Mistras Group, Inc. (NYSE:MG) Q3 2023 Earnings Conference Call November 3, 2023 9:00 AM ET Company Participants Manny Stamatakis – Chairman of the Board, Interim President and Chief Executive Officer Ed Prajzner – Senior Executive Vice President and Chief Financial Officer Conference Call Participants Chris Sakai – Singular Research Mitchell Pinheiro – Sturdivant & Co. Tim Moore – EF Hutton Brian Russo – Sidoti Operator Thank you for joining Mistras Group’s Conference Call for its Third Quarter Ended Septem ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 Or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __ to __ (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) (I.R.S. Employ ...

Table of Contents For the transition period from __ to __ Commission file number 001-34481 Mistras Group, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 Or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Exact name of registrant as specified in its charter) Delaware 22-3341267 (St ...

Financial Performance - The company generated revenues of $687.4 million, $677.1 million, and $592.6 million for the years ended December 31, 2022, 2021, and 2020, respectively, with a net income of $6.6 million in 2022[22]. - The company’s revenues are diversified, with a consistent increase in revenue from $592.6 million in 2020 to $687.4 million in 2022, reflecting growth in demand for its services[22]. - Revenue for the year ended December 31, 2022, was $687,373,000, representing an increase of 1.8% from $677,131,000 in 2021[303]. - Net income attributable to Mistras Group, Inc. for 2022 was $6,499,000, compared to $3,860,000 in 2021, marking a significant improvement[306]. - Earnings per share (EPS) for 2022 was $0.22 (basic) and $0.21 (diluted), up from $0.13 (both basic and diluted) in 2021[303]. - The company reported a comprehensive loss of $6,580,000 for 2022, primarily due to foreign currency translation adjustments of $(13,084,000)[306]. - Cash flows from operating activities for 2022 were $26,406,000, a decrease from $42,261,000 in 2021[312]. - The company incurred $12,591,000 in capital expenditures for property, plant, and equipment in 2022[312]. - Total cash and cash equivalents at the end of 2022 were $20,488,000, down from $24,110,000 at the end of 2021[312]. - The company had a bad debt provision of $42,000 for troubled customers in 2022, compared to no provision in 2021[303]. - Research and engineering expenses decreased to $1,994,000 in 2022 from $2,518,000 in 2021[303]. - Interest expense for 2022 was $10,505,000, slightly down from $10,882,000 in 2021[303]. Revenue Sources and Customer Base - Approximately 83% of the company's revenues in 2022 came from its Services segment, indicating a strong reliance on service offerings[22]. - The top ten customers accounted for approximately 33% of total revenues in 2022, with no single customer exceeding 10% of revenues[22]. - The company estimates that its Plant Condition Management Software (PCMS) is used by approximately 50% of U.S. refiners, providing recurring maintenance and support fees[34]. - The company has established long-term relationships with leading companies in asset-intensive infrastructure, primarily in oil and gas, aerospace, and manufacturing sectors[21]. - The company operates in three segments: Services, International, and Products and Systems, focusing on asset protection solutions primarily in North America[89]. - No customer represented 10% or more of the Company's revenue for the years ended December 31, 2022 and 2021[331]. Technological Advancements and Innovations - The company has developed the Sensoria™ blade monitoring technology for real-time monitoring of wind turbine blades, enhancing capabilities in the renewable energy sector[39]. - The OneSuite software platform offers over 90 integrated applications for asset integrity data management, centralizing customer data activities[30]. - The company has invested in digitalizing field inspection data collection and management through the MISTRAS Digital platform, improving data accessibility for customers[36]. - The company has established Centers of Excellence (COEs) to provide specialized support in various sectors, including Aerospace and Automated Ultrasonics[54]. - The company utilizes its MISTRAS Digital platform to provide real-time data and analytics, enhancing asset protection solutions across various industries[117]. - The company is focusing on digital transformation, with an emphasis on big data intelligence and actionable insights from asset integrity data, which is expected to enhance customer operations[61]. - The company received a U.S. patent for Sensoria, a rotor blade monitoring system, enhancing its capabilities in the renewable energy sector[109]. - The company has invested in the development of MISTRAS Digital, an electronic platform for field inspection assignments, aimed at enhancing efficiency and data flow[136]. Market Trends and Opportunities - The asset protection industry is experiencing growth due to the need for maintaining aging infrastructure, with companies increasingly investing in asset protection solutions to ensure operational integrity[59]. - The demand for advanced non-destructive testing (ANDT) solutions is rising, driven by the need for skilled personnel and integrated service providers capable of offering comprehensive asset protection solutions[58]. - The introduction of stringent pipeline integrity regulations is creating opportunities for the company to provide integrated inspection and data management solutions[68]. - The aerospace industry is rebounding, with backlog and production levels approaching pre-pandemic levels, creating opportunities for the company’s inspection and testing services[105]. - The company is expanding its focus on the aerospace and defense industries, driven by a backlog in commercial aircraft production and the need for advanced inspection solutions[82]. - The company expects demand for non-invasive inspections to rise, allowing for cost savings associated with reduced equipment downtime during testing[103]. Safety and Compliance - The company’s asset protection solutions help clients comply with safety and environmental regulations, extend asset life, and minimize repair costs[17]. - For the year ended December 31, 2022, the Total Recordable Incident Rate (TRIR) was 0.41, while the Days Away, Restricted and Transferred Rate was 0.15, and the Lost Work Day Rate remained at historical lows of 0.03[131]. - The company emphasizes a safety-conscious culture, continuously monitoring safety performance through company-wide safety statistics[130]. - The company is subject to numerous environmental, legal, and regulatory requirements worldwide, including the Clean Air Act and the Toxic Substances Control Act[142]. Strategic Initiatives and Future Outlook - The company aims to enhance its mechanical services portfolio, providing value through efficiency and speed in operations, particularly in high-access environments[84]. - The company plans to capitalize on acquisitions to enhance its solutions and expand its customer base, although significant acquisitions are not expected in 2023 due to current debt levels[88]. - The business is seasonal, with revenues typically lower in summer and winter months compared to fall and spring due to the oil and gas market's non-peak periods[133]. - The Company eliminated substantially all COVID-related cost reduction initiatives in 2022, reinstating employer match and increasing wages back to pre-pandemic levels[320]. - The Company is currently unable to predict the overall impact of inflationary pressures and the Russian-Ukrainian war on its business operations[321]. Financial Position and Assets - As of December 31, 2022, the company held seven U.S. patents and had six patent applications pending, all filed since 2018[140]. - As of December 31, 2022, Mistras Group reported total assets of $534.9 million, a decrease from $562.2 million in 2021[301]. - The company had goodwill of $199.6 million as of December 31, 2022, with no impairment charges recorded during the year[296]. - Mistras Group's total current assets increased to $167.9 million in 2022 from $161.3 million in 2021[301]. - The company's total liabilities decreased to $336.2 million in 2022 from $361.3 million in 2021[301]. - Mistras Group's total equity decreased to $198.7 million in 2022 from $200.9 million in 2021[301]. - For the year ended December 31, 2022, a 10% movement in average U.S. Dollar exchange rates would cause a change in adjusted operating income of approximately $0.1 million[284]. - Borrowings under the $190 million revolving credit facility and $125 million term loan are subject to interest rates ranging from 1.25% to 2.75% based on the Total Consolidated Debt Leverage Ratio[283]. - An increase in interest rates by 100 basis points would increase annual interest expense by approximately $1.9 million based on variable rate debt of $186.6 million[283].

Mistras Group, Inc. (NYSE:MG) Q4 2022 Earnings Call Transcript March 9, 2023 9:00 AM ET Company Participants Dennis Bertolotti - President & Chief Executive Officer Ed Prajzner - Executive Vice President & Chief Financial Officer Conference Call Participants Chris Sakai - Singular Research Mitch Pinheiro - Sturdivant Brian Russo - Sidoti Operator Thank you for joining Mistras Group's Conference Call for its Fourth Quarter and Fiscal Year ended December 31, 2022. My name is Michelle, and I will be your event ...

PART I—FINANCIAL INFORMATION [Financial Statements](index=4&type=section&id=ITEM%201.%20Financial%20Statements) This section presents Mistras Group, Inc.'s unaudited condensed consolidated financial statements as of and for the periods ended September 30, 2022 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of September 30, 2022, total assets decreased to $540.4 million from $562.2 million at year-end 2021, primarily due to reductions in goodwill, intangible assets, and property, plant, and equipment Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 (unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | **Total current assets** | $174,433 | $161,338 | | Goodwill | $197,433 | $205,439 | | **Total assets** | **$540,446** | **$562,195** | | **Total current liabilities** | $107,512 | $121,415 | | Long-term debt, net | $193,847 | $182,403 | | **Total liabilities** | **$353,390** | **$361,283** | | **Total equity** | **$187,056** | **$200,912** | [Unaudited Condensed Consolidated Statements of Income](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Income) For the third quarter of 2022, revenue increased to $178.5 million from $174.6 million year-over-year, and net income attributable to Mistras Group rose to $4.4 million from $3.4 million Q3 2022 vs Q3 2021 Performance (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Revenue | $178,462 | $174,556 | | Gross Profit | $53,784 | $52,216 | | Income from Operations | $9,114 | $9,236 | | Net Income attributable to Mistras Group | $4,373 | $3,380 | | Diluted EPS | $0.14 | $0.11 | Nine Months 2022 vs 2021 Performance (in thousands, except per share data) | Metric | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Revenue | $519,155 | $505,968 | | Gross Profit | $147,233 | $147,553 | | Income from Operations | $13,991 | $15,864 | | Net Income attributable to Mistras Group | $3,653 | $3,955 | | Diluted EPS | $0.12 | $0.13 | [Unaudited Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2022, net cash provided by operating activities was $10.5 million, a decrease from $22.5 million in the prior year, mainly due to changes in working capital Cash Flow Summary (Nine months ended Sep 30, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,531 | $22,469 | | Net cash used in investing activities | $(8,877) | $(15,494) | | Net cash used in financing activities | $(4,753) | $(8,866) | | **Net change in cash and cash equivalents** | **$(6,026)** | **$(3,163)** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed explanations of accounting policies, financial statement components, and recent developments - The company provides technology-enabled asset protection solutions for critical industrial and civil assets, with a focus on ESG initiatives and its OneSuite™ digital platform[24](index=24&type=chunk)[25](index=25&type=chunk)[26](index=26&type=chunk) - Business operations are being impacted by disruptions in the oil & gas market and supply chain due to the Russian-Ukrainian conflict, leading to deferred maintenance and inspection work by some customers[28](index=28&type=chunk)[30](index=30&type=chunk) - On August 1, 2022, the Company entered into a new 5-year credit agreement, replacing its prior one, providing a **$190 million revolving credit facility** and a **$125 million term loan**[97](index=97&type=chunk) - The Services segment is the largest, providing asset protection solutions in North America, while the International and Products and Systems segments offer similar services and products globally[130](index=130&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=29&type=section&id=ITEM%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance, highlighting a 2.2% revenue increase in Q3 2022 driven by organic growth in the Services segment, partially offset by unfavorable foreign exchange rates [Results of Operations](index=32&type=section&id=Results%20of%20Operations) For Q3 2022, revenue increased 2.2% to $178.5 million, and gross profit rose 3.0% to $53.8 million, with gross margin improving to 30.1% Consolidated Results of Operations Highlights | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $178,462 | $174,556 | $519,155 | $505,968 | | Gross profit | $53,784 | $52,216 | $147,233 | $147,553 | | Gross profit % | 30.1% | 29.9% | 28.4% | 29.2% | | Income from operations | $9,114 | $9,236 | $13,991 | $15,864 | - Q3 2022 revenue growth was driven by a **mid single-digit organic increase**, led by the Services segment (**+5.4%**), partially offset by an **11.7% decline** in the International segment due to unfavorable foreign exchange rates[161](index=161&type=chunk) - Oil and gas customer revenue increased to **54% of total revenue** in Q3 2022 from **53%** in Q3 2021, while aerospace and defense revenue grew to **12% of total revenue** from **10%**[162](index=162&type=chunk) - Selling, general and administrative (SG&A) expenses increased by **$2.4 million** in Q3 2022 compared to Q3 2021, mainly due to the reversal of temporary cost reductions implemented in 2020[178](index=178&type=chunk) [Liquidity and Capital Resources](index=39&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity remains strong, with $18.1 million in cash and cash equivalents and $105.3 million of unused commitments under its new credit facility as of September 30, 2022 Cash Flow Summary (Nine months ended Sep 30, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,531 | $22,469 | | Net cash used in investing activities | $(8,877) | $(15,494) | | Net cash used in financing activities | $(4,753) | $(8,866) | - As of September 30, 2022, the company had **$18.1 million** in cash and cash equivalents, with **$196.7 million** in borrowings and **$105.3 million** of unused commitments under its New Credit Agreement[198](index=198&type=chunk) - The decrease in cash from operating activities in 2022 was primarily attributable to a build-up of net working capital in the course of normal operations[194](index=194&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=41&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company reports that there have been no significant changes to its quantitative and qualitative disclosures about market risk from those discussed in its 2021 Annual Report on Form 10-K - There have been no significant changes to the company's market risk disclosures since the 2021 Annual Report[205](index=205&type=chunk) [Controls and Procedures](index=41&type=section&id=ITEM%204%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2022 - Management concluded that as of September 30, 2022, the company's disclosure controls and procedures were **effective**[206](index=206&type=chunk) - No changes occurred in the company's internal control over financial reporting during the quarter ended September 30, 2022, that materially affected, or are reasonably likely to materially affect, internal controls[207](index=207&type=chunk) PART II—OTHER INFORMATION [Legal Proceedings](index=42&type=section&id=ITEM%201.%20Legal%20Proceedings) This section refers to Note 14 of the financial statements for a description of legal proceedings, stating no material developments beyond what is disclosed there and in the 2021 Annual Report - For details on legal proceedings, refer to Note 14—Commitments and Contingencies, as there have been no material developments beyond what is disclosed there and in the 2021 Annual Report[210](index=210&type=chunk) [Risk Factors](index=42&type=section&id=ITEM%201.A.%20Risk%20Factors) The company states that there have been no material changes to the risk factors previously disclosed in its 2021 Annual Report on Form 10-K - There have been no material changes to the risk factors previously disclosed in the 2021 Annual Report[211](index=211&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=42&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no sales of unregistered securities during the period and no shares of its common stock were repurchased during the quarter - The company did not have any sales of unregistered securities and did not repurchase any of its equity securities during the quarter[212](index=212&type=chunk)[214](index=214&type=chunk) [Defaults Upon Senior Securities](index=42&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - None[215](index=215&type=chunk) [Mine Safety Disclosures](index=42&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[216](index=216&type=chunk) [Other Information](index=42&type=section&id=ITEM%205.%20Other%20Information) The company reported no other information for this item - None[217](index=217&type=chunk) [Exhibits](index=43&type=section&id=ITEM%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including the new Credit Agreement, CEO and CFO certifications, and XBRL data files - Filed exhibits include the Credit Agreement dated August 1, 2022, CEO/CFO certifications (Rule 13a-14(a) and Section 906), and XBRL interactive data files[219](index=219&type=chunk)

Mistras Group, Inc. (NYSE:MG) Q3 2022 Earnings Conference Call November 3, 2022 9:00 AM ET Company Participants Dennis Bertolotti - President & Chief Executive Officer Ed Prajzner - Executive Vice President, Chief Executive Officer & Treasurer Jon Wolk - Senior Executive Vice President & Chief Operations Officer Conference Call Participants Chris Sakai - Singular Research Mitch Pinheiro - Sturdivant & Co. Brian Russo - Sidoti Operator Thank you for joining, Mistras Group's Conference Call for its Third Quar ...

Financial Data and Key Metrics Changes - Revenue for the second quarter increased approximately 3% year-over-year to $179 million, marking the eighth consecutive quarter of growth [24][5] - Adjusted EBITDA for the quarter was $18.3 million, down from the previous year due to gross margin pressure from inflation [6][28] - Gross margin decreased to 29.9% from 31.1% a year ago, reflecting higher healthcare costs and inflationary pressures [25][6] - Net income for the quarter was reported at $4.7 million, or $0.15 per diluted share [28] Business Line Data and Key Metrics Changes - Aerospace and defense revenue was up nearly 33% in the second quarter, driven by a recovery in the commercial aerospace market [5][10] - The energy business saw strong performance in the midstream sector, with record revenues, while downstream experienced delays and deferrals [9][8] - The renewables business, particularly Sensoria, is scaling up with approximately 50 wind turbines being monitored, aiming for 100 by the end of 2022 [13][14] Market Data and Key Metrics Changes - The commercial aerospace market is recovering, with expectations for strong third-quarter results [5][10] - The energy market is operating at peak capacity utilization, with downstream experiencing project delays due to high crack spreads [8][9] - The company is seeing strong demand in oil and gas, aerospace, and defense, contributing to overall revenue growth [24][23] Company Strategy and Development Direction - The company is focused on diversifying its revenue streams away from energy, with ongoing growth initiatives in data solutions and renewables [23][16] - A new credit facility has been established to enhance liquidity and fund growth initiatives, including strategic acquisitions [18][33] - The company aims to improve gross margins through selective pricing adjustments and maintaining a favorable sales mix [6][17] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism for the second half of the year, anticipating strong recovery in the energy business and continued growth in aerospace and defense [20][21] - Inflation remains a challenge, but the company is implementing cost reduction initiatives and pricing actions to mitigate its impact [21][6] - The company expects to achieve its full-year revenue guidance of $695 million to $715 million, with adjusted EBITDA between $65 million and $69 million [36][37] Other Important Information - The company is expanding its capabilities in the aerospace sector with new machining equipment at its Georgia facility [11] - The focus on renewables includes building relationships with OEM manufacturers and penetrating the wind farm market [14][13] - The data solutions business is experiencing significant growth, with OneSuite adoption increasing among customers [15] Q&A Session Summary Question: What types of projects are being delayed in the downstream end market of energy? - Management indicated that delays were primarily in capital turnarounds, with most projects pushed into the third quarter due to high utilization rates and crack spreads [46][47] Question: How soon do you think you'll reach the pre-pandemic aerospace revenue run rate? - Management expects to reach the pre-pandemic run rate in 2023, contingent on supply chain improvements [51][54] Question: How is the rollout of Sensoria meeting expectations? - The rollout is exceeding expectations, with increased discussions and trials with customers, although it currently represents less than 5% of overall revenue [55][58] Question: How comfortable are you with increasing leverage for acquisitions? - Management prefers to maintain leverage below 3x while exploring growth opportunities through acquisitions, emphasizing diversification [60][62] Question: Can you provide insight into gross margin improvement expectations? - Management targets gross margins to exceed 30% in the third quarter, with significant improvements anticipated in the second half of the year [64][66] Question: Are you seeing any signs of recession? - Management has not observed signs of recession, citing strong demand in aerospace and energy markets [70][71]

PART I—FINANCIAL INFORMATION [Financial Statements](index=4&type=section&id=ITEM%201.%20Financial%20Statements) This section presents Mistras Group's unaudited condensed consolidated financial statements, detailing balance sheets, income, and cash flows [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows total assets decreased slightly to $555.5 million, with stable liabilities and a decrease in total equity to $194.3 million Condensed Consolidated Balance Sheets (in thousands) | Account | June 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $18,609 | $24,110 | | Total current assets | $172,916 | $161,338 | | Total assets | $555,542 | $562,195 | | **Liabilities & Equity** | | | | Total current liabilities | $127,382 | $121,415 | | Total liabilities | $361,281 | $361,283 | | Total equity | $194,261 | $200,912 | [Unaudited Condensed Consolidated Statements of Income (Loss)](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Income%20%28Loss%29) Q2 2022 revenue slightly increased to $179.0 million, but net income decreased to $4.6 million, resulting in a six-month net loss Unaudited Condensed Consolidated Statements of Income (Loss) (in thousands, except per share data) | Metric (in thousands, except per share data) | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $179,031 | $177,677 | $340,693 | $331,412 | | Gross Profit | $53,558 | $55,336 | $93,450 | $95,337 | | Income from Operations | $9,576 | $11,374 | $4,877 | $6,628 | | Net Income (Loss) Attributable to Mistras | $4,643 | $5,937 | $(720) | $575 | | Diluted EPS | $0.15 | $0.20 | $(0.02) | $0.02 | [Unaudited Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operations significantly decreased to $7.8 million for H1 2022, leading to a $5.5 million decline in cash and cash equivalents Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | Six months ended June 30, 2022 | Six months ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,809 | $18,126 | | Net cash used in investing activities | $(6,499) | $(10,318) | | Net cash used in financing activities | $(5,056) | $(12,970) | | Net change in cash and cash equivalents | $(5,501) | $(5,818) | | Cash and cash equivalents at end of period | $18,609 | $19,942 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Notes detail accounting policies, revenue, debt, and contingencies, highlighting impacts from the Russian-Ukrainian conflict and a new credit facility - The company provides integrated technology-enabled asset protection solutions for critical industrial and civil assets[22](index=22&type=chunk) - The Russian-Ukrainian conflict disrupts European operations with higher energy costs, and high oil prices cause customers to defer maintenance[26](index=26&type=chunk)[28](index=28&type=chunk) - No single customer accounted for **10% or more** of the company's revenue for the three and six months ended June 30, 2022 and 2021[34](index=34&type=chunk) - Total long-term debt was **$200.4 million** as of June 30, 2022, with a new **$190 million** revolving credit facility and **$125 million** term loan secured post-quarter[92](index=92&type=chunk)[127](index=127&type=chunk)[129](index=129&type=chunk) - The company agreed to a **$2.3 million** settlement for a California labor law case, receiving preliminary court approval[115](index=115&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=30&type=section&id=ITEM%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial results, noting a slight Q2 revenue increase, gross margin contraction, and enhanced liquidity from a new credit facility [Overview](index=30&type=section&id=Overview) The company provides technology-enabled asset protection solutions across three segments, focusing on proprietary technology for growth - The company operates through **three reportable segments**: Services, International, and Products and Systems[141](index=141&type=chunk)[146](index=146&type=chunk) - Strategic focus includes advanced asset protection solutions via proprietary technology like **MISTRAS OneSuite** and **Sensoria™**[143](index=143&type=chunk)[145](index=145&type=chunk)[146](index=146&type=chunk) - European operations face increased costs from the Russian-Ukrainian conflict, and high oil prices cause customer maintenance deferrals[135](index=135&type=chunk)[154](index=154&type=chunk) [Consolidated Results of Operations](index=33&type=section&id=Consolidated%20Results%20of%20Operations) Q2 2022 revenue grew 0.8% to $179.0 million, but gross profit declined, with Services segment growth offset by International segment FX impacts Consolidated Results of Operations | Metric | Q2 2022 | Q2 2021 | Change | | :--- | :--- | :--- | :--- | | Revenue | $179.0M | $177.7M | +0.8% | | Gross Profit | $53.6M | $55.3M | -3.2% | | Gross Margin | 29.9% | 31.1% | -120 bps | - Q2 2022 revenue growth was driven by a **3.1% increase** in the Services segment, offset by a **7.3% decrease** in the International segment due to unfavorable foreign exchange rates[160](index=160&type=chunk) - The Q2 gross profit margin decrease was primarily due to a **150 basis point** reduction in the Services segment's margin from higher benefit costs and ended Canadian wage subsidies[173](index=173&type=chunk) - Interest expense decreased to **$2.1 million** in Q2 2022 from **$3.2 million** in Q2 2021, due to a lower leverage ratio and the removal of the **1.0% LIBOR floor**[183](index=183&type=chunk)[184](index=184&type=chunk) [Liquidity and Capital Resources](index=40&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is supported by cash from operations and credit facilities, with operating cash flow decreasing to $7.8 million for H1 2022 Liquidity and Capital Resources (in thousands) | Cash Flow Activity (in thousands) | Six months ended June 30, 2022 | Six months ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,809 | $18,126 | | Net cash used in investing activities | $(6,499) | $(10,318) | | Net cash used in financing activities | $(5,056) | $(12,970) | - The decrease in operating cash flow was primarily due to a net working capital increase[193](index=193&type=chunk) - As of June 30, 2022, the company held **$18.6 million** in cash and **$11.7 million** in unused credit commitments[197](index=197&type=chunk) - Subsequent to quarter-end, a new credit agreement was secured, including a **$190 million** revolving credit facility and a **$125 million** term loan[127](index=127&type=chunk)[199](index=199&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=42&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) No significant changes occurred in the company's quantitative and qualitative market risk disclosures since the 2021 Annual Report - There have been no significant changes to the company's market risk disclosures since the 2021 Annual Report[204](index=204&type=chunk) [Controls and Procedures](index=42&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - Management concluded that as of June 30, 2022, the company's disclosure controls and procedures were effective[205](index=205&type=chunk) - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[206](index=206&type=chunk) PART II—OTHER INFORMATION [Legal Proceedings](index=43&type=section&id=ITEM%201.%20Legal%20Proceedings) This section refers to Note 14 for legal proceedings, confirming no material developments since the 2021 Annual Report - For details on legal proceedings, the report refers to Note 14-Commitments and Contingencies in the financial statements[209](index=209&type=chunk) [Risk Factors](index=43&type=section&id=ITEM%201.A.%20Risk%20Factors) No material changes occurred in the company's risk factors since the 2021 Annual Report on Form 10-K - There have been no material changes to the risk factors discussed in the company's 2021 Annual Report[210](index=210&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=43&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities, only repurchases from employees for tax withholding obligations - The company did not have any sales of unregistered securities during the period[211](index=211&type=chunk) - Shares were acquired from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock units[213](index=213&type=chunk) [Defaults Upon Senior Securities](index=43&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon its senior securities during the period - None[215](index=215&type=chunk) [Mine Safety Disclosures](index=43&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - Not applicable[216](index=216&type=chunk) [Other Information](index=43&type=section&id=ITEM%205.%20Other%20Information) The company reports no information for this item - None[217](index=217&type=chunk) [Exhibits](index=44&type=section&id=ITEM%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including a settlement agreement, plan amendment, and certifications - Exhibits filed with the report include a settlement agreement, an amendment to the company's 2016 Long-Term Incentive Plan, and certifications from the CEO and CFO[218](index=218&type=chunk)

Financial Data and Key Metrics Changes - Consolidated revenue increased by 5.2% year-over-year to $161.7 million, marking the seventh consecutive quarter of revenue growth since the pandemic [4][24] - Adjusted EBITDA for the quarter was $5.5 million, down from $7 million a year ago, reflecting non-recurring items impacting gross profit [5][29] - GAAP net loss was $5.4 million or $0.18 per diluted share, consistent with the prior year [29] - Gross profit for the quarter was approximately $40 million, with a gross margin of 24.7%, which was lower compared to the previous year due to higher healthcare costs and non-recurring items [25][26] Business Line Data and Key Metrics Changes - Upstream business saw a solid performance, largely unaffected by oil price volatility, with a reported increase of over 10% in the midstream sector for inline inspections [9][24] - Aerospace and defense revenue increased significantly by 24%, indicating a long-term growth market [10][24] - The industrial and other process industry sectors also experienced strong growth, contributing to the overall revenue increase [12] Market Data and Key Metrics Changes - The Downstream sector experienced a slow start due to supply chain issues and customer efforts to capitalize on high barrel prices, with activity expected to align with historical norms moving forward [8][9] - The commercial aerospace market is anticipated to recover, with expectations of significant volumes of material shipping for testing in the second half of 2022 [11][32] Company Strategy and Development Direction - The company is focused on expanding value-added services across all business lines, particularly in renewable energy, private space, and data solutions [5][37] - Growth initiatives related to data solutions, including OneSuite and Sensoria, are expected to enhance customer retention and create new revenue streams [20][21] - The company aims to leverage its existing capabilities to address supply chain challenges faced by customers, particularly in the aerospace sector [15][58] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving revenue growth and expanding adjusted EBITDA margins for the full year, despite ongoing challenges in certain end markets [5][34] - The company anticipates a full-year revenue growth target of between $695 million to $750 million, with adjusted EBITDA expected to be between $65 million to $69 million [33][34] - Management highlighted the importance of cost containment and operational efficiency as key components of their strategy moving forward [36][68] Other Important Information - The company expects free cash flow for the year to approximate 50% of adjusted EBITDA, with capital expenditures projected at $20 million [31] - The net debt increased by $10.4 million in the first quarter, attributed to an increase in net working capital [31] Q&A Session Summary Question: Upstream and Downstream performance - Management confirmed that the Upstream sector was up about 10%, while Downstream was slower due to project delays and labor issues [44][46] Question: Downstream market predictability - Management indicated that many projects were delayed rather than canceled, and they expect a ramp-up in activity later in the year [46][48] Question: Changes in margins post-pandemic - Management noted that while inflation is impacting certain skill sets, overall margins have not permanently changed, and they expect to recover from previous reductions [50][51] Question: OneSuite revenue contribution - OneSuite is expected to contribute across all business lines, enhancing customer retention and generating new revenue streams [52][53] Question: Aerospace market recovery expectations - Management anticipates a return to pre-pandemic levels in the aerospace sector, although supply chain issues may pose challenges [57][58]