| Finance - financing cash flows | $ | 4,140 | $ | 4,060 | ||||||||||
| Finance - operating cash flows | 624 | 721 | ||||||||||||
| Operating - operating cash flows | 12,502 | 13,098 | ||||||||||||
| ROU assets obtained in the exchange for lease liabilities: | ||||||||||||||
| Finance leases | $ | 5,076 | 2,923 | |||||||||||
| Operating leases | 6,067 | 7,021 | ||||||||||||
| Weighted-average remaining lease term (in years): | ||||||||||||||
| Finance leases | 5.1 | 5.4 | ||||||||||||
| Operating leases | 4.7 | 5.3 | ||||||||||||
| Weighted-average discount rate: | ||||||||||||||
| Finance leases | 5.5 | % | 5.3 | % | ||||||||||
| Operating leases | 5.6 | % | 5.7 | % | ||||||||||
Maturities of lease liabilities as of December 31, 2022 is as follows (in thousands):
| Finance | Operating | ||||||||||
| 2023 | $ | 6,131 | $ | 12,109 | |||||||
| 2024 | 3,970 | 9,869 | |||||||||
| 2025 | 2,448 | 7,304 | |||||||||
| 2026 | 1,747 | 5,272 | |||||||||
| 2027 | 842 | 4,119 | |||||||||
| Thereafter | 255 | 5,089 | |||||||||
| Total | 15,393 | 43,762 | |||||||||
| Less: Present value discount | 1,147 | 5,320 | |||||||||
| Lease liability | $ | 14,246 | $ | 38,442 | |||||||
The Company’s Consolidated Balance Sheets include the following related to operating leases as of December 31, 2022 and 2021 (in thousands):
| Leases | Classification | 2022 | 2021 | |||||||||||||||||
| Assets: | ||||||||||||||||||||
| ROU assets | Other Assets | $ | 36,946 | $ | 42,451 | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| ROU liability - current | Accrued expenses and other current liabilities | $ | 10,376 | $ | 10,040 | |||||||||||||||
| ROU liability - long-term | Other long-term liabilities | 28,066 | 34,030 | |||||||||||||||||
| Total ROU liabilities | $ | 38,442 | $ | 44,070 | ||||||||||||||||
The components of lease costs for the year ended December 31, 2022 and 2021 are as follows (in thousands):
| Classification | 2022 | 2021 | ||||||||||||||||||
| Finance lease expense: | ||||||||||||||||||||
| Amortization of ROU assets | Depreciation and amortization | $ | 4,068 | $ | 4,111 | |||||||||||||||
| Interest on lease liabilities | Interest expense | 624 | 721 | |||||||||||||||||
| Operating lease expense | Cost of revenue; Selling, general & administrative expenses | 12,783 | 13,042 | |||||||||||||||||
| Short-term lease expense | Cost of revenue; Selling, general & administrative expenses | 77 | 27 | |||||||||||||||||
| Variable lease expense | Cost of revenue; Selling, general & administrative expenses | 2,141 | 2,507 | |||||||||||||||||
| Total | $ | 19,693 | $ | 20,408 | ||||||||||||||||
Additional information related to leases as of December 31, 2022 and 2021 is as follows:
| 2022 | 2021 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities for finance and operating leases (in thousands): | ||||||||||||||
| Finance - financing cash flows | $ | 4,140 | $ | 4,060 | ||||||||||
| Finance - operating cash flows | 624 | 721 | ||||||||||||
| Operating - operating cash flows | 12,502 | 13,098 | ||||||||||||
| ROU assets obtained in the exchange for lease liabilities: | ||||||||||||||
| Finance leases | $ | 5,076 | 2,923 | |||||||||||
| Operating leases | 6,067 | 7,021 | ||||||||||||
| Weighted-average remaining lease term (in years): | ||||||||||||||
| Finance leases | 5.1 | 5.4 | ||||||||||||
| Operating leases | 4.7 | 5.3 | ||||||||||||
| Weighted-average discount rate: | ||||||||||||||
| Finance leases | 5.5 | % | 5.3 | % | ||||||||||
| Operating leases | 5.6 | % | 5.7 | % | ||||||||||
| Finance | Operating | ||||||||||
| 2023 | $ | 6,131 | $ | 12,109 | |||||||
| 2024 | 3,970 | 9,869 | |||||||||
| 2025 | 2,448 | 7,304 | |||||||||
| 2026 | 1,747 | 5,272 | |||||||||
| 2027 | 842 | 4,119 | |||||||||
| Thereafter | 255 | 5,089 | |||||||||
| Total | 15,393 | 43,762 | |||||||||
| Less: Present value discount | 1,147 | 5,320 | |||||||||
| Lease liability | $ | 14,246 | $ | 38,442 | |||||||
| Finance | Operating | ||||||||||
| 2023 | $ | 6,131 | $ | 12,109 | |||||||
| 2024 | 3,970 | 9,869 | |||||||||
| 2025 | 2,448 | 7,304 | |||||||||
| 2026 | 1,747 | 5,272 | |||||||||
| 2027 | 842 | 4,119 | |||||||||
| Thereafter | 255 | 5,089 | |||||||||
| Total | 15,393 | 43,762 | |||||||||
| Less: Present value discount | 1,147 | 5,320 | |||||||||
| Lease liability | $ | 14,246 | $ | 38,442 | |||||||
Legal Proceedings and Government Investigations
The Company is periodically involved in 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 for possible losses from the matters described below, the Company does not believe that any currently pending or threatened legal proceeding to which the Company is or is likely to become a party will have a material adverse effect on its business, results of operations, cash flows or financial condition. The costs incurred by the Company to defend lawsuits, investigations and claims and amounts the Company pays to other parties because of these matters may be covered by insurance in some circumstances.
Litigation and Commercial Claims
The Company was contracted to perform inspections of welds on various pipeline projects in Texas for a customer. As of December 31, 2022 approximately $1.4 million of past due receivables were outstanding from this customer. The customer provided the Company with notice in December 2019, alleging that the Company’s inspection of 66 welds (out of approximately 16,000 welds inspected) were not in compliance with the contract, claimed approximately $7.6 million in damages, and requested that the Company pay these damages and any other damages incurred. The Company filed a lawsuit in the District Court of Bexar County, Texas, 37th Judicial District, on December 17, 2019, in an action captioned Mistras Group, Inc. v. Epic Y-Grade Pipeline LP, to recover the $1.4 million and other amounts due to the Company. The customer filed a counterclaim on March 6, 2020, alleging breach of contract and seeking recovery of its alleged damages. The Company believes that any successful claim by the customer regarding the Company’s workmanship will be covered by insurance, subject to payment of a deductible. 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. In the year ended December 31, 2022, the Company recorded a charge of $0.1 million for a potential loss from this matter. The Company recorded a reserve in the amount of $1.4 million during the twelve months ended December 31, 2019 for these past due receivables.
Two proceedings have been filed in California Superior Court for the County of Los Angeles regarding alleged violations of the California Labor Code. Both cases are captioned Justin Price v. Mistras Group, Inc., one being a purported class action lawsuit on behalf of current and former Mistras employees in California, filed on June 10, 2020, and the other was filed on September 18, 2020, behalf of the State of California under the California Private Attorney General Act on the basis of the same alleged violations. The two cases was consolidated and requested payment of all damages, including unpaid wages, and various fines and penalties available under California law. On May 4, 2021, the Company agreed to a settlement of all claims in the cases, which was more formally documented pursuant to a settlement agreement completed October 5, 2021, as amended as of May 3, 2022. Pursuant to the settlement, the Company agreed to pay $2.3 million to resolve the allegations in these proceedings and to be responsible for the employer portion of payroll taxes on the amount of the settlement allocated to wages. The settlement as agreed upon by the parties received final court approval on September 26, 2022, and the Company paid the settlement proceeds and related payroll taxes to the claims administrator in the fourth quarter of 2022. The Company recorded expense of approximately $1.6 million during the three months ended March 31, 2021 related to this settlement, which is in addition to expense of $0.8 million the Company recorded during the three months ended December 31, 2020.
Pension Related Contingencies
Certain of Company’s subsidiaries had significant reductions in their unionized workers in 2018. The collective bargaining agreements for the employees of this subsidiary required contributions for these employees to two national multi-employer pension funds. The reduction in employees resulted in the subsidiary incurring a complete withdrawal to one of the pension funds under the Employee Retirement Income Security Act of 1974 ("ERISA"), which was fully satisfied in 2019. The Company has determined that the subsidiary is likely to incur partial or complete withdrawal liability to the other pension fund. The balance of the estimated total amount of this potential liability as of December 31, 2022 is approximately $2.5 million, which was incurred in 2018 and 2019.
Severance and labor disputes
During December 2019, the Company executed an agreement to sell the rights of certain customer "staff leasing" contracts related to its German subsidiary for total consideration of approximately $0.1 million, effective January 1, 2020. No other assets or liabilities other than those employee benefits related to employees working on the customer contracts were included in the sale. As of December 31, 2022, the Company has approximately $0.1 million of accrued estimated severance payment obligations, which takes into account the Company's estimate with respect to the employees that have been or will be transitioned to the German subsidiaries' other customers. The $0.1 million of estimated obligations is net of $0.4 million in payments made and $1.0 million in reversals due to employees being transitioned to customer contracts.
The Company was entitled to indemnification on certain labor claims from the sellers of a company acquired by its Brazilian subsidiary. The Company and the sellers entered into a settlement agreement for approximately $1.0 million, which provided for payment in two installments, the first for approximately 31% of the settlement and the second for the remaining 69%. The first installment in the amount of approximately $0.3 million was paid by the sellers in December 2020 and the Company recognized that amount as a gain in selling, general and administrative expenses in the same period. The remaining payment for $0.6 million was received in the first quarter of 2021 and the Company recognized that amount as a gain in selling, general and administrative expenses in the same period.
Acquisition and disposition related contingencies
The Company is liable for contingent consideration in connection with certain of its acquisitions. As of December 31, 2022, total potential acquisition-related contingent consideration ranged from zero to approximately $0.9 million.
During 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. On August 3, 2021, the parties amended the agreement and extended the period by 12 months. As of December 31, 2022, the commitment was fully satisfied.
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, inspection, mechanical and engineering services that are used to evaluate the safety, structural integrity and reliability of critical energy, industrial and public infrastructure and commercial aerospace components. Software, digital and data services are included in this segment.
•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.
The accounting policies of the reportable segments are the same as those described in Note 1-Summary of Significant Accounting Policies and Practices. Segment income from operations is one of the primary performance measures used by the chief operating decision maker, to assess the performance of each segment and make resource allocation decisions. Certain general and administrative costs such as human resources, information technology and training are allocated to the segments. Segment income from operations excludes interest and other financial charges and income taxes. Corporate and other assets are comprised principally of cash, deposits, property, plant and equipment, domestic deferred taxes, deferred charges and other assets. Corporate loss from operations consists of administrative charges related to corporate personnel and other charges that cannot be readily identified for allocation to a particular segment.
Selected consolidated financial information by segment for the periods shown was as follows (with intercompany transactions eliminated in Corporate and eliminations):
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Revenue | |||||||||||||||||
| Services | $ | 573,336 | $ | 555,387 | $ | 476,164 | |||||||||||
| International | 112,425 | 117,245 | 107,556 | ||||||||||||||
| Products and Systems | 12,727 | 13,831 | 16,449 | ||||||||||||||
| Corporate and eliminations | (11,115) | (9,332) | (7,598) | ||||||||||||||
| $ | 687,373 | $ | 677,131 | $ | 592,571 | ||||||||||||
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Gross profit | |||||||||||||||||
| Services | $ | 159,049 | $ | 155,384 | $ | 141,084 | |||||||||||
| International | 33,591 | 34,282 | 31,046 | ||||||||||||||
| Products and Systems | 5,490 | 7,001 | 6,826 | ||||||||||||||
| Corporate and eliminations | 43 | 480 | (425) | ||||||||||||||
| $ | 198,173 | $ | 197,147 | $ | 178,531 | ||||||||||||
Income (loss) from operations by operating segment includes intercompany transactions, which are eliminated in Corporate and eliminations.
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Income (loss) from operations | |||||||||||||||||
| Services | $ | 49,616 | $ | 48,458 | $ | (44,222) | |||||||||||
| International | 3,566 | 1,839 | (21,855) | ||||||||||||||
| Products and Systems | (992) | (117) | (936) | ||||||||||||||
| Corporate and eliminations | (32,391) | (32,010) | (34,204) | ||||||||||||||
| $ | 19,799 | $ | 18,170 | $ | (101,217) | ||||||||||||
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Services | $ | 25,103 | $ | 25,259 | $ | 26,093 | |||||||||||
| International | 7,648 | 8,791 | 8,659 | ||||||||||||||
| Products and Systems | 810 | 928 | 998 | ||||||||||||||
| Corporate and eliminations | (267) | (57) | (45) | ||||||||||||||
| $ | 33,294 | $ | 34,921 | $ | 35,705 | ||||||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Intangible assets, net | |||||||||||
| Services | $ | 43,260 | $ | 51,862 | |||||||
| International | 4,422 | 6,344 | |||||||||
| Products and Systems | 1,208 | 1,042 | |||||||||
| Corporate and eliminations | 125 | 133 | |||||||||
| $ | 49,015 | $ | 59,381 | ||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Total assets | |||||||||||
| Services | $ | 407,779 | $ | 424,058 | |||||||
| International | 104,531 | 111,619 | |||||||||
| Products and Systems | 12,408 | 10,532 | |||||||||
| Corporate and eliminations | 10,186 | 15,986 | |||||||||
| $ | 534,904 | $ | 562,195 | ||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Long-lived assets | |||||||||||
| United States | $ | 176,237 | $ | 183,052 | |||||||
| Other Americas | 108,582 | 120,012 | |||||||||
| Europe | 41,392 | 48,334 | |||||||||
| $ | 326,211 | $ | 351,398 | ||||||||
Refer to Note 2-Revenue, for revenues by segment and by geographic area for the years ended December 31, 2022, 2021, and 2020.
Selected consolidated financial information by segment for the periods shown was as follows (with intercompany transactions eliminated in Corporate and eliminations):
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Revenue | |||||||||||||||||
| Services | $ | 573,336 | $ | 555,387 | $ | 476,164 | |||||||||||
| International | 112,425 | 117,245 | 107,556 | ||||||||||||||
| Products and Systems | 12,727 | 13,831 | 16,449 | ||||||||||||||
| Corporate and eliminations | (11,115) | (9,332) | (7,598) | ||||||||||||||
| $ | 687,373 | $ | 677,131 | $ | 592,571 | ||||||||||||
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Gross profit | |||||||||||||||||
| Services | $ | 159,049 | $ | 155,384 | $ | 141,084 | |||||||||||
| International | 33,591 | 34,282 | 31,046 | ||||||||||||||
| Products and Systems | 5,490 | 7,001 | 6,826 | ||||||||||||||
| Corporate and eliminations | 43 | 480 | (425) | ||||||||||||||
| $ | 198,173 | $ | 197,147 | $ | 178,531 | ||||||||||||
Income (loss) from operations by operating segment includes intercompany transactions, which are eliminated in Corporate and eliminations.
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Income (loss) from operations | |||||||||||||||||
| Services | $ | 49,616 | $ | 48,458 | $ | (44,222) | |||||||||||
| International | 3,566 | 1,839 | (21,855) | ||||||||||||||
| Products and Systems | (992) | (117) | (936) | ||||||||||||||
| Corporate and eliminations | (32,391) | (32,010) | (34,204) | ||||||||||||||
| $ | 19,799 | $ | 18,170 | $ | (101,217) | ||||||||||||
| For the year ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Services | $ | 25,103 | $ | 25,259 | $ | 26,093 | |||||||||||
| International | 7,648 | 8,791 | 8,659 | ||||||||||||||
| Products and Systems | 810 | 928 | 998 | ||||||||||||||
| Corporate and eliminations | (267) | (57) | (45) | ||||||||||||||
| $ | 33,294 | $ | 34,921 | $ | 35,705 | ||||||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Intangible assets, net | |||||||||||
| Services | $ | 43,260 | $ | 51,862 | |||||||
| International | 4,422 | 6,344 | |||||||||
| Products and Systems | 1,208 | 1,042 | |||||||||
| Corporate and eliminations | 125 | 133 | |||||||||
| $ | 49,015 | $ | 59,381 | ||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Total assets | |||||||||||
| Services | $ | 407,779 | $ | 424,058 | |||||||
| International | 104,531 | 111,619 | |||||||||
| Products and Systems | 12,408 | 10,532 | |||||||||
| Corporate and eliminations | 10,186 | 15,986 | |||||||||
| $ | 534,904 | $ | 562,195 | ||||||||
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Long-lived assets | |||||||||||
| United States | $ | 176,237 | $ | 183,052 | |||||||
| Other Americas | 108,582 | 120,012 | |||||||||
| Europe | 41,392 | 48,334 | |||||||||
| $ | 326,211 | $ | 351,398 | ||||||||
The following is a summary of the quarterly results of operations for calendar years 2022, 2021, and 2020 (in thousands).
| Quarter ended | December 31, 2022 | September 30, 2022 | June 30, 2022 | March 31, 2022 | ||||||||||||||||||||||
| Revenue | $ | 168,218 | $ | 178,462 | $ | 179,031 | $ | 161,662 | ||||||||||||||||||
| Gross Profit | 50,939 | 53,784 | 53,558 | 39,892 | ||||||||||||||||||||||
| Income (loss) from operations | 5,802 | 9,114 | 9,576 | (4,698) | ||||||||||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | 2,842 | $ | 4,373 | $ | 4,643 | $ | (5,363) | ||||||||||||||||||
| Earnings (loss) per common share: | ||||||||||||||||||||||||||
| Basic | $ | 0.09 | $ | 0.15 | $ | 0.15 | $ | (0.18) | ||||||||||||||||||
| Diluted | $ | 0.09 | $ | 0.14 | $ | 0.15 | $ | (0.18) | ||||||||||||||||||
| Quarter ended | December 31, 2021 | September 30, 2021 | June 30, 2021 | March 31, 2021 | ||||||||||||||||||||||
| Revenues | $ | 171,163 | $ | 174,556 | $ | 177,677 | $ | 153,735 | ||||||||||||||||||
| Gross Profit | 49,594 | 52,216 | 55,336 | 40,001 | ||||||||||||||||||||||
| Income (loss) from operations | 2,306 | 9,236 | 11,374 | (4,746) | ||||||||||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | (94) | $ | 3,380 | $ | 5,937 | $ | (5,362) | ||||||||||||||||||
| Earnings (loss) per common share: | ||||||||||||||||||||||||||
| Basic | $ | 0.00 | $ | 0.11 | $ | 0.20 | $ | (0.18) | ||||||||||||||||||
| Diluted | $ | 0.00 | $ | 0.11 | $ | 0.20 | $ | (0.18) | ||||||||||||||||||
| Quarter ended | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | ||||||||||||||||||||||
| Revenues | $ | 160,777 | $ | 147,894 | $ | 124,435 | $ | 159,465 | ||||||||||||||||||
| Gross Profit | 49,345 | 47,384 | 41,158 | 40,644 | ||||||||||||||||||||||
| Income (loss) from operations | 4,652 | 5,742 | (383) | (111,228) | ||||||||||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | 181 | $ | 1,523 | $ | (2,656) | $ | (98,509) | ||||||||||||||||||
| Earnings (loss) per common share: | ||||||||||||||||||||||||||
| Basic | $ | 0.01 | $ | 0.05 | $ | (0.09) | $ | (3.40) | ||||||||||||||||||
| Diluted | $ | 0.01 | $ | 0.05 | $ | (0.09) | $ | (3.40) | ||||||||||||||||||
The following is a summary of the quarterly results of operations for calendar years 2022, 2021, and 2020 (in thousands).
| Quarter ended | December 31, 2022 | September 30, 2022 | June 30, 2022 | March 31, 2022 | ||||||||||||||||||||||
| Revenue | $ | 168,218 | $ | 178,462 | $ | 179,031 | $ | 161,662 | ||||||||||||||||||
| Gross Profit | 50,939 | 53,784 | 53,558 | 39,892 | ||||||||||||||||||||||
| Income (loss) from operations | 5,802 | 9,114 | 9,576 | (4,698) | ||||||||||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | 2,842 | $ | 4,373 | $ | 4,643 | $ | (5,363) | ||||||||||||||||||
| Earnings (loss) per common share: | ||||||||||||||||||||||||||
| Basic | $ | 0.09 | $ | 0.15 | $ | 0.15 | $ | (0.18) | ||||||||||||||||||
| Diluted | $ | 0.09 | $ | 0.14 | $ | 0.15 | $ | (0.18) | ||||||||||||||||||
| Quarter ended | December 31, 2021 | September 30, 2021 | June 30, 2021 | March 31, 2021 | ||||||||||||||||||||||
| Revenues | $ | 171,163 | $ | 174,556 | $ | 177,677 | $ | 153,735 | ||||||||||||||||||
| Gross Profit | 49,594 | 52,216 | 55,336 | 40,001 | ||||||||||||||||||||||
| Income (loss) from operations | 2,306 | 9,236 | 11,374 | (4,746) | ||||||||||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | (94) | $ | 3,380 | $ | 5,937 | $ | (5,362) | ||||||||||||||||||
| Earnings (loss) per common share: | ||||||||||||||||||||||||||
| Basic | $ | 0.00 | $ | 0.11 | $ | 0.20 | $ | (0.18) | ||||||||||||||||||
| Diluted | $ | 0.00 | $ | 0.11 | $ | 0.20 | $ | (0.18) | ||||||||||||||||||
| Quarter ended | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | ||||||||||||||||||||||
| Revenues | $ | 160,777 | $ | 147,894 | $ | 124,435 | $ | 159,465 | ||||||||||||||||||
| Gross Profit | 49,345 | 47,384 | 41,158 | 40,644 | ||||||||||||||||||||||
| Income (loss) from operations | 4,652 | 5,742 | (383) | (111,228) | ||||||||||||||||||||||
| Net income (loss) attributable to Mistras Group, Inc. | $ | 181 | $ | 1,523 | $ | (2,656) | $ | (98,509) | ||||||||||||||||||
| Earnings (loss) per common share: | ||||||||||||||||||||||||||
| Basic | $ | 0.01 | $ | 0.05 | $ | (0.09) | $ | (3.40) | ||||||||||||||||||
| Diluted | $ | 0.01 | $ | 0.05 | $ | (0.09) | $ | (3.40) | ||||||||||||||||||
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
For the fiscal year ended December 31 , 2022
or
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 Number) | |||||||
(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 | Name of each exchange on which registered | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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. Yes ý No o
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). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. Yes ☐ No ý
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to § 240.10D-1(b). Yes ☐ No ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, based on the closing price of $5.94 on June 30, 2022, the last business day of the registrant's most recently completed second fiscal quarter, as reported on the New York Stock Exchange, was approximately $119.1 million.
As of March 10, 2023, the Registrant had 29,926,879 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Auditor Name: KPMG LLP Auditor Location: Short Hills, New Jersey Auditor Firm ID: 185
Explanatory Note
On March 15, 2023, Mistras Group, Inc. (the “Company”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Original Form 10-K”). The Company is amending the Original Form 10-K due to an error in Exhibit 23.1 included in the Original Form 10-K, which resulted in Exhibit 23.1 not including the correct registration statements to be listed within the Exhibit as filed. This Amendment No. 1 to the Original Form 10-K (the “Amendment”) amends the Original Form 10-K solely to file a revised consent of our independent registered public accounting firm, KPMG LLP (“KPMG”) filed as Exhibit 23.1. The consent filed with the Original Form 10-K included the registration statement on Form S-8 (File No. 333-164688) that did not need to be included and failed to include two registration statements on Form S-8 that should have been included in the consent. The revised consent by KPMG includes the corrected registration statements on Form S-8 (File No. 333-217047, 333-254369 and 333-266573) and is filed as Exhibit 23.1 hereto.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications of the Principal Executive Officer and Principal Financial Officer are being filed as exhibits to this Amendment.
Except as described above, no other amendments are being made to the Original Form 10-K. This Amendment does not reflect events occurring after the filing of the Original Form 10-K or modify or update the disclosure contained therein in any way other than as required to reflect the revised consent of KPMG discussed above.
The following documents are filed as exhibits to this Amendment pursuant to Item 601 of Regulation S-K. The exhibits required to be filed by Item 15 are set forth in, and filed with or incorporated by reference in, the “Exhibit Index” of the Original Form 10-K.
| Exhibit No. | Description | |||||||
| 23.1* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 32.2** | ||||||||
_______________________
* Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.
| MISTRAS GROUP, INC. | ||||||||
| By: | /s/ Edward Prajzner | |||||||
| Edward J. Prajzner | ||||||||
| Senior Executive Vice President and Chief Financial Officer | ||||||||
Date: May 5, 2023
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the registration statements (Nos. 333-217047, 333-254369 and 333-266573) on Form S-8 of our report dated March 15, 2023, with respect to the consolidated financial statements of Mistras Group, Inc. and the effectiveness of internal control over financial reporting.
/s/ KPMG LLP
Short Hills, New Jersey
May 5, 2023
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Dennis Bertolotti, certify that:
1. I have reviewed this Annual Report on Form 10-K/A 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.
May 5, 2023
| By: | /s/ DENNIS BERTOLOTTI | |||||||
| Dennis Bertolotti | ||||||||
President, Chief Executive Officer and Director (Principal Executive Officer) | ||||||||
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Edward J. Prajzner, certify that:
1. I have reviewed this Annual Report on Form 10-K/A 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.
May 5, 2023
| By: | /s/ EDWARD J. PRAJZNER | |||||||
| Edward J. Prajzner | ||||||||
| Senior Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
Exhibit 32.1
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K/A of Mistras Group, Inc. (the Company) for the year ended December 31, 2022, I, Dennis Bertolotti, President and Chief Executive Officer, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:
(1) such Annual Report on Form 10-K/A for the year ended December 31, 2022, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in such Annual Report on Form 10-K/A for the year ended December 31, 2022, fairly presents, in all material respects, the financial condition and results of operations of the Company.
The foregoing certification is being furnished solely to accompany such Annual Report on Form 10-K/A for the year ended December 31, 2022, pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
| Date: | May 5, 2023 | /s/ DENNIS BERTOLOTTI | ||||||
| Dennis Bertolotti | ||||||||
| President, Chief Executive Officer and Director | ||||||||
| (Principal Executive Officer) | ||||||||
Exhibit 32.2
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report on Form 10-K/A of Mistras Group, Inc. (the Company) for the year ended December 31, 2022, I, Edward J. Prajzner, Principal Financial and Accounting Officer, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:
(1) such Annual Report on Form 10-K/A for the year ended December 31, 2022, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in such Annual Report on Form 10-K/A for the year ended December 31, 2022, fairly presents, in all material respects, the financial condition and results of operations of the Company.
The foregoing certification is being furnished solely to accompany such Annual Report on Form 10-K/A for the year ended December 31, 2022, pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
| Date: | May 5, 2023 | /s/ EDWARD J. PRAJZNER | ||||||
| Edward J. Prajzner | ||||||||
| Senior Executive Vice President and Chief Financial Officer | ||||||||
| (Principal Financial and Accounting Officer) | ||||||||