Mistras (MG) - 2021 Q4 - Annual Report

markdown PART I [Business](index=4&type=section&id=ITEM%201.%20BUSINESS) Mistras Group provides integrated asset protection solutions, achieving **$677.1 million revenue** and **$3.9 million net income** in 2021 Financial Performance (2019-2021) | Year Ended Dec 31 | Revenue (in millions) | Net Income/(Loss) (in millions) | | :--- | :--- | :--- | | 2021 | $677.1 | $3.9 | | 2020 | $592.6 | $(99.5) | | 2019 | $748.6 | $6.1 | - The Services segment is the primary revenue driver, contributing **approximately 82% of total revenues** in 2021[21](index=21&type=chunk) - The company's customer base is diversified, with the top ten customers accounting for **about 33% of revenues** in 2021, and no single customer representing **more than 10%**[21](index=21&type=chunk) Our Business Overview - Mistras Group is a leading multinational provider of integrated, technology-enabled asset protection solutions, operating under a "One Source for Asset Protection Solutions" model[13](index=13&type=chunk)[16](index=16&type=chunk) - The company serves a wide range of industries, including oil and gas, petrochemical, aerospace and defense, renewable and non-renewable energy, and civil infrastructure[14](index=14&type=chunk)[20](index=20&type=chunk)[26](index=26&type=chunk) - Core capabilities include Non-Destructive Testing (NDT), laboratory testing, sensing technologies, engineering services, and data management through its Industrial Internet of Things (IIoT) connected digital software and monitoring solutions[15](index=15&type=chunk) Our Specialized Solutions - The company offers a comprehensive portfolio of solutions including field inspections, data management (OneSuite, PCMS®), online monitoring, laboratory testing, maintenance, engineering consulting, access services (rope, drone), and equipment manufacturing (Acoustic Emission and Ultrasonic Testing)[22](index=22&type=chunk)[25](index=25&type=chunk) - The Plant Condition Management Software (PCMS®) is a key data management tool, estimated to be used by **approximately 50% of U.S. refining capacity**[33](index=33&type=chunk) - A U.S. patent was received in Q4 2021 for Sensoria™, a wind blade monitoring technology, enhancing offerings in the renewable energy sector[38](index=38&type=chunk) Asset Protection Industry Overview and Trends - Key industry dynamics include the need to extend the life of aging infrastructure, outsourcing of non-core technical activities, and the digital transformation of asset protection processes[58](index=58&type=chunk)[59](index=59&type=chunk)[60](index=60&type=chunk) - Increasingly strict safety regulations, such as OSHA's National Emphasis Program and PHMSA's "Mega Rule" for pipelines, are driving demand for reliable asset protection suppliers[63](index=63&type=chunk)[67](index=67&type=chunk) - The aerospace and defense industry is expected to see continued demand due to a multi-year backlog for next-generation commercial aircraft[65](index=65&type=chunk) Our Competitive Strengths - The company's "OneSource" model, offering a comprehensive portfolio of integrated solutions, is a key competitive advantage, particularly during plant turnarounds and shutdowns[69](index=69&type=chunk)[70](index=70&type=chunk) - Proprietary data management solutions like PCMS® and integrated data platforms provide a competitive edge and create barriers to entry for competitors[71](index=71&type=chunk)[73](index=73&type=chunk) - A long-standing, trusted relationship with a diversified customer base, including major firms in oil and gas, aerospace, and power generation, reinforces its market position[72](index=72&type=chunk) Our Growth Strategy - Key growth strategies include continuing to digitalize asset protection data with platforms like MISTRAS OneSuite, expanding focus in the aerospace, defense, and pipeline integrity industries, and growing the mechanical services portfolio[79](index=79&type=chunk)[81](index=81&type=chunk)[82](index=82&type=chunk)[83](index=83&type=chunk) - The company aims to expand its customer base into new end markets such as wind energy, leveraging new technologies like the Sensoria™ monitoring tool[86](index=86&type=chunk) - While acquisitions have been a part of past growth, the company does not expect to make any significant acquisitions in 2022 due to current debt levels and covenant restrictions[87](index=87&type=chunk) Our Segments - The company operates through three reportable segments: - **Services:** Provides asset protection solutions in North America, representing the largest portion of the business - **International:** Offers similar services and products to markets in Europe, the Middle East, Africa, Asia, and South America - **Products and Systems:** Designs, manufactures, and sells asset protection products and systems, primarily in the United States[88](index=88&type=chunk)[89](index=89&type=chunk)[90](index=90&type=chunk) Our Target Markets Revenue by Target Market (2021) | Target Market | % of 2021 Revenue | | :--- | :--- | | Oil & Gas | 54% | | Aerospace & Defense | 10% | | Industrial | 10% | | Power Generation & Transmission | 8% | | Other Process Industries | 8% | | Public Infrastructure, Research & Engineering | 5% | | Petrochemical | 3% | - The Oil and Gas market, covering downstream, midstream, and upstream operations, remains the company's largest market[98](index=98&type=chunk) - The Aerospace and Defense market is rebounding from COVID-19, with demand driven by new aircraft production and the use of advanced composite materials requiring advanced inspection solutions[104](index=104&type=chunk)[105](index=105&type=chunk) Human Capital - As of December 31, 2021, the company had **5,400 employees worldwide, with 3,600 in the U.S.**[121](index=121&type=chunk) - The company emphasizes a strong safety culture, reflected in its Total Recordable Incident Rate (TRIR), which was **0.15 for 2021 (excluding COVID-19 cases)**, a reduction from previous years[131](index=131&type=chunk) - In 2020, the Board of Directors established an Environmental, Social and Safety Committee to oversee initiatives in these areas[123](index=123&type=chunk) Competition - The company operates in a highly competitive but fragmented market. Key competitors for NDT services include Acuren, SGS Group, and Team Qualspec[133](index=133&type=chunk) - Significant barriers to entry in the NDT market include the need for advanced technology, complex regulations, certification processes, and capital requirements[133](index=133&type=chunk) Intellectual Property - The company protects its intellectual property through a combination of patents, copyrights, trademarks, and trade secrets. As of December 31, 2021, it held **six U.S. patents by ownership and one by license**[139](index=139&type=chunk)[140](index=140&type=chunk) - Primary trademarks include MISTRAS®, the stylized globe design, and the tagline "One Source for Asset Protection Solutions"[141](index=141&type=chunk) Executive Officers Executive Officers as of December 31, 2021 | Name | Age | Position | | :--- | :--- | :--- | | Sotirios J. Vahaviolos | 75 | Executive Chairman and Director | | Dennis Bertolotti | 62 | President, Chief Executive Officer and Director | | Edward J. Prajzner | 55 | Executive Vice President, Chief Financial Officer and Treasurer | | Michael C. Keefe | 65 | Executive Vice President, General Counsel and Secretary | | Michael J. Lange | 61 | Senior Group Executive Vice President | | Jonathan H. Wolk | 60 | Senior Executive Vice President and Chief Operating Officer | [Risk Factors](index=23&type=section&id=ITEM%201A.%20RISK%20FACTORS) Significant risks include oil and gas dependency, founder influence, and credit agreement covenants - A substantial portion of revenue comes from the oil and gas industry (**54% in 2021**), making the company susceptible to negative trends and price volatility in this sector[154](index=154&type=chunk)[155](index=155&type=chunk) - The company's founder and Executive Chairman, Dr. Sotirios J. Vahaviolos, owns **approximately 29% of the outstanding common stock**, giving him significant influence over corporate decisions[179](index=179&type=chunk) - The credit agreement contains financial covenants that, if breached, could limit access to credit and require repayment of debt. Due to current debt levels, acquisitions in 2022 are not expected without bank approval[185](index=185&type=chunk)[186](index=186&type=chunk) - In the first quarter of 2020, the company recognized significant goodwill and intangible asset impairment charges totaling **over $100 million** due to market declines and uncertainty surrounding the COVID-19 pandemic[160](index=160&type=chunk)[190](index=190&type=chunk)[191](index=191&type=chunk) [Unresolved Staff Comments](index=34&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) The company reports no unresolved staff comments - None [Properties](index=34&type=section&id=ITEM%202.%20PROPERTIES) The company operates approximately **120 facilities** across **10 countries**, headquartered in Princeton Junction, New Jersey - The company operates approximately **120 facilities** in **10 countries**, with the corporate headquarters in Princeton Junction, New Jersey[203](index=203&type=chunk) [Legal Proceedings](index=34&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) Legal proceedings details are incorporated by reference from Note 18 of the financial statements - Information regarding legal proceedings is incorporated by reference from Note 18-Commitments and Contingencies in the financial statements[204](index=204&type=chunk) [Mine Safety Disclosures](index=34&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) The company reports no mine safety disclosures - None PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=34&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT'S%20COMMON%20EQUITY,%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) Common stock trades on NYSE under 'MG'; no cash dividends expected as earnings are retained for expansion - Common stock trades on the NYSE under the symbol "MG"[206](index=206&type=chunk) - No cash dividends have been paid, and none are expected in the foreseeable future as earnings are retained for business expansion[208](index=208&type=chunk) [Reserved](index=35&type=section&id=ITEM%206.%20%5BRESERVED%5D) This item is reserved [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=36&type=section&id=ITEM%207.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) In 2021, revenue increased **14.3% to $677.1 million** from **$592.6 million** in 2020, resulting in **$3.9 million net income** from market recovery Consolidated Results of Operations (2021 vs. 2020) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Revenues | $677.1M | $592.6M | | Gross Profit | $197.1M | $178.5M | | Gross Profit % | 29.1% | 30.1% | | Income (Loss) from Operations | $18.2M | $(101.2)M | | Net Income (Loss) | $3.9M | $(99.5)M | - The **14.3% revenue increase** in 2021 was primarily due to organic growth in the Services and International segments as markets recovered from the COVID-19 pandemic[233](index=233&type=chunk) - The significant improvement in operating income was predominantly due to the absence of the **$106.1 million in impairment charges** that were recorded in 2020[237](index=237&type=chunk) Revenue by Segment (2021 vs. 2020) | Segment | 2021 Revenue (in thousands) | 2020 Revenue (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Services | $555,387 | $476,164 | +16.6% | | International | $117,245 | $107,556 | +9.0% | | Products and Systems | $13,831 | $16,449 | -15.9% | Gross Profit by Segment (2021 vs. 2020) | Segment | 2021 Gross Profit (in thousands) | 2020 Gross Profit (in thousands) | 2021 Margin | 2020 Margin | | :--- | :--- | :--- | :--- | :--- | | Services | $155,384 | $141,084 | 28.0% | 29.6% | | International | $34,282 | $31,046 | 29.2% | 28.9% | | Products and Systems | $7,001 | $6,826 | 50.6% | 41.5% | - Operating expenses decreased by 36.0% primarily due to the **$106.1 million in impairment charges** recorded in 2020, which were not repeated in 2021[237](index=237&type=chunk) - The effective tax rate was **46.6% in 2021** compared to **12.9% in 2020**, with the increase driven by having income in the current year versus a loss in the prior year[242](index=242&type=chunk) Liquidity and Capital Resources Cash Flow Summary (2021 vs. 2020) | Cash Flow Activity (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by Operating activities | $42,261 | $67,802 | | Net cash used in Investing activities | $(18,551) | $(14,969) | | Net cash used in Financing activities | $(23,245) | $(44,169) | - As of December 31, 2021, the company had **$24.1 million in cash and cash equivalents** and an available borrowing capacity of **$26.2 million under its credit agreement**[255](index=255&type=chunk) - The decrease in cash from operating activities was primarily due to movements in working capital, specifically related to net accounts receivable collections[251](index=251&type=chunk) - Future uses of cash are expected to be for debt repayment, international expansion, equipment purchases, and technology investments. Capital expenditures are expected to be **2-3% of total revenues**[259](index=259&type=chunk) Critical Accounting Policies and Estimates - Key critical accounting policies involve significant estimates for revenue recognition, the valuation of long-lived assets and goodwill, and accounting for acquisitions[263](index=263&type=chunk) - The majority of revenue is recognized over time as work progresses, based on time and materials incurred. For fixed-fee arrangements, a cost-to-cost method is used[268](index=268&type=chunk) - Goodwill is tested for impairment annually on October 1 or when a triggering event occurs. A quantitative test as of March 31, 2020, resulted in a **$77.1 million impairment charge**. No impairment was noted in the October 2021 test[273](index=273&type=chunk)[277](index=277&type=chunk)[278](index=278&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=48&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) Market risks include interest rate and foreign currency exposure; a **100 basis point increase** raises annual interest expense by **$2.0 million** - The primary market risks are interest rate sensitivity on variable-rate debt and foreign currency risk from international operations[282](index=282&type=chunk)[283](index=283&type=chunk) - Based on **$196.1 million** of variable rate debt at year-end 2021, a **100 basis point increase in interest rates** would increase annual interest expense by approximately **$2.0 million**[282](index=282&type=chunk) [Financial Statements and Supplementary Data](index=49&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) Audited consolidated financial statements for 2021-2019 and KPMG LLP's unqualified audit report are presented - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021[288](index=288&type=chunk) - The auditor identified the valuation of goodwill for the services and European reporting units as a critical audit matter due to the subjective judgments required in evaluating discount rates and forecasted financial performance[296](index=296&type=chunk) Consolidated Financial Statements Consolidated Balance Sheet Data (as of Dec 31) | Account (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total Current Assets | $161,338 | $162,588 | | Total Assets | $562,195 | $583,313 | | Total Current Liabilities | $121,415 | $109,847 | | Total Liabilities | $361,283 | $386,094 | | Total Equity | $200,912 | $197,219 | Consolidated Income Statement Data (Year Ended Dec 31) | Account (in thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenue | $677,131 | $592,571 | $748,586 | | Gross Profit | $197,147 | $178,531 | $217,297 | | Income (Loss) from Operations | $18,170 | $(101,217) | $24,137 | | Net Income (Loss) | $3,893 | $(99,466) | $6,080 | | Diluted EPS | $0.13 | $(3.41) | $0.21 | Notes to Consolidated Financial Statements - Note 2 provides a detailed disaggregation of revenue by industry and geographic location, showing Oil & Gas as the largest industry and the United States as the largest geographic market[364](index=364&type=chunk)[365](index=365&type=chunk) - Note 8 details the **$77.1 million impairment charge** taken in Q1 2020, with **$57.2 million allocated to the Services segment** and **$19.9 million to the International segment**[383](index=383&type=chunk) - Note 11 describes the Senior Credit Facility, which includes a revolving line of credit and a term loan maturing in December 2023. As of Dec 31, 2021, total borrowings were **$196.1 million**[392](index=392&type=chunk)[397](index=397&type=chunk) - Note 18 discloses a legal proceeding where the company agreed to a **$2.3 million settlement** for alleged violations of the California Labor Code[448](index=448&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=85&type=section&id=ITEM%209.%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None [Controls and Procedures](index=85&type=section&id=ITEM%209A.%20CONTROLS%20AND%20PROCEDURES) Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective[463](index=463&type=chunk) - Management concluded that as of December 31, 2021, the company's internal control over financial reporting was effective, based on the COSO framework[467](index=467&type=chunk) [Other Information](index=85&type=section&id=ITEM%209B.%20OTHER%20INFORMATION) The company reports no other information - None [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=86&type=section&id=ITEM%209C.%20DISCLOSURE%20REGARDING%20FOREIGN%20JURISDICTIONS%20THAT%20PREVENT%20INSPECTIONS) The company reports no disclosures regarding foreign jurisdictions that prevent inspections - None PART III [Directors, Executive Officers and Corporate Governance](index=86&type=section&id=ITEM%2010.%20DIRECTORS,%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) Executive officers and corporate governance information is incorporated by reference from the 2022 proxy statement - Information required by this item is incorporated by reference from the company's 2022 proxy statement[473](index=473&type=chunk) [Executive Compensation](index=86&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) Executive compensation information is incorporated by reference from the 2022 proxy statement - Information required by this item is incorporated by reference from the company's 2022 proxy statement[474](index=474&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=86&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) Security ownership and related stockholder matters are incorporated by reference from the 2022 proxy statement - Information required by this item is incorporated by reference from the company's 2022 proxy statement[475](index=475&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=86&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS,%20AND%20DIRECTOR%20INDEPENDENCE) Certain relationships, related transactions, and director independence are incorporated by reference from the 2022 proxy statement - Information required by this item is incorporated by reference from the company's 2022 proxy statement[476](index=476&type=chunk) [Principal Accountant Fees and Services](index=86&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) Principal accountant fees and services information is incorporated by reference from the 2022 proxy statement - Information required by this item is incorporated by reference from the company's 2022 proxy statement[477](index=477&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=86&type=section&id=ITEM%2015.%20EXHIBITS%20AND%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists financial statements, schedules, and exhibits filed with or incorporated by reference into the Form 10-K - This item lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report[479](index=479&type=chunk)[480](index=480&type=chunk) [Form 10-K Summary](index=88&type=section&id=ITEM%2016.%20FORM%2010-K%20SUMMARY) The company reports no Form 10-K summary - None