Mistras Group, Inc. Aktie

Good day, everyone. My name is [indiscernible]. I will be your conference operator today. At this time, I would like to welcome you to the MISTRAS Group, Inc. Q2 2026 Earnings Call. [Operator Instructions]

At this time, I would like to turn the call over to Thomas Tobolski, Senior Vice President of Finance and Treasurer.

Good morning, everyone, and welcome to MISTRAS Group's Second Quarter 2026 Earnings Conference Call. I am joined today by Natalia Shuman, President and Chief Executive Officer; and Ed Prajzner, Senior Executive Vice President and Chief Financial Officer.

Before we start, I want to remind everyone that remarks made during this conference call as well as supplemental information provided on our website contain certain forward-looking statements and involve risks and uncertainties as described in MISTRAS' SEC filings. The company's factors that can cause actual results to differ are discussed in the company's most recent annual report on Form 10-K and other reports filed with the SEC.

The discussion in this conference call will also include certain non-GAAP financial measures that we believe are useful to investors evaluating the company's performance but that were not prepared in accordance with U.S. GAAP. Reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and the company's related current report on Form 8-K. These reports are available at the company's website in the Investors section and on the SEC's website.

I will now turn the conference call over to Natalia Shuman.

Good morning, everyone, and thank you for joining us today. Our second quarter results demonstrate continued progress towards the transformation outlined on the Vision2030 as MISTRAS becomes a more diversified, technology-enabled and less cyclical company. This transformation is increasingly evident in our financial performance and business mix. Growth in Aerospace & Defense, Infrastructure and Power more than offset headwinds in Oil & Gas as our mix continued to shift towards high margin end market with deeper customer relationships and greater long-term visibility.

For the quarter, revenue increased 4.2% to $193 million, marking our fourth consecutive quarter of year-over-year growth. We also delivered record second quarter adjusted EBITDA of $25.8 million, demonstrating the operating leverage in our model, while significantly improving free cash flow by $23.9 million quarter-over-quarter and continuing to position the business around higher growth, higher value end markets.

Let me start with our performance by end markets, which clearly demonstrates the benefits of a more diversified platform. Starting with Oil & Gas, which remains an important end market for MISTRAS. Revenue declined by $8.5 million or 8.2% compared to the prior year period. This was primarily due to the impact of customer programs exited in 2025, of which the majority impact has already been realized. As we discussed last quarter, certain Oil & Gas customers have deferred some maintenance and project activity amid elevated commodity prices. This has affected inspection cadence, turnarounds and other work. We anticipate that the majority of the deferrals from the first half of 2026 will continue to be pushed further out.

After adjusting for the level of turnarounds in 2026 and work that we exited in 2025, our Oil & Gas revenue was up 1% in the second quarter, and we anticipate this outlook to continue over the second half within our resilient Oil & Gas business. We remain selective in the opportunities we pursue with a clear focus on higher-margin, high-return engagements rather than volume. At the same time, the second quarter decline in Oil & Gas was more than offset by strong growth in our strategic end markets, which were up 28% in the aggregate.

Starting with Aerospace & Defense. This market remains one of our primary growth engines, with second quarter revenue increasing by $3.2 million or 13.2% year-over-year. Our in-lab testing business continues to be particularly strong. Demand is temporarily outpacing capacity due to a healthy backlog, strong customer relationships and the mission-critical nature of the work we perform for some of the sector's most demanding customers.

In response, we are investing meaningfully to expand capacity in our in-lab testing operations with a particular focus on automation and throughput. Along that line, we announced that we have expanded our in-lab capabilities in both Houston and Los Angeles. In these locations, we added equipment and services that allow customers to manage more complex aerospace manufacturing workflows in a single facility, from manufacturing support and defect characterization to weld repair, nondestructive testing and final certification. Over time, we believe these investments in facility expansion, automation and process improvements could nearly triple our in-lab testing capacity. Importantly, these investments are supported by visible customer demand, and will expand our service capabilities while strengthening our role as a trusted supply chain partner.

Turning to Infrastructure. Revenue increased by $6.2 million or 76.5% year-over-year, marking another strong quarter for this key growth market. Continued investments in U.S. LNG infrastructure and data center constructions is creating meaningful opportunities for us, particularly as customers require quality assurance inspection, commissioning support and asset integrity expertise across increasingly complex projects. We are shifting more of our focus and resources towards these larger, more complex engagements because they better align with our technical capabilities, deepened customer relationships and support higher-value, longer-duration work. A good example is our Woodside's Louisiana LNG mega project, where the scope continues to expand across multiple offerings. The growth we are seeing in Infrastructure is another clear example of our Vision2030 diversification strategy translating into profitable growth opportunities.

Our Power Generation business also delivered strong growth, with revenue increasing by $3.1 million or 26.4% year-over-year. This performance was driven primarily by continued maintenance demand from wind energy customers, in addition to onshore wind development, repowering activity and ongoing investment in renewable energy infrastructure. Power Generation is also benefiting from broader investment in power infrastructure, including demand associated with the rapid expansion of data centers. As customers invest across both traditional and renewable generational assets, we are continuing to diversify our customer base and position the business to capture opportunities across multiple technologies and end markets.

Together, our improved sales mix and operational efficiencies contributed to a 10 basis point expansion in gross margin in the second quarter. Combined with disciplined expense management, this helped drive a record second quarter adjusted EBITDA, demonstrating the operating leverage in our model.

Let me now take a few minutes to provide an update on the continued execution of the key -- 3 key strategic priorities within our strategic plan, Vision2030. As a reminder, these priorities are: First, expanding wallet share by delivering a more comprehensive, integrated and innovative solutions for our customers. Second, diversifying into attractive growth markets. And third, building greater operational leverage through continued efficiency and productivity improvements.

With respect to our first strategic priority, expanding wallet share, our proprietary technology solutions, including the ART Crawler monitoring technologies and PCMS data offerings continue to play an increasingly important role in our customer inspection programs. This solution improve inspection quality, support better decision-making and provide actionable insights into customers, managing complex asset integrity needs. As customers continue to invest in asset integrity and digital transformation, particularly in Power and Energy, these capabilities are becoming more deeply embedded in customer workflows and helping strengthen long-term partnerships.

To further accelerate our progress, I'm pleased to report that we have hired an Executive Director of AI, leading our AI adoption and forming an AI center of excellence from MISTRAS Group's data solutions organization, focus on applying AI to asset protection, mechanical integrity, inspection intelligence, engineering productivity, automation and customer-facing data solutions.

On our second strategic priority, diversifying into attractive growth margin markets, we continue to make meaningful progress during the quarter. We secured notable contract wins across wind, energy, commercial diving and marine infrastructure service lines, underscoring the breadth of our capabilities and the value we can deliver beyond traditional entity offerings.

We also hosted a Technology Day in Houston during the second quarter, giving customers a first-hand look at our capabilities and service offerings. The event was well attended, and the feedback was positive across a range of industries. These events help deepen engagement with existing customers and introduce prospective customers to the broader MISTRAS platform.

During the second quarter, we also expanded our relationship with U.S. Department of Defense, securing additional project awards that reflect the strength of our technical expertise and our ability to support mission-critical infrastructure and asset integrity requirements. Together, these wins reinforce our strategic focus on broadening our end market exposure, while driving sustainable growth across our platform.

For our third strategic priority, building great operational leverage, we continue to advance automation, digital initiatives across the organization. These efforts are focused on improving workflow efficiency, working capital management, collections activity, information processing and productivity in support functions. While this AI and automation initiatives are still in the very early phases, they are helping us create a more scalable operating platform by reducing administrative burden and allowing teams to focus on high-value work.

As we continue to build innovative solutions and drive operating leverage, labor availability remain an important consideration. The market for qualified technicians remains tight and we continue to compete for specialized talent. We have responded by sharpening our recruiting approach and enhancing technicians' benefit plans in targeted areas where demand is the strongest, with the goal of filling labor gaps while maintaining the quality and technical expertise our customers expect.

Overall, our strategic plans continues to gain traction and is increasingly evident in our results. We are strengthening technology and service integration, expanding into higher growth markets and improving operational efficiency, all of which are positioning MISTRAS for more sustainable, long-term value creation.

Before Ed walks us through the financials, I want to briefly highlight a few additional achievements from the quarter that reinforce the progress. First, MISTRAS was recently recognized by MarketsandMarkets as a star in both NDT inspection services and NDT inspection equipment, reflecting the strengths of our asset protection platform and technical capabilities.

Second, MISTRAS was added to several Russell growth and defensive benchmarks as a part of the latest reconstitution of the Russell family of indices, which we believe can broaden visibility and support trading liquidity over time.

And finally, we recently launched AEScout, a rapid deployment acoustic emission monitoring solutions that complements conventional NDT inspections and strengthen risk-based inspection and integrity management programs. AEScout gives operators a practical way to collect evidence quickly between traditional inspection intervals, helping them prioritize inspection resources, reduce unnecessary disruption and make more confident decisions. It also supports our emerging integrity management as a service model as we aim to deliver more comprehensive, innovative solutions for our customers.

In summary, we continue to execute against our long-term transformation on the Vision2030. We are expanding in Aerospace & Defense, Infrastructure and Power, managing Oil & Gas with discipline and investing in the highest return areas of the business to support profitable growth.

Now I would like to turn the call over to Ed to walk through a more comprehensive overview of our second quarter results.

Thank you, Natalia, and good morning, everyone. Let me walk you through our financial performance for the second quarter. As Natalia mentioned, we delivered revenue growth of 4.2%, supported by strong execution across strategic end markets. Importantly, that growth translated into improved profitability, with gross profit margin expanding by 10 basis points year-over-year and income from operations expanding by 53.6%. These improvements were driven mainly by our continued focus on a favorable mix shift towards higher value business and continued operational and overhead cost efficiencies achieved across the business.

SG&A decreased year-over-year by $1.1 million or 2.7% compared to the prior year period. Excluding the impact of foreign currency translation in 2025, SG&A expenses increased $1.7 million or 4.6%. The year-over-year comparison was affected by a change in presentation adopted in 2026, under which, foreign currency gains and losses are reported within other income and expense net. Previously, these amounts were included within SG&A. The prior year amounts were not reclassified as the impact was not material.

Operating income was $12.9 million for the second quarter compared to $8.4 million in the prior year period, an increase of 53.6%. This represented a nearly 60% conversion of incremental revenue year-over-year into operating income in the second quarter. On the bottom line, we generated GAAP net income of $7.6 million, resulting in GAAP earnings per diluted share of $0.23. On a non-GAAP basis, net income and earnings per diluted share were $9.1 million and $0.28 per share, respectively. These significantly improved results, GAAP and non-GAAP net income and EPS all more than doubling, reflect our strong performance, particularly given the investments we are continuing to make to support future growth.

Adjusted EBITDA was $25.8 million, an increase of 7% over the prior year quarter and represents our highest ever second quarter adjusted EBITDA to date. Adjusted EBITDA margin was 13.3%, up 30 basis points year-over-year, reflecting stable operating performance, continued cost discipline and the benefits of our ongoing mix shift.

Turning to cash flow. Both cash flow from operations and free cash flow significantly improved during the second quarter. This progress reflects focused management attention on upfront building, cycle time, customer escalations and proactive collection efforts. We generated a free cash flow increase of $23.9 million compared to the prior year quarter as a result of higher net income generated and significantly improved working capital dynamics.

This progress achieved during the second quarter aligns with our previously mentioned focus when driving sustainable cash generation, and we remain intently focused on further improving conversion as we continue to view cash generation as a critical area of focus for the business. We will continue to dedicate significant time and execution attention to strengthening cash flow performance. That includes accelerating the use of automation including AI, improving internal processes and working closely with customers to ensure cash collections better reflect the value and benefits that we deliver. These efforts have shown progress over the past few quarters, and we expect to return to historically favorable cash flow levels in the second half of the year.

Our capital allocation priorities remain unchanged: invest in high-growth opportunities, strengthen the balance sheet through disciplined debt reduction and maintain flexibility to pursue attractive strategic opportunities. We also recently extended our credit facility by one additional year to allow us more optionality as we incorporate Vision2030.

Our interest expense in the quarter was $4.1 million, which was down $0.1 million or 2.4% compared to $4.2 million in the prior year quarter, reflecting decreases in our borrowing costs. Our effective income tax rate for the second quarter was 23.1%, and we anticipate an effective tax rate of approximately 25% for the full year 2026. Our bank-defined leverage ratio was approximately 2.2x as of June 30, 2026, which is down versus 2.4x at March 31, 2026, and is well within the maximum allowable leverage of 3.75x, and this is the lowest level it has been since 2018.

Our capital allocation strategy remains focused on the use of residual free cash flow to pay down debt to our targeted 2x leverage ratio by the end of 2026 as well as continue to make capital investments into higher growth, higher-value areas as governed by our strategic plan.

We appreciate your continued support. And at this time, I will turn the call back over to Natalia for her closing remarks.

Thank you, Ed. Before we move to Q&A, let me close with a few final thoughts and provide our outlook for the remainder of the year.

We delivered another strong quarter, highlighted by our fourth consecutive quarter of year-over-year revenue growth. We also delivered record second quarter adjusted EBITDA, demonstrating the operating leverage in our model. The steps we have taken to sharpen our go-to-market approach, streamline operations and broaden our integrated solutions are producing intangible results. Therefore, we're increasing our full year guidance ranges up to $740 million to $755 million in revenue and up to $92 million to $95 million in adjusted EBITDA. This range reflects continued strength in our strategic growth markets, particularly offset by a low level of activity in our Oil & Gas end market, attributable to our ongoing macro environment factors, including higher crude oil prices.

We continue to see favorable demand trends, particularly in our Aerospace & Defense and Infrastructure end markets, which we expect to support growth throughout the remainder of the year. We remain focused on strengthening operational execution, driving greater efficiency and further improving cash flow and working capital performance. Our strategic plan continues to gain momentum. We are expanding wallet share, deepening customer relationships and advancing technology and data-enabled solutions that make MISTRAS more differentiated and better positioned for sustainable, profitable growth. We also expect to generate meaningful free cash flow while continuing to invest in the capacity, people and capabilities needed to support long-term growth. This will allow us to reduce debt, strengthen the balance sheet and maintain strategic flexibility.

I'll close by thanking all of our MISTRAS employees, from the front lines to the back office, for their tireless efforts in executing on their day-to-day tasks while embracing transformative change and the evolving strategy of our company. These efforts are creating value for our customers, and in turn, our shareholders. I look forward to updating you on our performance as we progress toward our strategic goals.

And with that, I'll -- let me turn the call back to [ Linus ] for questions.

[Operator Instructions] Your first question comes from the line of John Franzreb with Sidoti & Co.

Natalia, I'd like to begin where you just left off. It sounds to me that in -- raising your revenue guidance for the year, it's more a function of better demand in A&D and Infrastructure and that you anticipate Oil & Gas to remain, I don't know, a little bit of a flat to down profile in the second half? Is that the right assessment?

That's right, John. Yes, thanks for the question. It's indeed correct. We see strength in our strategic growth markets that we outlined there, Aerospace & Defense, Infrastructure, Power, and Oil & Gas is our core market. But there, what we see is more of a stabilization. Currently, we saw -- if we take out the turnaround and the exited programs, so we saw about 1% growth in Q2. So we anticipate sort of flat to moderate growth in Q2 and -- in Q3 and Q4. So that's how we look at it.

Got it. Got it. And I guess this is another thing that you said in your prepared remarks, and I don't know if I interpreted it correctly, but you talked about the increasing capacity during your breakdown of A&D being up threefold. Is that threefold just for A&D-related projects? Or is that threefold for all lab related work?

Most is for in-lab work. So what we're doing is we're expanding our capacity in in-lab, and the markets that we serve in our laboratory operations is Aerospace & Defense and Industrials. So both markets will benefit from that expanded capacity. And we project, again, according to our strategic plan, our Vision2030, we project to triple our capacity by the end of '27.

Got it. That's significant. And I guess one last question. Can you give me your thoughts about the 60% drop down, I think, is what you mentioned, Ed, the conversion. Is that a sustainable kind of number in this kind of environment? It seems relatively impressive.

Thanks, John. Good question. Yes, that was for the second quarter. For the full year, it's actually slightly higher than that. And yes, there -- in the in-lab business, in the data business, there is a fixed cost element. So when volume rises, yes, there is a very attractive contribution margin drop down there. And you'll see that in many past quarters, when volume spikes up, you get a significant drop down there. So that's a good percentage to use in future periods. That's sustainable, absolutely.

That's great. And I got to throw in one oddity question. The other income number -- or the revenue number was $8 million [ and ] change, and that's the highest number it's been in years. I'm just curious if there's any abnormal job or anything -- maybe you can just explain a little bit what's going on there?

Other income you're referring to, John, that's...

Other revenue.

Other revenue -- Sorry, that's the otherwise not classified industries. It's a lot of smaller call-out work. It's not fitting in the other predetermined end markets. But it's another example of our good diversification where we're picking up lots of work in different places beyond our core markets, but that's what that is a mix of industries and a lot of that's project work and call-out work in lots of different diverse places.

One of the example, John, is like cruise operators, right? So that we would classify kind of in other revenue stream because it doesn't really -- falls into the Infrastructure or Power, but we still provide these type of services and the -- our customers rely on us.

No, it's just because it was double the first quarter and I looked back a lot of years and still hasn't found it. It is kind of a threshold. So it's just something I noticed, but thanks for taking the oddball question, if you will.

Your next question comes from the line of Alex Riegel with Texas Capital Securities.

Very nice quarter. Can you discuss some of the backlog trends by segment?

Sure, Alex. When we look at kind of backlog, we really not kind of define -- our visibility is not defined by like a single backlog metric. On the field side, our visibility is often better reflected by the recurring activity and long-standing kind of contracts and customer relationships and embedded integrated programs that we have.

So in-lab, we have reserved capacity where we have strategic agreements with our customers. And there, we see of minimum volume that we negotiate with our customers. So we do have the visibility into the volume for foreseeable quarters. And then we do see, obviously, confirmed backlog of the turnarounds, for example, or other projects in the Infrastructure and Power. So -- but again, it's not a single metric of backlog that defines our visibility, if you like.

That's helpful. And then last quarter, you mentioned that you were starting to build an M&A pipeline. How has that progressed?

Yes. So our strategic plan does not depend on any transformative M&A. So it's really -- it depends on executing on Vision2030 and strengthening our cash flow, reducing leverage. Having said that, we're obviously looking at opportunistic kind of opportunities where we can enhance our capabilities. So we continue to look and build the pipeline, but I cannot give you anything concrete at this time.

Your next question comes from the line of Gowshi Sri with Singular Research.

Can you all hear me?

Yes, Gowshi.

My first question is a little bit on color on that in-lab revenue. It was slightly sequentially down. I know last quarter you said, the third half goes to 3 shares around the summertime and possibly a fourth by the year-end. Are those still -- milestones still on schedule? And when does that actually start impacting kind of the revenue line?

Indeed, in-lab revenue is largely depends on the -- unlocking our capacity. So whenever we make an investment, there is a lead time until these investments will come online. So meaning that we can generate the revenue. Usually, the lead time is about 9 to 12 months. So as we continue to invest in the lab network, we would see that the growth could be slightly different quarter-on-quarter. So it cannot be exactly the same due to those -- some capacity constraints.

But overall, we're feeling really optimistic about this growth market because customers are reaching out to us. They are -- there is a supply chain constraints, very visible constraints, and customers are proactively reserving the capacity. So they came for improved turnaround times, they're looking at the flexibility. So -- and we see that this is will, again, gives us enough visibility into the revenue growth in in-lab, specifically, but it depends on the investments that we're making and how soon, how fast they come online.

At this time, I see no callers in the queue, so I will hand back for closing remarks.

All right. Thank you, [ Linus ], and thank you, everyone, for joining our call today and for your continued interest in MISTRAS. Our story remains straightforward. We are diversifying into faster-growing end markets, improving our business mix, expanding margins, strengthening cash flow and investing in capabilities that support long-term earnings power. We remain confident in our ability to execute against our 2026 objectives and create sustainable value for our shareholders. That's pretty much it. Have a good day.

Thank you. This ends today's conference call. You may disconnect at this time.

Good day, everyone. My name is Danny, and I will be your conference operator today. At this time, I would like to welcome you to MISTRAS Group, Inc. Q1 2026 Earnings Conference Call. [Operator Instructions]

At this time, I would like to turn the call over to Thomas Tobolski, Senior Vice President, Finance and Treasurer. Thank you.

Good morning, everyone, and welcome to the MISTRAS Group's First Quarter 2026 Earnings Conference Call. I'm joined today by Natalia Shuman, President and Chief Executive Officer; and Ed Prajzner, Senior Executive Vice President and Chief Financial Officer.

Before we start, I want to remind everyone that remarks made during this conference call as well as supplemental information provided on our website contains certain forward-looking statements and involve risks and uncertainties as described in MISTRAS' SEC filings. The company's factors that can cause actual results to differ are discussed in the company's most recent annual report on Form 10-K and other reports filed with the SEC.

The discussion in this conference call will also include certain non-GAAP financial measures that we believe are useful to investors evaluating the company's performance, but that were not prepared in accordance with U.S. GAAP. Reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8-K. These reports are available at the company's website in the Investors section and on the SEC's website. I will now turn the conference call over to Natalia Shuman.

Good morning, everyone, and thank you for joining us today. On the call today, I will cover three areas: highlights of our strong first quarter performance by the industry verticals and end markets where we provide our integrated offerings. Then I will provide an update on progress made against our strategic plan and finally, highlights of noteworthy awards and acknowledgments achieved in Q1.

Ed will provide additional qualitative context into the first quarter numbers. But first, let me cover the highlights of our first quarter results. Before I do, I want to address three questions we routinely hear from the investors. First, in our Aerospace and Defense, demand remains strong, and we are focused on expanding capacity and throughput to better convert that demand into revenue.

Second, the range in our full year outlook continues to be driven primarily by the timing and spending levels in our Oil and Gas business, while our strategic growth markets remain solid. Third, our profitability improvement continues to be driven by a combination of mix, pricing discipline and operating efficiency.

Turning to end market update. I'm pleased to report that we delivered top line growth of nearly 5%, reflecting the strength of our diversified platform, key growth areas and the disciplined execution of our strategic plan, Vision2030. While the macro environment remains volatile, our team continued to focus on areas where we can control and have the greatest opportunity to win, and that focus is clearly reflected in our results.

I will start with the largest end market. Our Oil and Gas end market declined by $11.1 million or 11.5% this quarter. We anticipated a decrease in volumes, which was not due to a loss of market share or competitiveness. Instead, it resulted from two outcomes of specific conditions and disciplined decisions.

First, current market conditions and a very busy period in the upstream and downstream sectors driven by a 50% spike in global oil prices over the last few months have caused several clients to defer maintenance and inspection projects and activities. These macro dynamics affect total demand in all suppliers in our industry.

Second, we are intentionally prioritizing profitability and long-term value creation over the near-term low-margin volume. In the late 2025 and throughout the quarter, we selectively chose not to participate in bids that did not meet our margin and return thresholds. This is a strategic shift toward a more profitable and sustainable mix of work, and we are committed to maintaining pricing discipline rather than pursuing low-margin opportunities to preserve top line volume.

Taken together, these factors have reduced our Oil and Gas revenue, but they are strengthened the quality of our backlog and position us for improved profitability as market conditions normalize. We remain confident in our competitive position and our ability to capture high-value opportunities as they emerge in this market.

Regardless, our Oil and Gas core remains resilient, supporting a significant base of recurring run and maintain business with more than 60% of our volume occurring at our evergreen accounts. Our Aerospace and Defense market, our long-term growth engine, led the way in our Q1 growth. In this market, we have achieved revenue growth of $7.2 million, representing a 35.5% increase over prior year, underscoring the importance of this key market as a core engine of our Vision2030.

We continue to gain market share as customers prioritize optimized throughput and productivity, quality and technical expertise, where our focused investments are paying off. This strong top line expansion was also supported by meaningful volume increases and additional capacity and utilization as brought online in the second half of 2025.

We also realized a benefit as a result of strategic pricing initiatives started in 2025, which are anticipated to continue in 2026 based on the increased market demand. We are now seeing the benefits in both customer satisfaction and improved throughput cycle times, which we believe will continue into the foreseeable future. Consequently, we continue to invest in expanding capacity, and we will manage growth thoughtfully to ensure quality, on-time delivery and margin integrity as volumes scale.

In our Infrastructure end market, we delivered increased revenue of $6.1 million or 84%, marking another exceptional quarter for this key growth market. Demand tied to data centers, new construction and infrastructure development remains robust, and we are increasingly involved in larger, more complex projects for our customers. Our integrated suite of service offerings are gaining traction, creating new recurring revenue streams and deepening our customer relationships on a variety of projects, including bridges, amusement parks and public sector infrastructure projects as just a few examples.

In addition, these projects typically carry margin profiles at or above the company average, reflecting their complexity and technical requirements. This combination of project activity and end market expansion positions our Infrastructure business as a meaningful contributor to our long-term value creation.

Similar to the Infrastructure end market, we have seen positive developments in our Power Generation end market. We have delivered revenue growth of $1.9 million and 40% over the prior year. The main drivers were our targeted expansion in our at height offerings, particularly for our wind business, specifically by utilizing our recently expanded capabilities and new technologies, which we have integrated and used to access hard-to-reach areas on large structures while meeting all required safety standards and improving field efficiency.

Overall, we delivered resilient revenue growth of nearly 5%, supported by execution across our strategic end markets. This translated into improved profitability with gross profit margin expanding by 120 basis point year-over-year. This improvement was driven by a favorable business mix shift towards higher-value work, sustained pricing discipline and continued operational efficiency.

Based on this favorable mix and growth in our major growth markets, reflecting the strengthening of our platform, we have generated significant improvements of our EBITDA margins. We have delivered an adjusted EBITDA increase of 18.7% as compared to the prior year comparable period, growing adjusted EBITDA from $12 million to $14.3 million. We also expanded our year-over-year adjusted EBITDA margin by 110 basis points to 8.5% from 7.4% in our seasonally low first quarter results.

Turning to my second topic. Let me provide an update on our continued execution against the key priorities within our strategic plan, Vision2030. As a reminder, these priorities are: expanding share of wallet by delivering more comprehensive, integrated and innovative solutions for our customers, diversifying into attractive growth markets and building greater operational leverage through continued efficiency and productivity improvements.

Starting with our first priority. Across the energy sector, we continue to see a clear industry trend toward consolidation of spend and accelerated digital transformation, particularly within Oil and Gas. Our customers are increasingly looking to simplify their vendor base. They are looking for partners who can integrate data and inspection workflows and deliver more predictive technology-enabled outcomes. This plays directly to our strength, most notably our ability to integrate services, technology, data and analytics into a unified offering, differentiating us in a way that few others in the industry can match.

Continued growth of our PCMS up over 10% in the first quarter over the prior year, is evidence of our proven value proposition as we're leading integrated integrity and testing platform, delivering comprehensive, innovative and data-driven insights. We are also seeing momentum with our mechanical integrity turnkey solutions. This is a fully managed white glove mechanical integrity program, which removes the burden of process safety management, reduces operational costs and keeps facilities audit ready through expert-led inspections, data management and compliance oversight via a fixed monthly subscription.

Additionally, over the past year, we have added complementary services, including adjacent mechanical work such as welding, robotics and drone-based inspection capabilities, which enhance our ability to deliver full scope and turnkey solutions. The response from our customers has been very encouraging. Our client relationships continue to strengthen, field interactions continue to increase, leading to deeper engagement and broader opportunity pipelines.

Innovation remains a core component of our strategy. Our proprietary Automated Radiographic Testing Crawler, PCMS and other technologies continue to gain traction as customers look for more real-time insights, automated reporting and predictive maintenance capabilities. These tools, combined with our long-standing subject matter expertise, are enabling us to solve some of the most complex technical challenges our clients face. We are being invited into earlier stages of project planning and more strategic conversations, which is exactly the type of engagement we want.

Diversification of customers remains another important component of our strategic plan and success towards this second priority within our strategic plan provided a significant benefit to our first quarter results. This is evidenced by the previously mentioned growth rates in our strategic market, excluding Oil and Gas, which combined for an aggregate growth of $15.2 million or a 30% increase across Aerospace and Defense, Power Generation, Infrastructure and Industrials.

Specifically, our focus on Aerospace and Defense, supported by our hub-and-spoke models, has generated meaningful growth over the last few quarters and continues to offer significant upside opportunities. We have also had several notable wins in this market within both the commercial aerospace and private space categories. Our positioning in Aerospace and Defense will continue to strengthen as the industry seeks capacity expansion to help service the backlog in an area which we are uniquely positioned to capitalize upon.

And finally, we continue to drive operational efficiencies across the organization in support of the third priority of our strategic plan. We are deploying digital and AI-enabled tools in our back office to streamline workflows, reduce manual effort and improve accuracy. At the same time, we are working more closely with our partners to optimize processes, enhance scheduling and ensure we have the right headcount alignment to support both productivity and growth.

Overall, we are making good progress against our strategic plan, benefiting our customers by reducing downtime, improving predictability and lowering their total inspection cost, which positions us for sustainable long-term value creation.

Ed will provide additional details regarding our financial performance during this quarter. But before doing so, I would like to point out a few other noteworthy achievements that we realized during this quarter. This quarter, we were honored to be recognized by Frost & Sullivan as a Company of the Year within the global Non-Destructive Testing Field Inspection Services industry. We view this as an important validation of the progress we are making to integrate the services, technology and innovation to better meet evolving customer needs.

In addition to industry recognition, we continue to earn meaningful recognition from customers, our unwavering commitment for Safety and Operational Excellence. At a long-term evergreen site, our team was nominated for the Gulf Coast Safety Award for maintaining a Goal Zero injury rate. We have also received the 2025 American Equity Underwriters Safety Award, a distinction earned by less than 2% of all AAEU members. This award recognizes organizations that demonstrate excellence in developing and implementing effective safety management systems. We were selected based on our proactive safety programs and consistently low claim numbers, reflecting the company's commitment to employee safety and strong leadership engagement. This achievement highlights the strength of our safety-first culture and the dedication of our teams.

In summary, we continue to build momentum in the first quarter of 2026, executing on several planned actions and initiatives that highlight the strength of our people, the value of our integrated offerings and our ongoing focus on driving efficiencies across the business.

Now I would like to turn the call over to Ed to work through a more comprehensive overview of our first quarter results.

Thank you, Natalia, and good morning, everyone. Let me walk you through our financial performance for the quarter.

We delivered resilient revenue growth of 4.6%, supported by solid execution across our strategic end markets. Importantly, this growth translated into improved profitability with gross profit margin expanding by 120 basis points year-over-year. This improvement was driven by a favorable mix towards higher-value business, sustained pricing discipline and continued operational efficiency.

For the quarter, we generated income from operations of $4.7 million and GAAP net income of $2.4 million, resulting in GAAP earnings per diluted share of $0.07. We are pleased with this performance, particularly given the investments we are making to support future growth. Each of these metrics is significantly improved from the prior year due to higher gross profit dollars generated and lower reorganization costs and interest expense incurred.

Adjusted EBITDA was $14.3 million, an increase of 18.7%, reflecting both stronger operating leverage and the benefits of our efficiency initiatives. This resulted in an adjusted EBITDA margin of 8.5%, up 110 basis points over the prior year period.

On operating expenses, SG&A increased year-over-year as planned by $1.3 million or 3.7% primarily reflecting strategic investments to support commercial execution and enable growth in our strategic areas, while maintaining discipline in overhead spending. Importantly, despite these investments, we delivered higher net income and EPS, consistent with the expectations we communicated earlier in the year.

Turning to cash flow. We generated negative $4.5 million of free cash flow, which represents a decrease of $4.3 million as compared to the prior year quarter. This decrease was attributable to unfavorable working capital dynamics, primarily a reduction in accrued expenses and as anticipated increase in capital expenditure spending of $1.4 million in the quarter. This CapEx investment was heavily focused on the expansion of in-laboratory testing capabilities and strategic equipment focused on improving the safety and efficiency of our field operations.

Additionally, as a reminder, the first half of the year is typically working capital intensive for us, making the back half of the year a more meaningful indicator of sustainable free cash flow performance. Regardless, we are dedicating significant time and execution attention to strengthening our cash flow performance. This includes accelerating our use of automation, improving internal processes and working more closely with our customers to ensure our cash collection cycle more accurately reflects the ROI that we deliver. These efforts have continued to gain traction over the past few quarters, and we expect to return to our historically favorable levels of cash flow in the second half of this year.

Our cash flow focus is visible in the decrease in our accounts receivable balance from $154.7 million as of December 31, 2025, to $151.4 million as of the March 31, '26, despite the higher level of revenue activity. We will continue to be intently focused on further reductions to our outstanding accounts receivable balance throughout 2026. While we are encouraged by this progress, our cash flow performance remains below our expectations, and we are intensifying our focus on driving sustainable cash generation across the organization.

Our interest expense in the quarter was $2.9 million, which was down $0.4 million or 13.4% compared to $3.3 million in the prior year quarter, reflecting decreases in our cost of borrowing. Our effective income tax rate for the first quarter was 13.8%, which was primarily attributable to a recognized discrete tax benefit of $1.7 million due to a realized windfall on compensation expense. Specifically, we received a tax benefit when shares vesting at a higher appreciated value than the original recorded book expense. This was a function of our share price increasing by nearly 80% or over $6 per share compared to the value used in recognizing book expense at the time of the grant in the initial year of the award. We anticipate an effective tax rate of approximately 25% for the full year 2026.

Our bank-defined leverage ratio was approximately 2.4x as of March 31, 2026, which is down versus 2.5x at December 31, 2025, and well within the maximum allowable leverage of 3.75x. Our capital allocation strategy remains focused on the use of residual free cash flow to pay down debt to our targeted 2x leverage ratio by the end of 2026 as well as capital investments into higher growth, higher-value areas as governed by our strategic plan.

You will note in our earnings release tables that within our disaggregated revenue disclosure by type, we have merged Data Analytical Solutions revenue into field services revenue, and we have retitled this grouping to be Integrated Field Solutions. We did this to accentuate the ongoing integration of our innovative offerings as a key focus of our Vision2030 strategic goal. Importantly, this change does not impact total revenue but better reflects how customers increasingly buy and value our service offerings.

Accelerating the expansion of our Data Analytical Solutions brand remains a key priority, and we believe this is best achieved by further integration of our technology with our technical know-how in the field focused on customer-centric opportunities.

At this time, I would like to turn the call back over to Natalia for her closing remarks before we move on to your questions.

Thank you, Ed. Before we move to Q&A, let me close with a few final thoughts.

This was a strong quarter marked by positive revenue growth and once again, meaningful improvement in profitability. This was our third consecutive quarter delivering mid-single-digit revenue growth. Our results reflects the disciplined execution of our teams and the continued momentum we are building across the business. We are seeing clear benefits from the actions we have taken to strengthen our commercial capabilities, enhance operational efficiency and expand our integrated offering.

We are scaling up our platform by investing in both capital and operating expenditures, focusing on the existing demand in our key growth markets. We will continue to prioritize diversification while also maintaining margin discipline in the Oil and Gas sector. In addition, we were proud to receive significant recognitions this quarter from the industry experts who acknowledge our leadership and innovation and from the customers who recognize our commitment to safety, quality and doing the right thing. These acknowledgments reinforce the value we bring to the market and the dedication of our people across the globe.

We are pleased with these achievements and recognition and even more proud of the people behind it. It is clear signal that our strategy is working and that we are well positioned to lead in the next chapter of innovation in our industry.

Given our performance to date, we are reaffirming our full year guidance of revenue between $730 million to $750 million and adjusted EBITDA between $91 million and $93 million. As we have discussed previously, the range in our outlook is primarily driven by the expected timing and spending levels in our Oil and Gas end market. Oil and Gas field inspection may continue to be impacted by high crude oil prices into the second quarter of 2026, while we continue to see solid demand and execution in our strategic growth markets. We remain confident in our ability to execute, deliver on our commitments and continue building momentum through 2026 as we deepen our customer relationships, expand our integrated offerings and further strengthen MISTRAS position in the market.

With that, let me turn the call over to our operator so we can take your questions.

[Operator Instructions] Our first question today comes from John Franzreb of Sidoti & Co.

I'd actually like to start with some comments you made, Natalia, about the Oil and Gas sector. You said that you did not pursue certain business that contributed to down results on a year-over-year basis. Am I to understand that this is business that you had in calendar 2025 that you let go in calendar 2026?

That's right, John. You're absolutely correct in your understanding. So, in the late 2025 and throughout this quarter, we had made a strategic decision to selectively exit low-margin run and maintain business. So -- and this is intentional, again, to bring us to the high-margin work and utilize our technician capacity for that high-value and high-margin work.

Got it. I just wanted to make sure. And given the high oil prices and the high production rates that we're seeing here in North America, is there still concern about deferments on maintenance spending to the right? Or do you think that will eventually catch up, I don't know, in the third quarter or so? What are your thoughts there?

Yes. So, we see, of course, oil prices are still quite favorable for us, right, being on the high end. However, there is some delays and deferral of the maintenance. The operators and producers do not want to stop for maintenance at this time, but we see that demand is still there. So, we will most likely see some impact in Q2 as well.

But again, this is very much of a near-term development. So, we still believe that there will be potential rebound. And it comes with increased rise of failure, right? So when your assets working to the -- when they're working to the maximum, so there is some potential failure that could occur. So demand is still there.

Got it. And then just switching to A&D, another great quarter for the business. Could you just talk a little bit about adding capacity? Maybe give us some more color on what that means to us and when you expect to recognize the revenue related to capacity additions?

Yes. Thanks. So, we have started, as you might remember, at the second half of 2025 to invest in our capacity. So, some of that investments already, I mean, equipment and machinery and mostly the ultrasonic tanks, right, they came online in this quarter. So, we're already seeing that capacity impact or effect of the capacity expansion in our results in Q1.

So, with that, obviously, what is important to understand that we're also bringing additional labor. We're bringing -- we need to train our people in as we're bringing this new equipment and new capacity online. We also added shifts across our core operations and hubs. So we now have in two of our hubs, we have three shifts going to meet the demand, and we expect to add more shifts in other hubs that we have.

So that's what we're doing in terms of the capacity. So, it's not necessarily building new labs, but it's really making sure that we're utilizing our existing lab to the full capacity because the demand is there and the industry is struggling with the capacity and the supply.

And just on that, I know you said you're going to add shifts. But as far as staffing is concerned, are you at the optimal level, you still need to add staffing?

We're adding some staffing. So yes.

Our next question comes from Alex Rigel at Texas Capital Securities.

You mentioned better pricing initiatives. Can you expand upon this and discuss how broad the action is across your business?

Certainly. So pricing initiatives is a large contributor to our overall improved margins. So we have started pricing initiatives mostly in the A&D sector and Infrastructure, where we believe that demand is supportive of increased prices and that we continue to benefit from that initiative.

So, we started in the second half of the year 2025, and now we see the impact across going into the Q1 as well, and we'll most likely see it in Q2 -- but again, that's all because the demand is high, and it supports our strategy. We are very disciplined on the work we're taking in because, again, of that limited capacity. So, we need to be very, very thoughtful and mindful of how we manage the client demand. And again, the team is executing well. That pricing strategy is working quite well.

And then secondly, in Aerospace and Defense, growth was very impressive. Can you talk a little bit about the sustainability of this revenue base and maybe the longevity of these new relationships and contracts that you have with your customers?

Yes. So, look, this industry is certainly doing really well. OEMs, their backlog remains at record levels. And demand is quite strong across the Commercial Aerospace and especially Defense. We're seeing Defense is doing really well in Europe. But the primarily -- the constraint is not demand, right? So, demand is high. What we're seeing is it's a supplier capacity and labor availability and materials availability. So that's what is still a constraint.

So, we see that backlog to -- we believe the backlog will continue across 2026. So, when we need to continuously expand our capacity and invest in our capacity to help the industry. So, on the client side, we have long-standing relationships with our customers, and we're expanding those relationships through, again, adding more capabilities and service offerings. If we look specifically at A&D, what customers really value in that particular sector, they value capacity, they value quality and they value speed.

So, on those three elements, we continue doing well in those three. And therefore, our customers appreciate what we're doing on our side. So, they are increasing their orders with us. We serve the major operators in this sector. So, it's again, it's long-term contracts, long-standing relationships that we have.

And just to drop this down one more level, Alex, sustainability is, I think, the key part of your question. This capacity we're building, it's for new aircraft deliveries. It's for rocket and satellite launches. It's for new vessels of naval hardware being procured. This is long-cycle backlog that's there that will be here for the longer term. We're chasing that down. So it's -- the sustainability is there. It's a question of catching up to it and helping the customer get into their backlog is what we're focused on.

And most interestingly that customers are willing to co-invest with us. So they are certainly seeing that where we are -- where our unique differentiators are, especially in UT testing. And so they're willing, again, to bring the capacity, expand the capacity to bring more equipment online. They are willing to co-invest with us.

Our next question comes from Gowshi Sri. I'll come back to Gowshi. In the meantime, I'll take a question from Gerard Sweeney at ROTH Capital.

I just had a question on data centers. I think this is an area that you're exploring. And just our work in the industry really shows that some of the front-end work is really starting to emerge in some numbers with other companies. So just meaning concrete being poured, sites being prepped and I think the opportunity for you guys is more testing what I call outside the wall's equipment, sort of almost like a mini power station for these entities. But I want to see how this opportunity develops, what's the opportunity for you? Maybe you can shed a little bit light on that front.

Indeed, Gerry, thanks. Very, very good opportunity for us. We are in early stages there, but you're absolutely right that data centers, especially on the CapEx side, when they're being constructed, they resembles for the most part, power and utilities work where we're helping our customers -- to make sure that we inspect the size and the installation of the equipment.

We're doing essentially the same testing that we do for the Power Generation, but on the new fields for the data centers. So there, we use -- we're kind of looking at it as it's the same services that we provide. It's Ultrasonic Testing, it's visual inspection, Magnetic Particle Testing, or radiography, right? All of those testing, it's the same services and new use case.

What we're doing on the data center, we invest heavily on more on a go-to-market strategy where we're connecting on a deeper level with our customers. And step by step, we're proving our credibility. We're proving our reliability in that particular sector, right, as we all know, what customer values is quality. They value that -- there's this urgency. So that's what, again, capacity. So -- and that's what we can provide to them because this is a very fast-growing market, as we all know. So we're very optimistic. And you're absolutely right, it's a great opportunity for us.

Is there any way you could frame out maybe the opportunity for like, I don't know, an average or large data center, some of the work or the Non-Destructive Testing aspect that you may be able to entertain at one of the facilities?

What do you mean -- could you please repeat it?

I mean how much revenue opportunity would there be for MISTRAS to do some of the testing work at some of these, an average size data centers developed?

I understand your question, Gerry. Thanks. So basically, the way we think about it that data centers are in our infrastructure end markets vertical. So the way we think about it, this vertical will grow double digits this year and beyond. So the revenue potential is there. It's again, it's small steps because we are not known in data centers today, but we're clearly making right now the good steps, and we have a path to earn that credibility, that respect in that industry. So we're making steps, but I could not quantify a specific revenue that will come in 2026.

So, but we believe because it's a smaller -- smaller vertical for us, we will continue to grow it. As we mentioned before, this particular quarter is growing 84%. So -- and that's obviously quite good growth. I don't think it will be every quarter, but certainly double digits. That's our expectation.

I'll hand back to Gowshi Sri from Singular Research.

Congratulations on diversifying the clientele portfolio. On the -- you mentioned in the Q1 release that you're exiting the lower-margin run maintaining accounts. Can you give us a sense of how much of that revenue you've already exited versus how much of that is still in the portfolio? What kind of -- where there's -- where there is another tranche of that revenue that could come out either in the top line in H2 or either as a fiscal '27 improvement?

Yes. Thanks, Gowshi. So basically, if you look at $11 million decline in Oil and Gas, so about 2/3 of that decline is attributed to the -- specifically to those decisions, the exit of low-margin work. So we do think that it will persist. So we'll see some impact going into Q2 and Q3, but the intention is to offset that decline with the higher-value work.

So we are working closely with our clients to expand that wallet share with our integrated solutions. So we believe that by making those actions, those very -- in executing on this very intentional strategy by bringing additional services like we introduced, again, welding, we introduced cleaning, the light craft work to bring the clients' turnkey solutions, we are increasing our margins. So we believe we will be able to sort of offset that negative impact of those exits, right, where we walked away from some contracts by this high-value work. We're quite optimistic about that.

Awesome. I just want to get a bit more color on the A&D margins. So when you win the new A&D capacity contracts, the one that require upfront capital investment in equipment and these technicians. When we look at the incremental margins after the first year of the contract versus the second or third year utilization as utilization matures, are we -- am I trying to understand whether there will be – whether there's a rapid growth in A&D in the near term is nearly -- is initially dilutive to margins before becoming accretive, whether you are capturing full margin economics for all -- or you're capturing it from day one?

I'll take that one, Gowshi. Great question. No, it's not, don't think of it in terms of dilutive. These are -- our hub-and-spoke model is mature. It's expanding. So we're adding on extending capabilities, extending the product line extension, doing more technical steps for customers. So there is a ramp-up when you build the equipment, you buy it, you configure it, you test to a standard, then you ramp up and you're testing more parts per ship for the customer. So yes, you gain efficiency and a learning curve as you go. But these aren't greenfield sites we're building. We were expanding existing in-lab facilities, scaling them up for many common customers and doing more for them. One more step that was either before or after the original test we did, we're annexing it on to what we do.

So it's not -- there's a slight learning curve as we do it the first time, bringing in new parts or things we haven't tested before. But no, it's not -- there's not a major dilutive period there as you're ramping up there. It's minor and then you come up the curve once the equipment is fully installed. If it was a brand-new part for a brand-new customer needing a new piece of equipment, yes, that might take you 12 months to get there. But normally, there's an extension of something we're already doing or testing and repeating the work on bar stock, plate stock, component parts we've done before. So it's generally not something entirely new. But no, it's an incremental thing that does ramp up in a relatively short period of time versus having a long learning curve.

Also, just to add to that, right, also think about that we're not just adding equipment. What we did and what contributed to our results already in Q4 of '25 and now in Q1 is adding shifts. So we used to have one or two shifts per site per hub. Right now, we have in two of our largest hubs, we have three shifts going. So just by adding staffing, by adding labor, we already could generate higher throughput for our customers. That, in our view, is also expanding capacity, if I can characterize it as such.

And you mentioned that part of that A&D growth and the lab growth is going to require new certified technicians. What is the market for that kind of labor at the moment? Are you seeing -- would you see any wage inflation for certified NDT technicians? And if so, will you maintaining a disciplined pricing approach, how would that play out?

It's a great question. And indeed, there is always a shortage of NDT technicians on the market. And that's another reason why we're making such a strategic decision to exit some of the low-margin work because we believe our technicians are deserving high-value work. So we're utilizing the technician capacity in the right way. So it's very tough to find technicians and then obviously train, test onboard and so on. So it takes time, it takes effort. So we want to make sure that they utilize in the right way, in the right contracts and the right relationships. So -- but it is a issue on the market.

So the good news from MISTRAS, right, as a company, we've been around for many, many years. We are a very credible player. So it's a choice. We are the choice for technicians to join. So that's, again, something that's going for us. And we are giving opportunities for technicians in terms of upgrading their skills so they can get better pay as time goes. So that's the way we look at it. So it's just to do it, to look at it from their perspective, right, what is in for them. But at the same time, we have to make sure that we match them with the high-value work and not low-margin work and contracts.

I'll make this my last one. You've combined your data analytics solutions into the Integrated Field Solutions category. I understand that reflects the kind of the Vision2030 integration strategy. But from a modeling kind of investment perspective, the PCMS and the data business are kind of key to the long-term multiple expansion story. Can you give us a discrete metrics on the data business in Q1? whether the revenues growth is recovering, recurring revenue percentage, new customer logos? Any kind of color on new vertical wins outside of the Oil and Gas?

Absolutely. Something that we are very proud of is the growth of PCMS continues to be quite strong. So --and again, as we're introducing integrated solutions, so we show that we generated about $8 million -- $8.2 million in cross-selling opportunities. In PCMS, specifically, we had 11 new logos in Q1. Again, great achievement by the team, plus 29 expansions. So when it comes to data and integrated solutions and PCMS specifically, what we see once we implement it at one site, the customer wants to implement the solution at another site. So we had 29 expansions specifically for PCMS software across this particular quarter.

So again, from modeling perspective, we project double-digit growth in that area. We continue to invest, especially when it comes to AI capabilities. Our clients are very much collaborating with us and seeing how we can turbocharge the insights and information that we're providing to them to make decisions. So they're working very closely with us as we continue to innovate in that space of specifically data and PCMS. So we're very optimistic about those integrated solutions. Again, they are leading that shift specifically because remember, PCMS is mostly in Oil and Gas and petrochem at the moment. So we believe that there are some other applications to other industries, but the biggest opportunity is in Oil and Gas.

And that's where shift -- is going from low-margin, low-value work to more integrated solution and more high-value and high-margin work, where we're utilizing that technology, we're utilizing the data, specifically PCMS. So it continues to be a key metric for us. We're looking at the customer renewals rate. We're looking at how many applications within the suite of software our customers are using. So -- and again, we continue to track those. And we will report transparently to you as well on our development, specifically in PCMS area.

I see no callers in the queue at this time. So I will hand it back to Ms. Shuman for her closing remarks. Thank you.

Well, thank you. Thank you, Danny, and thank you, everyone, for joining this important call today and for your continued interest in MISTRAS. I look forward to providing you with an update on our business and progress achieved towards our ongoing initiatives on our next call. And have a good day, everyone.

This ends today's conference call. You may disconnect at this time. Thank you.

Good day, everyone. My name is Luke, and I will be your conference operator today. At this time, I would like to welcome you to the Mistras Group, Inc. Q4 2025 Earnings Conference Call. [Operator Instructions]. At this time, I would like to turn the call over to Thomas Tobolski, Senior Vice President, Finance and Treasurer.

Good morning, everyone, and welcome to Mistras Group's Fourth Quarter 2025 Earnings Conference Call. I'm joined today by Manny Stamatakis, Executive Chairman of the Board; Natalia Shuman, President and Chief Executive Officer; and Ed Prajzner, Senior Executive Vice President and Chief Financial Officer. Before we start, I want to remind everyone that remarks made during this conference call as well as supplemental information provided on our website contain certain forward-looking statements and involve risks and uncertainties as described in Mistras' SEC filings.

The major factors that can cause Mistras' actual results to differ are discussed in the company's most recent annual report on Form 10-K and other reports filed with the SEC. The discussion in this conference call will also include certain non-GAAP financial measures that we believe are useful to investors evaluating the company's performance but that were not performed -- prepared in accordance with U.S. GAAP.

Reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8-K. These reports are available at the company's website in the Investors section and on the SEC's website. I will now turn the conference over to Natalia.

Good morning, everyone. Thank you for joining us today. It is my pleasure to report to you highlights of our fourth quarter and full year financial performance and provide an update on the progress made to date on our strategic plan and our outlook for '26. Let me first start with fourth quarter results. I'm pleased to report that we delivered consolidated revenue growth of 5.1% in the fourth quarter versus the prior year.

As we communicated earlier this year, we successfully executed on a number of critical initiatives to restart revenue growth in second half of 2025. In particular, we generated double-digit revenue growth across several key areas of our business, namely within the aerospace and defense, power generation and infrastructure end markets. Our Aerospace and Defense business, which is our long-term growth engine, led the way with $4.5 million of growth in the fourth quarter, increasing 21.9% over prior year quarter.

Power Generation was up $3.3 million, representing 33.2% growth over prior year quarter. The industrials and infrastructure verticals were also up 6.7% and 26.8%, respectively, over the same time frame. These increases more than offset the anticipated decline in oil and gas revenue due to timing of projects and the closure of unprofitable labs. Our aerospace and defense operations, as we have reported throughout the year, have made significant improvements in 2025, driven by new leadership supported by targeted capital investments. We have rebuilt the structure, introduced a hub-and-spoke operating model and implemented dynamic pricing strategies.

In addition to commercial aerospace strength, demand within the private space and defense industries has also played a favorable role in expanding our growth in this market. These actions led to the record high performance in our laboratories business, which grew by 61% in our fourth quarter as compared to the prior year. Aerospace and defense expansion plus the double-digit growth in other key industries already mentioned, has resulted in favorable business mix, which in turn was a major driver behind the 190 basis point improvement in gross profit margin of 28.4% on gross profit of nearly $51.5 million for the fourth quarter.

This contributed to our GAAP net income of $3.9 million and EPS of $0.12 in the fourth quarter and non-GAAP net income and EPS of $7.9 million and $0.20, respectively. We achieved adjusted EBITDA of $24.8 million, which was up 18.2% over the prior year quarter, representing a 13.7% adjusted EBITDA margin, which was a 160 basis point improvement over the prior year comparable quarter. Our fourth quarter adjusted EBITDA and adjusted EBITDA margin represent the highest ever fourth quarter performance achieved in the company's history. Equally important, this performance reflects improved pricing discipline, mix and operating efficiency and not only onetime actions such as restructuring and lab closures.

Next, I would like to provide a few highlights of our full year 2025 results. On a full year basis, consolidated revenue was $724 million, which was slightly up year-over-year, excluding the impact of laboratory closures. Revenue was up for the full year in our aerospace and defense, industrials, power generation and infrastructure end markets. Our International segment delivered revenue growth of nearly 6% for the year, driven by a diversified platform, most notably solid performance within the industrials and aerospace and defense markets. We had anticipated our second half revenue performance to exceed that of the first half of the year, and this trend materialized, driven by significant improvements across key growth markets while improving margins.

We expect to continue this trajectory of profitable growth in the future. Our overall efforts in 2025 resulted in the generation of adjusted EBITDA of $91.1 million for the year with an EBITDA margin of 12.6%, which exceeded our previously issued outlook. Our intense focus throughout the year was to deliver EBITDA margin improvement. We, in fact, achieved these goals, utilizing financial and operational discipline while establishing a strong foundation in 2025 and providing credibility to the market, which our results demonstrated.

To summarize our 2025 results, I am very pleased with our performance, achieving adjusted EBITDA at all-time record. This is a testament to our proven business model and client-first mindset. In 2025, I was focused on building a new executive team, eliminated unprofitable business and streamlined the organization while focusing on the strategic direction and building new capabilities and developing a winning culture. We have already experienced early success, including recent wins, improved margins, the adoption of new pricing strategies and an overall new sense of purpose, direction and intensity, which position us very well for the future.

Let me now shift to a brief overview of our most recent progress against our 3 key priorities in our strategic plan, Vision 2030, the first of which is expanding our share of wallet and transforming our current services into a more comprehensive, integrated and innovative solutions for our customers. Our Data Solutions business plays a key role in executing on this priority. This business derives significant value from its more than 20 years of inspection data that we have collected, analyzed and transformed into actionable insights for our customers.

Specifically, within this business, we achieved great success within our planned condition management software, PCMS offering, which grew by 20.7% in the fourth quarter of 2025 and 25.2% for the full year versus the prior year comparable period. This growth was driven by market demand, new customer adoption and increasing the number of in-house implementations.

This offering is a specialized industrial software platform with a high level of recurring revenue. This platform is a part of broader OneSuite asset protection software ecosystem, a cloud-based integrated platform that brings together our various software tools, data services and analytics into a single connected environment, which helps to keep complex infrastructure safe, compliant and operating effectively.

We expect to enlarge our market share related to our data analytical solutions business as we expand our platform from its original compliance focus to its current risk-based inspection, which will ultimately transition to more sophisticated, predictive maintenance and AI-centric platform, reflecting our commitment to continued innovation in data-driven inspection. We are monitoring and driving the data services revenue by growth -- by revenue growth by measuring several interrelated metrics, including sustaining a high year-over-year renewal rate, expanding the percentage of available applications utilized by each customer and increasing our customer retention.

We intend to prospectively report upon the growth rate of this business, utilizing this and related metrics so that you can monitor our progress going forward. In addition to doing more for the existing customers in the oil and gas market, we're also winning projects with new customers, allowing us to diversify our business, which is the second priority within our strategic plan. Examples of successful end market diversification include 2 recent wins in bridge monitoring contracts in the U.S. where our innovative monitoring and data analytical capabilities set us apart.

These projects helped to contribute to the growth in our infrastructure end market, which grew by $2.5 million or 26.8% in the quarter and $4.5 million or 13.2% for the full year. This growth, coupled with recently announced strategic hires, including a Vice President of Building and Infrastructure, further expands our capabilities and create new opportunities across an exciting end market. Another example of executing on this second priority in our recent announcement in December of 2025 of a win of a long-term construction project with Bechtel related to a new LNG terminal for Woodside, which is a multibillion-dollar LNG production and export facility under construction in South Louisiana.

This project is one of the most significant energy infrastructure developments in the world and represent a major investment in the U.S. Gulf Coast energy capacity. Additionally, we continue to pursue data center business. Our services provide integrated support throughout the entire data center life cycle, which is responding to high demand within this sector. Currently, we are performing projects with some of the largest data center owners with the ability to further scale our services throughout the entire life cycle of the data center projects. This is illustrated in our previously announced partnership with Batchelor & Kimball to deliver our suite of specialized inspection services to B&K's data service center projects.

Our overall diversification efforts, including targeted capital expenditures as well as additional strategic sales hires have bolstered our growth in power generation, industrials and infrastructure in the second half of the year. This diversified revenue growth demonstrates the success of our differentiated solutions and ability to deliver on customer expectations.

The third priority of our strategic plan is focused on building operational leverage by doing what we do today but better through efficiency and productivity gains. We have invested in innovative proprietary technology to assist with digitalization of timekeeping and scheduling to more efficiently monitor the utilization of equipment and productivity of our technicians. In addition, we continue to strengthen our sales and business development teams, all of whom bring industry experience and fresh perspective to our business.

In summary, we have executed on several planned actions and initiatives throughout 2025, which have produced favorable outcomes. We believe that this growth reflects the strength of our people, integrated offering and continued focus on driving efficiencies across the business. I will share more thoughts on 2026 later, but let me now turn the call over to Ed for more details on fourth quarter results and the highlights of full year 2025.

Thank you, Natalia. Given some early successes of our strategic efforts, gross profit increased to nearly $205 million for the full year 2025, up 6.4% from $192 million for full year 2025, representing a gross profit margin of 28.4%, which was a 190 basis point improvement year-over-year compared to 26.3% in the prior year. As noted in our press release yesterday, our results reflect certain overhead and personnel expenses, which have been reclassified from SG&A to cost of revenue.

The effect of this for the fourth quarter of 2024 was $5.5 million and for the full year 2024 was $20.9 million, reclassification from SG&A to cost of revenue. This redistribution of overhead and personnel expenses had no impact on operating income, net income or adjusted EBITDA comparability. Selling, general and administrative expenses were up $3.6 million in the fourth quarter compared to the prior year comparable period, attributable to strategic investments to grow our business and unfavorable foreign translation conversion. SG&A for full year 2025 was $139.9 million as compared to $135.5 million in the prior year, an increase of $4.4 million, again, due primarily to unfavorable foreign translation conversion in addition to strategic investments to grow our business, the selling component of SG&A, whereas general and administrative overhead spending has been and will continue to be tightly controlled.

During the current fiscal year, we revised our presentation of foreign currency losses and gains, which are now included within other expense and income line net. Previously, such amounts were presented within selling, general and administrative expenses. The prior year amounts have not been reclassified due to immateriality. This change in presentation had no effect on previously reported net income. GAAP income from operations in the fourth quarter of 2025 was $10.4 million compared to $10.5 million in the prior year period. GAAP income from operations for the full year improved to $40.6 million from $39.8 million in the prior year. Non-GAAP income from operations in the fourth quarter improved to $15.7 million from $14.3 million, an increase of nearly 10%, on a full year basis, non-GAAP income from operations improved to $55 million from $46.2 million, which is an increase of nearly 19% or 130 basis points year-over-year.

We recorded $12.6 million of reorganization and other costs for the full year 2025 and $4.8 million during the fourth quarter related to our continuing initiatives to reduce and recalibrate overhead costs in addition to incremental cost of other related actions. Our effective income tax rate for the full year 2025 was 24.7% as compared to 22% for the prior year. We anticipate our effective income tax rate for 2026 to be in the mid-25% range. Interest expense was $3.7 million for the fourth quarter, down by $0.2 million from the prior year period.

For the full year 2025, interest expense was $14.6 million, down $2.5 million from the prior year. For the fourth quarter, we reported GAAP net income of $3.9 million or $0.12 per diluted share. On a non-GAAP basis, we reported non-GAAP net income of $8 million or $0.25 per diluted share for the fourth quarter. This resulted in GAAP net income of $16.8 million or $0.53 per diluted share for the full year 2025 and non-GAAP net income of $28.1 million or $0.88 per diluted share for the year ended December 31, 2025. This compares to GAAP net income of $19 million or $0.60 per diluted share and non-GAAP net income of $22.7 million or $0.72 per diluted share in the prior year period due primarily to incremental reorganization and other costs incurred in '25.

As committed in the third quarter, we delivered positive free cash flow in the fourth quarter of 2025, and I'm pleased to report that we generated $32.1 million of cash from operations and $24.6 million of free cash flow in the fourth quarter of 2025. This compares to $25.7 million of cash from operations and $20.8 million of free cash flow in the prior year comparable period. For the full year 2025, we generated $33 million of cash from operations and $3.8 million of free cash flow as compared to $50.1 million of cash from operations and $27.1 million of free cash flow in the prior year period.

While full year free cash flow declined versus last year, this was driven by 3 identifiable factors. Elevated DSO during our ERP stabilization period, higher restructuring activity and growth-related CapEx. Two of these 3 factors are already moderating, and we expect improved cash flow conversion as we move through 2026. We will build upon this cash improvement achieved in the fourth quarter and continue to prioritize improving our cash flow performance in 2026, specifically by leveraging a newly hired Vice President of Working Capital Management as well as by improving back-office structure, tools and accountability to accelerate the order to cash cycle and lowering accounts receivable.

Our total accounts receivable balance was $154.7 million as of December 31, 2025, up $27.4 million as compared to $127.3 million as of December 31, 2024. This was due to the timing of working capital throughout the year. We are intently focused on reducing our accounts receivable balance below fiscal '24 levels throughout 2026. In addition, increased restructuring charges of $7 million and incremental CapEx investments of $6.2 million year-over-year, which are anticipated -- which were anticipated as a part of our strategic plan, also adversely impacted our cash flow.

Specifically, our CapEx in 2025 was $29.2 million as compared to $23 million in the prior year. This increased capital expenditure spending in 2025 was heavily focused on the selective expansion of lab capabilities and capacity in addition to strategic equipment purchases focused on improving the safety and efficiency of our field operations. We anticipate maintaining CapEx at this higher level into 2026 to approximately 4.5% of revenue, but maintaining spending thereafter at our prior depreciation level. This will enable us to continue to expand and upgrade capacity, particularly at our in-lab aerospace and defense facilities, which have been partially constrained by capacity.

These investments are targeted towards areas where demand already exists. The primary return mechanism is improved utilization and throughput, which allows us to convert existing demand into revenue more efficiently rather than relying on speculative growth. Gross debt was $178 million at December 31, 2025, compared to $169.7 million at December 31, 2024, an increase of $8.3 million. Net debt was $150 million at December 31, '25, compared to $151.3 million at December 31, '24, a decrease of $1.3 million.

Our bank-defined leverage ratio was approximately 2.5x at December 31, 2025, which is up versus approximately 2.3x as of December 31, 2024, yet is well within the maximum allowable leverage ratio of 3.75x. Our capital allocation strategy is to use residual free cash flow to pay down debt to a 2x leverage ratio while maintaining a temporarily elevated CapEx level. We will continue to emphasize debt reduction as our priority use of our residual free cash flow, and we are targeting a debt paydown of approximately $20 million in fiscal '26 in addition to the significant paydown we made in the fourth quarter of 2025.

This would result in a defined bank leverage ratio of approximately 2x by the end of fiscal '26. In summary, this significant financial improvement reflects our proactive cost management, operational efficiency leverage and focus on higher-margin businesses. And this success was attributable to a new and invigorated executive team, reducing unprofitable business and being laser-focused on our strategic direction, all while building new capabilities and developing the culture to win. Let me now turn the call back over to Natalia for her to give us her outlook on '26.

Thank you, Ed. Given that we have established the foundation for future success in 2025, we view 2026 as an opportunistic time in the market to continue on a number of management imperatives towards executing on our strategic plan in order to position Mistras to unlock its inherent value over the longer term. First, as Ed mentioned, we will be increasing capital expenditures from our historic 5-year average of approximately 3% to 4.5% of revenue to expand and upgrade capacity and remove constraints for targeted growth.

These investments will be primary focused on our in-lab business, serving the fast-growing aerospace and defense market. Scale is a key for our customers within this market who demand integrated services in large capacities from their supply chain partners. Additionally, we will invest in CapEx related to innovative AI capabilities in our data solutions businesses. This will enable faster and more accurate analytics and insights for our customers. Our overall CapEx plan reflects confidence in our customer demand trends with compelling ROI expectations. Most importantly, these investments are targeted and sequenced. We do not view margin erosion, leverage creep on negative free cash flow as acceptable trade-offs.

Our intent is to protect the earnings base while expanding long-term earnings power. Secondly, we will be focused on our go-to-market strategy and invest in our sales-related technological applications and other initiatives. This investment will focus on advancing our effort in marketing and selling our leading proprietary technology and innovative data-centric solutions such as ART crawlers and OneSuite digital applications as a suite of data-centric services, providing predictive solutions and strategic insight.

By undertaking the strategic initiatives and investing organically for long-term market-leading growth, we will leverage our competitive advantages and strengths to position -- to best position ourselves for success and future growth. Accordingly, for 2026, we anticipate full year revenue to between $730 million to $750 million and adjusted EBITDA to be between $91 million to $93 million. While we are addressing both CapEx and targeted operating investments in 2026, we expect adjusted EBITDA margins to remain resilient as we plan to maintain operational discipline and cost control. We also expect net income and EPS to exceed 2025 performance. Importantly, our 2026 outlook does not assume a macro acceleration or strong rebound in oil and gas activity or any contribution from acquisitions. I would now like to our Executive Chairman of the Board, Manny Stamatakis, to offer his remarks.

Thank you, Natalia, and good morning, everyone. I would like to offer you a brief Board-level perspective as we look ahead. 2025 was a very good year for the company, particularly in strengthening our position in data-driven inspection, mission-critical testing and aerospace and defense programs. I am pleased with the operational progress and the platform that management has built across these end markets.

Particularly, I want to commend the meaningful strides we've made this year in significantly improving our executive team under the direction of our CEO. We strengthened leadership and sharper execution have materially improved our performance and strategic focus. As we enter 2026, the Board fully supports management's view that this will be an investment year, focused on transforming and modernizing our platform. In our industry, long-term value is created by investing to meet demand within our end markets in data integrity, digital inspection capabilities, specialized talent and accreditation for higher complexity aerospace and defense work.

Such investments take time to translate into revenue and margin expansion, but they are essential to sustaining durable growth. Most importantly, the Board views 2026 as an acceleration of our strategy via increased investments and a deliberate step to deepen our technical differentiation and expand our relevance to customers operating in regulated mission-critical environments. We are confident in the execution plan, the capital allocation priorities and the long-term ambitions, particularly as risk-based inspection and aerospace defense spending continue to evolve.

I wanted investors to hear clearly that the Board views 2026 as a targeted year, which will strengthen the foundation for future growth. I'll now turn it back to Natalia for her to give you her closing thoughts.

Thank you, Manny. I'll close by thanking all of our customers and partners who contributed to our superior results throughout 2025. And in particular, I would like to sincerely thank all of our Mistras team members from the front lines to the back office for their tireless efforts in executing on their day-to-day tasks while embracing transformative change in the evolving strategy of our company.

These efforts are creating value for our customers and in turn for our shareholders. We look forward to updating you on our performance as we progress further in 2026 towards our strategic goals. And with that, let me turn the call back to the operator for questions.

[Operator Instructions]. Our first question comes from Mitchell Pinheiro with Sturdivant & Co.

Can you hear me?

Yes, Mitchell.

A couple of questions. So Aerospace and Defense, it's your -- had a great quarter, and it's obviously a big part of -- it's your longer-term growth engine, I think, as you said. So I'm curious -- and you also -- in other remarks, you talked about good visibility.

So I guess, when you look at backlog of your customers, both in the space side and the aerospace side and then on the defense side, what kind of confidence do you have in that? Number two, from a capacity, you talked about expanding capacity. Is that at all revenue limiting in 2026? Or you have plenty of capacity to do what you need to do? And then -- and are you winning new business with these customers? And if so, how are you doing that in terms of capabilities? Or is it -- just curious how you're doing it.

Yes. Thank you. Thanks for this question. I will start with customers. Indeed, we do have very good close relationships with our customers. We meet with them, specifically in aerospace and defense, I'm talking about, we meet with them monthly to evaluate their demand. We know what they expect. And as I mentioned before, for them, scale and capacity matters.

We also have established a hub-and-spoke model that allows us to use that platform at large for our customers. So regardless of their location, we are able to assist that, but again, by expanding the capacity. When talking to specifically about capacity and your questions whether we do have constraints, yes, we do have constraints, and that's exactly where we're going to invest to remove those constraints to then increase the utilization, increase the throughput, increase the productivity and then sort of unlock the demand into really into the revenue. So that's essentially what we're doing in aerospace and defense.

We have great visibility into the demand. And these customers are -- as you know, in aerospace and defense, there is a strong demand for NDT, particularly NDT testing. And they don't have enough of in-house capabilities. So they are certainly looking for other suppliers who can support them and who can be large enough to support them. And yes, we're winning new business. So we're celebrating adding a few new customers this year. And this is all thanks to our team that's there on the ground, and they're doing a really good job.

Okay. And then just one more question on aerospace and defense. So in terms of capabilities, is this a target area for maybe a tuck-in acquisition? Do you have any plans for something like that? Or are you looking at that? Or is it -- or you think you can sort of do it just through your own CapEx, your own internal investment?

Look, you're absolutely right. The growth and differentiation comes from the capabilities, depth in that business specifically. So we have commented before that we are enlarging our offering. In addition to NDT testing, we now do welding, machining, repairs, cleaning. -- and so on. So that is quite critical for our customers. In terms of acquisitions, as you can imagine, it's very pricey acquisitions at this moment.

Of course, we are always looking at our capital allocation strategy. But at this time, we believe that the highest return on our capital is organic expansion. So -- and we believe that we are capable of building these capabilities and organically expand our capacities. I can give you a good example in Q4 demonstrated that. To respond on demand, we -- at one lab, we added 100% of headcount, basically enlarge headcount. We removed that constraint, and we were able to generate increase in revenue of 61%. Can we repeat it? Probably not to that extent, but we already see the ways how we can remove existing constraints to generate additional revenue.

Okay. Helpful. And then I mean, with obviously, the disruption in the Middle East, I'd love to hear your thoughts about how it may be affecting operations or how you view the first quarter? Is there any insight you could provide there would be helpful.

Yes, certainly. We have not seen a material direct impact. Our footprint in that region is very limited. But of course, there's a lot of uncertainty, and we continue to monitor geopolitical developments. Our customers are still evaluating what it means to them. Obviously, as you well know, if the oil price as a result of these events, if oil price goes up, the upstream activities will be intensified within the U.S., and it will positively impact us. But at this time, it's too premature to say.

Okay. And then just one more question. So you in terms of -- obviously, oil and gas is the majority of your business at the moment and the faster-growing segments, aerospace, the energy, your power generation, I guess, I should say, infrastructure, they're going to be your focus or obviously, your growth focus, let's say. Is -- could you talk about new customer wins, bid activity in those application -- in those segments. What -- do you think the growth is going to come from existing customers, a balance between existing customers and new customers? And also, if you could talk about like sort of the margin profile of these growth businesses as compared to, say, your company average?

Yes. Thank you for this question. It's a very good one. It actually touches on 2 of our strategic priorities that we intently focus on. One is the oil and gas customers where we are expanding our offerings and services. And that's where, again, we believe very strongly that we are able to participate in oil and gas customers' digitalization efforts.

And by offering to them our data services and data analytics and AI tools, we're able to help them to be more efficient as they looking at their performance. So there, we're talking about expanding that existing client base or expanding the share of their wallet and we're talking expanding of the margins, right? We're intently focused on margins profile in our core markets of oil and gas. The second priority is the diversification.

And those industries, like you mentioned, is infrastructure, power generation, where we -- again, we're winning new contracts. There, it's all about capabilities and all about building that go-to-market strategy. So while we're working on capabilities, while we're investing in that part, we're also looking at how best to competitively position ourselves. Again, great example will be data centers. We have what it takes when it comes to data centers. It's the same services we already provide for our core client base like oil and gas, but here, we're using a new use case.

So it takes a little time to get this going, but we already had that win and margin profile, to answer to your question, is higher because those services in high demand at the moment and the demand is very visible. So that allows us to, again, to position us competitively well and still generate sufficient amount of margins.

Okay. And by the way just one more question. I'm sorry. When you look at the revenue guidance for this year, the difference between the low end of the range and the high end of the range is what type of -- why would we be at the low end versus why would we be at the high end?

Good question. So basically, the reason is -- so there's a couple of scenarios that we're looking at, right? And our large share of our business is still in oil and gas. And so our customers, although they did already present themselves as I would describe it less pessimistic, but they're still quite cautious. So it's a large portion of our business. So depending on how oil and gas customers do this year would largely impact our performance.

So we're quite confident when it comes to aerospace and defense, infrastructure, power generation, we will generate sufficient amount of growth there. But again, it's a smaller share of our total revenue. And therefore, we are dependent on the oil and gas market. We are making -- again, all the strategic plan is about to diversify as much as possible. So we are not -- we are less dependent. But at this time, this is our scenario where it all depends how well we do at the -- in the oil and gas market.

Our next question comes from John Franzreb with Sidoti & Co.

I'd like to start with the fourth quarter results, especially the improvement in the gross margin profile. I was wondering if you could quantify how much of that is pricing versus mix versus maybe exiting some of the unprofitable businesses? Can you kind of put a bandwidth around where the improvements came from?

Absolutely. I will start qualitatively and then Ed will add if anything. So there's 3 distinct factors that influence our performance in Q4. And it's a mix -- a favorable revenue mix number one; number two, it's improved pricing discipline. And number three is really the operating efficiency.

So there's less impact of the unprofitable branches or laboratories closures, and we'll talk about it. But let me unpack it a little bit. So obviously, revenue mix comes with the expansion of the aerospace and defense, right, as our laboratory business contributed really well as well as our data services. So again, we saw great growth in PCMS due to multiple implementations. So that's revenue mix that contributed to higher gross margins. If I have to quantify -- so let me touch on the pricing first. So pricing discipline. So we -- as we already mentioned in 2025 in the beginning, we had established very rigorous pricing programs, and now they are working really well.

So the pricing discipline and again, in the Q1 -- in the Q4, when we had a surge in demand in aerospace and defense, we were able to apply that pricing discipline, and we had some expedited fees. And in fact, it's again, had a positive impact on our gross margins. So if I have to quantify it, it's probably think about it as 25% price and 75% volume, specifically in aerospace and defense.

And then on operating efficiencies, right, it's -- obviously, there is some restructuring impact, but it's minimal. It's around 1.5%. But there -- it's not big. So it's really the effect of price and the mix.

Got it. And just maybe to reframe one of the previous questions, is there a way to call out how much of your aerospace and defense revenues are just in defense?

Just in defense, I probably would say -- and we can follow up with you on that. I probably would say it's 70% aerospace, commercial aerospace and private space and about 30% to 35% in defense. We have very -- we have good presence in defense and international segment. And that's where we see that increase, again, as defense budgets going up. So it clearly benefits and creates positive impact.

Understood. And Natalia, it seems to me like you're taking maybe a more cautious view to the oil and gas market in 2026 than you were, say, 3 months ago. Does that extend into the current upcoming turnaround season? Or are you just looking at 2026 as a whole?

A couple of comments here. Let me start with turnarounds, right? So we had exceptionally good turnaround -- turnaround season in 2025. So whenever turnaround happens, it's usually not every year because customers have to extensively plan for turnarounds. So it's usually once in 3 years, once in 2 years.

So this particular year, 2026 is not that robust when it comes to turnarounds. So that's number one. That certainly will have some impact. We still have quite a good visibility into turnarounds already for Q1 and Q3. But certainly, that's apologies for Q2 and Q3. But certainly, this is something that we are still working on. Secondly, if you look at oil and gas, again, what we hear from our customers, they actually do not spend as much on CapEx.

They are projecting to be flat or somewhat down. What it means for us is they will maintain their maintenance budgets, right? So they want to get their life -- more life out of their assets basically. And so that means that it should favorably impact us. So I don't foresee some negative impact in oil and gas by any means. I do see that we have a very good opportunity and especially with our data services.

But we have to be a bit cautious. Again, to me, I think it's all -- it largely depends on the spending of our oil and gas customers.

Understood. And I got a bunch of more questions, but I'll ask this last one and then get back into the queue. Regarding the CapEx increase of 4.5%, is that viewed as a onetime 2026 phenomenon? Or do you expect to be spending at an elevated level for maybe a couple of years?

That's right. We anticipate CapEx to remain at elevated levels in 2026 and into 2027. But then we anticipate the intensity to moderate after that and kind of following the completion of our key initiatives that's driven by our strategic plan. So that's the outlook. And then we expect our CapEx to return to our historical depreciation levels after 2027 to about 3% of revenue.

Our next question comes from Gowshi Sri with Singular Research.

Can you hear me?

Yes, hi.

Just a few questions from my side. Firstly, on the international, the profitability seemed to have improved quite nicely there. So just was wondering, are those gains concentrated in just a couple of standout contracts or countries? Or do you feel that you have made more systemic changes in pricing, cost structure or customer mix that should make that improvement more sustainable in 2026 as well.

It is structural improvement, just to answer to your questions directly. We did -- international had a good year, very good year. We had overall 6% increase in our revenues and improved margins profile.

So there, in international, we have quite diversified platform. So in fact, oil and gas was slightly down in international for the year, but we did have good increase in aerospace and defense. We had good increase in infrastructure, good increase in power generation. So they did -- the International segment and the teams in Europe and elsewhere did really, really well. So from margin profile, we will invest slightly in our international facilities as well. So we will see some capacity enlargement and capacity constraints removal. So we would anticipate margins to be sustainable in the long run.

Okay. And then secondly, on your largest, let's say, strategic accounts, particularly in the oil and gas sector, how is your wallet share and contract duration trended over the last 12 to 18 months as you have shifted towards higher value, more integrated offerings? Are you seeing any change in competitive dynamics or in-sourcing there that would make the wallet share harder to hold in 2026?

I would not -- and thank you for this question. I would not say it's harder to hold the wallet share. It's just we see that there is more appetite from our customers to consider the -- to consider digital platforms, to consider data analytics, data insights. So -- and we see this as a very good opportunity for us to introduce the higher-value work to them, right, that benefits them as they continue to execute capital discipline.

Having said that, they're also increasing their risk managing spending. So again, to increase the efficiency, the operational excellence, the asset life extension. And so they have higher demands. All our strategic customers come to us to help them to create that digital data platforms now, right? So there's much more appetite to look at this type of solutions, the integrated offering. So that's what we see particularly there.

So it's not it's harder to keep and retain the volume, but we are shifting away from the commoditized kind of just NDT services to more value-driven solutions where we are expanding our offerings to include data analytics, to include digital data, to include the digital platform. And that's what we're essentially doing, expanding that services portfolio for our existing oil and gas customers. And again, from the bid activity, from the -- our sales activity, we see that increased interest. And because, again, they're very much of in tune with what they need to do in terms of the risk management when they expect more from their assets, right? Because there is more load, right, the bigger probability of failure. So they have to manage their risks.

Our next question comes from Alex Riegel with Texas Capital Securities.

Very nice quarter. As it relates to the restructuring actions over kind of like the last 12 months or so, can you talk to or quantify the long-term cost savings and also address sort of any negative revenue headwinds that you could be facing in 2026 because of those?

Thanks, Alex. I'll address that question. So yes, the restructuring was elevated in '25 over you saw that $12 million. That's a combination of severance in there from headcount reductions. There's lease breaks in there and other strategic actions we've taken to really drive efficiencies and productivities.

So there is a good payback on much of that. I mean, the facilities, the lab closures that we talked about throughout the year. there is payback there. That's an uplift to the margins. There was no contraction of business. There's not a negative revenue implication from those restructurings. We really are streamlining and driving for efficiency, more throughput. Natalia mentioned earlier, getting another shift of operational effectiveness out of an existing site by really debottlenecking our own sort of self-induced capacity constraints. That's a big part of restructuring is about is really to have clean line of sight, delayering the organization to speed up decision-making.

So there's a lot of soft benefits as well there. But most of that cost is out. Again, some of the heads got replaced. That's not a direct [indiscernible] savings, but facilities is definitely a savings. And there were some onetime expenses here driving strategy and other things in restructuring in '25.

This number will moderate significantly in '26. So that number will come back down. It was also a drag on our free cash flow a little bit. But we look for returns on the reorg expense that we booked here, and you will see that kind of reflecting itself in '26.

And then as we look out longer term, can you help us or remind us what your sort of longer-term organic revenue growth and EBITDA margins could look like for this business that you're improving?

Yes. Thanks, Alex. So when we look at our strategic plan, we're looking at a CAGR about 5% through 2030. And for margins, our aspirations are to reach 15% margins, EBITDA margin. That's the profile we're looking at.

At this time, I see no callers in the queue. So I'll hand the call back to Ms. Shuman for her closing remarks.

Thank you, Luke, and thank you, everyone, for joining this call today and for your continued interest in Mistras. I look forward to providing you with an update on our business, strategic plan and progress achieved towards our ongoing initiatives on our next call. Thank you, everyone.

This ends today's conference call. You may disconnect at this time.

Good day, everyone. My name is Laila and I will be your conference operator today. At this time, I would like to welcome you to MISTRAS Group Q3 2025 Earnings Conference Call. [Operator Instructions]

At this time, I would like to turn the call over to Thomas Tobolski, Senior Vice President of Finance and Treasurer.

Good morning, everyone, and welcome to MISTRAS Group's Third Quarter 2025 Earnings Conference Call. I'm joined today by Natalia Shuman, President and Chief Executive Officer; and Ed Prajzner, Senior Executive Vice President and Chief Financial Officer.

Before we start, I want to remind everyone that remarks made during this conference call as well as supplemental information provided on our website contain certain forward-looking statements and involve risks and uncertainties as described in MISTRAS' SEC filings. The major factors that can cause MISTRAS' actual results to differ are discussed in the company's most recent annual report on Form 10-K and other reports filed with the SEC.

The discussion in this conference call will also include certain non-GAAP financial measures that we believe are useful to investors evaluating the company's performance, but that were not prepared in accordance with U.S. GAAP. Reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8-K. These reports are available at the company's website in the Investors section and on the SEC's website.

I will now turn the conference over to Natalia Shuman.

Thank you, Tommy. Good morning, everyone. Thank you for joining us today. It is my pleasure to report on our Q3 results and update you on the progress made to date on our strategic initiatives. Let's start with our third quarter results. I'm pleased to report that third quarter was highlighted by consolidated revenue growth of 7% versus the prior year. As we planned and communicated early in the year, our goal was to grow revenue in the second half of 2025 year-over-year and we achieved this in the third quarter.

With the improved revenue, we generated an expanded bottom line result in the third quarter with net income of $13.1 million or earnings per diluted share of $0.41 and our record quarterly adjusted EBITDA of $30.2 million. With regards to the performance within our end market, we have delivered year-over-year revenue growth for Q3 in each of our 5 largest industry verticals. Energy market consisting of our oil & gas and power generation industries led the way growing 8.1%. Oil & gas was up $6.2 million or 6.2% and power generation was up $2.8 million representing 24.3% growth year-over-year.

These results are attributable to strong turnaround activity, PCMS projects and market conditions in power generation driven by increased demand for rope access services within our renewable business. Aerospace & defense, our second largest market, was up 10.6% or $2.3 million due to a solid volume gain across the private space and defense industries and in addition to the successful price increase strategies. Our largest customers in this market continue to forecast future growth in their businesses over both the short and long term as evidenced by their robust backlogs.

With its higher than company average margin profile, aerospace & defense is one of our top strategic priorities for both top line revenue generation and margin improvements. Industrial and infrastructure markets were both up in the third quarter over prior year. We achieved 15.8% growth or an increase of $3.1 million in industrials driven by the increased demand of manufacturing. And we achieved 21.1% growth or a $1.8 million increase in infrastructure driven by the increased activity in construction and capital projects.

Overall, this diversified revenue growth across our 5 largest end markets and across geographies, including growth of 5.5% within our International segment was driven by the broad market demand for our services and demonstrates the success of our differentiated solution and our ability to deliver on customer expectations. Turning to profitability. Gross profit increased by $9.3 million or 19% with gross margin expanded by 300 basis points to 29.8% over the prior year quarter.

The increase in gross margin was due to favorable business mix, closure of unprofitable labs early in the year and operational efficiencies as a result of a streamlined operational structure and better focus and accountability. Consolidated adjusted EBITDA generated in the third quarter was $30.2 million resulting in a 15.4% EBITDA margin. This represented an increase of $6.9 million or 29.6% versus the prior year period, underscoring the improved operating leverage in our business model.

Let's now shift to a brief overview of our progress against our 3 key priorities in our strategic plan, Vision 2030, the first of which is expanding and transforming our current services to a more comprehensive and integrated solutions for our existing and new customers. Our entire leadership team has continued to be keenly focused on meeting with as many customers as possible to hear their voice directly and better understand their perception of MISTRAS. Our integrated offerings and solutions are finding broader adoption and use cases as indicated by the strength of our recent results and there is more to come as we continue to unlock MISTRAS' value.

For example, there is an opportunity for many of our field services customers to utilize our proven PCMS solution which, as we demonstrated, would drive efficiency and improve their operational execution. This offering illustrates the value of bringing our whole integrated solution to our customers. Since only a very small percentage of our field services customers currently use our data analytics and software solutions, this is an exciting opportunity for us. And in addition to doing more of existing and new customers in our core markets, we are also winning projects with brand new customers in new and adjacent markets.

These efforts form the basis for the second key priority of our strategic plan, diversification, expanding our client base into new industries while protecting our core business. Our recent announcement of wins with Batchelor & Kimball related to data center projects and Bechtel on the Hanford P Project for the United States Department of Energy are examples of recently awarded long-term construction projects outside of our core energy markets.

The third strategic priority of Vision 2030 is focused on building operational leverage by doing what we do today, but better through efficiency and productivity gains. Beyond these positive sales efforts and an inflection in our growth, I have continued to strengthen MISTRAS' capabilities and build a scalable leading asset integrity and testing platform as Manny Stamatakis, our Executive Chairman, started last year to ensure long-term sustainability of our results. During the third quarter, I added a new Chief Human Resources Officer and a new Chief Legal Officer.

In addition, we have strengthened our sales and marketing team, continued with commercial discipline and have further integrated our sales force. We have also reinforced our operational management team throughout 2025 with several new hires who all bring industry expertise and experience and a fresh perspective to our lab operations. These new managers are already demonstrating early wins and contributing to our operating results. Their early success highlights the intensity, urgency and accountability at each of our locations across all our divisions.

MISTRAS has the foundation, technical know-how, proven expertise and people to win. We are advancing our organizational systems, empowering our technicians with digital tools and investing in relationships with our customers to drive ROI and shareholders' value. I'm confident that we will execute with continuous improvement and I plan to be very transparent in assessing and communicating our progress and reporting to you. I will share additional highlights of our Vision 2030 strategy later.

But let me now turn the call over to Ed for more details on the financial results.

Thank you, Natalia. As shown on Slide 6, revenue for the third quarter was $195.5 million, a 7% increase which exceeded expectations. This growth in the quarter reflects increases across several key areas of our business, including our PCMS offering and the aerospace & defense, industrials and power generation end markets. In particular, our PCMS offering within our data solutions business grew by nearly 25% in the quarter representing the second consecutive quarter of achieving significant growth. This growth was attributed to several implementation projects of PCMS programs.

As Natalia mentioned earlier, gross profit increased by $9.3 million in the third quarter with gross profit margin expanding by 300 basis points. This improvement was attributable to favorable business mix and operating efficiencies. On a 9-month basis, our gross profit margin has expanded 180 basis points year-over-year from 26.3% to 28.2%. As a result of our gross profit expansion and SG&A cost control, we generated $20.4 million of income from operations, which is an increase of $8.5 million or nearly 72% growth versus the prior year comparable period.

We improved adjusted EBITDA to $30.2 million resulting in a 29.6% increase over the prior year quarter. This significant improvement reflects our proactive cost management, operational efficiency leverage and a shift towards higher margin business. Our adjusted EBITDA margin increased to 15.4% from 12.7% for the third quarter, an expansion of 270 basis points. As noted in our press release yesterday, our results reflect certain overhead and personnel expenses, which have been reclassified from SG&A to cost of revenue. This reclassification recorded within our financials was $5.7 million for the 3 months ended September 30, 2024.

The impact of this reclassification for full year 2024 was approximately $20.9 million from SG&A to cost of revenue. This redistribution of overhead and personnel expenses has no impact on operating income, net income or adjusted EBITDA comparability. Selling, general and administrative expenses were essentially flat in the third quarter as compared to the prior year comparable period despite the higher revenue level achieved due to our ongoing cost control management while also making strategic investments in our business.

For the third quarter of 2025, the company recorded $1.8 million of reorganization and other cost related to our continuing initiatives to reduce and recalibrate overhead cost in addition to incremental costs of other related actions. Our effective income tax rate for the third quarter was approximately 22% benefiting from discrete items in the quarter whereas we expect the full year 2025 effective rate to be approximately 25%. Interest expense was $3.4 million for the third quarter, down by just under $1 million or 21.4% from the prior year period due to a lower cost of borrowing.

For the third quarter, we reported GAAP net income of $13.1 million or $0.41 per diluted share compared to $6.4 million or $0.20 per diluted share in the prior year period. This improved result of doubling year-over-year for the quarter significantly exceeded expectations. Note that the buildup of accounts receivable, both billed and unbilled, on our balance sheet as we discussed in the second quarter has continued to cause a drag on our cash flow generation in the third quarter.

As we have shared earlier, this is a working capital timing item due to implementation and adoption of an upgraded ERP system in April, which is taking us longer than anticipated to come up the learning curve. Note that unbilled accounts receivable did decrease as of September 30 compared to June 30, 2025 whereas billed accounts receivable increased over the same time frame. Hence, we anticipate positive free cash flow generation in the fourth quarter of 2025. We will focus on improving our cash flow performance in the quarters to come.

Specifically, improvements to our back-office structure, focused tools and accountability will contribute to reduced accounts receivable, both billed and unbilled. Although some improvement is projected in the fourth quarter, we anticipate to normalize our free cash flow generation in the first half of 2026 to more historical levels. In addition to the higher days sales outstanding experienced in 2025, the increased restructuring charges and incremental CapEx investments year-over-year have also adversely impacted our free cash flow.

Due to this buildup of net working capital as of September 30, 2025, bank borrowings increased year-over-year with net debt of $174.5 million as of September 30, 2025. On the positive side, we are continuing our investment in our business for the longer term while lowering and maintaining a trailing 12-month leverage level of just below 2.7x. We expect positive free cash flow and debt paydowns in the fourth quarter and we continue to emphasize debt reduction as a priority use of our residual free cash flow.

Although strong revenue growth was achieved in the third quarter, we expect full year 2025 revenue to be between $716 million to $720 million. This would represent essentially flat performance compared to the prior year after adjusting an approximate 1% reduction in revenue resulting from our ongoing efforts to voluntarily exit unprofitable business during 2025. Whereas adjusted EBITDA has continued to improve and is expected to increase for full year 2025. Accordingly, we are raising our prior qualitative adjusted EBITDA guidance range of exceeding the 2024 adjusted EBITDA level of $82.5 million.

Based on our strong third quarter 2025 adjusted EBITDA performance results and the current fourth quarter forecast, we expect our full year adjusted EBITDA to be between $86 million to $88 million. Our focus for 2025 has been and remains margin improvement and adjusted EBITDA expansion such that we can generate profitable growth and invest further in our growth momentum heading into 2026. We appreciate your continued support.

And at this time, I would like to turn the call back over to Natalia for her closing remarks before we move on to take your questions.

Thank you, Ed. I'll conclude by summarizing the market opportunity we see and preview why we believe MISTRAS is well positioned to create and capture more value. Demand for our services is continuously driven by mission-critical projects, aging assets and aging infrastructure across a diverse set of demanding and dynamic industries. That said, the MISTRAS of today is not operating at the full potential of our capabilities. We have historically operated as a company in silos and on a project-by-project basis.

Historically, it was more common to be commissioned by a customer to provide a single nondestructive testing at a specific plant versus an entire program on a more strategic enterprise-wide basis. In fact it is the exception and not the rule that the customers of MISTRAS utilized our services in a holistic way. This represents significant opportunities for future growth. Our overall strategic priority in the near term is to change this paradigm and drive more strategic value to our customers through the synergy and scale of our capabilities. The time is right because the challenges that our customers face today require an enterprise level approach to risk mitigation and optimal return on their CapEx investment.

We believe MISTRAS has the technical know-how, proven expertise, data analytics and advanced solutions portfolio to best serve as the new standard for 21st century testing and inspection industry. Our Vision 2030 strategic plan is built on the foundation that MISTRAS is significantly more valuable to our customers when we deliver the complete suite of services of our platform as an integrated solution. In the months and quarters ahead, we will be sharing more detail on the execution of our plan and how we are connecting with our customers. In the meanwhile, let me close with recapping the 3 priorities of our strategic plan.

First, to continue to develop and deliver comprehensive and integrated solutions to our existing customers in our core markets. Our goal is to be more integrated with each client by providing holistic solutions instead of singular fixes. At an enterprise level, we drive value for customers and in doing so, we expect to broaden the addressable revenue and profit opportunity. Secondly, diversify into new industries while protecting our core business. We expect our revenue mix and end markets to become increasingly diverse as we do more for new customers.

Historically, our company has been subject to oil & gas secular cycles and our objective is to diversify in order to mitigate the impact of cycles tied to commodity prices. Thirdly, to build upon operational efficiencies, do what we do today, but better to improve our margins primarily in the field services business. We have an opportunity to drive increased profitability as we deliver solutions for clients on a holistic enterprise basis. We have had recent success in margin progression through operational efficiency and we believe it will be a catalyst of our Vision 2030 strategy that will drive sustainable operating leverage, industry leading performance and scale.

I'll close by thanking all of our customers and partners who have contributed to our superior results this quarter. In particular I would like to sincerely thank all of our MISTRAS employees from the front lines to back office for their tireless efforts in executing on their day-to-day tasks while embracing transformative change and evolving strategy of our company. These efforts are creating value for our customers and in turn, our shareholders. We look forward to updating you on our performance as we progress further.

With that, let me turn the call back to the operator for questions.

[Operator Instructions] Your first question will come from Mitch Pinheiro with Sturdivant.

So a couple of things. First, I didn't see a breakdown of the oil & gas revenue by subcategory and I didn't know if that was an omission or if you planned not to have that in your releases going forward.

Yes, Mitch. I will explain. We did in fact remove that subcategory reporting. As I reported before, I have done a lot of analysis of how our customers buy and how we operate and basically what we've learned that many clients of ours straddle between those 2 or 3 subcategories. So reporting on those subcategories is not very accurate. But I can tell you right now because of the strong quarter especially attributed to the turnarounds, downstream was up about 14% where we also saw the LNG sector is very strong and midstream and upstream was low single-digit growth. So that kind of gives you an idea of where we are. But again, several of our customers are in between those subcategories so reporting doesn't make sense.

Okay. Maybe you should figure out a way to recategorize it because it's obviously the lion's share 2/3 of your business and it does have a fairly large impact when you have strong upstream, downstream to at least have some visibility there and so enough of that. Then the other question I have, and this is sort of less to do with the quarter and more to do with reporting, is as I look at your business it's hard to understand what field services, shop lab, I understand data analytics.

It's hard to really understand and how to model that. So to look at your -- and then on top of that with all your subsegments; oil & gas, aerospace, industrials, power gen; it's a confusing way to present your story financially. And I was wondering if you're going to look at changing the way you present your financials to better reflect how you're looking at the business.

Yes. Good comments, Mitch. We can certainly follow up with you on that and see what would make sense, how you would like us to give a view better picture. So Ed, do you have any comments?

Yes. I mean, Mitch, it's a good question. We struggle with this as well the best ways to look at the business, but we try to give you as transparent a view as we can. We give you, meaning all investors, geography; we give the end markets being served. We're talking about our service types now between the field, the in-lab and the data. So we are trying to pull it apart so you can better understand it and we're trying to give you multiple views of it. But we will continue to call out the high, the low and give you a feel for what's growth rates, relative mix. It is all very important. Run and maintain versus called out is something we also talk about. That's another important way of looking at the business to get to the run rates. But all of that's important and we'd like to give you different ways to view the business to understand the drivers of the activity.

We report separately the in-lab services as well as the field services. Some of our labs still are doing both. So we are certainly now separating that so to give more transparency into the operations and the performance so that you will see some improvements there for sure as we're going forward in '26. And again our strategic plan is built around the specific industries and market verticals that we serve. So you will see more there for sure as we're progressing with our strat plan.

Okay. I mean like for instance so just taking a look at -- so you had oil & gas good performance there and I would have thought field services would have been up then. I see field services down 1%. So why would field services be down 1% when you had such a nice quarter in the oil & gas segment?

But if you see the other category in the same table, that's the labs that do both. Those offices that do the field inspection and the in-lab testing and that's where you see the increase, right? So substantial increase. And again to that point, as we go forward in '26, we will separate those and you will not see others any longer. So that will give you a much better idea of field services and in-lab and then data analytics as well.

And PCMS, Mitch, is another piece of that answer. PCMS is oil & gas focused. They're in half the refineries in North America, but they're not field services. They're clearly data. So that's another example there where that industry is up because of PCMS, but they're not field services. They're in a different category, i.e., the data solutions category.

Okay. And then staying on this, your aerospace & defense, very nice growth sort of accelerating out of like a slower first half and I see that shop laboratories was up 12%. I'm assuming the shop laboratories is mostly your aerospace & defense business.

That is correct. Yes, aerospace, defense and industrials. As you know, third largest end market is industrial. So most of our in-lab is testing for the industrials and aerospace & defense.

So what kind of capacity do you have? I mean so you've consolidated some of that, but do you have the capacity to grow at this type of rate for a couple of years or is there a bottleneck there that you have to solve or can you talk a little bit about how you can grow the aerospace & defense business within the labs?

Absolutely. Couple of things there. Yes, very proud of the team in lab. They've done a very good job. There was a volume increase as well as the price calibration. So we can see that certainly that customers are now much more willing to pay for the services and the value we provide to them. But to answer to your specific question on capacity, that is our strategic plan, right? So to expand further on the capacity, we are continuing to build out hub-and-spoke model where we have several large hubs in different parts of the country as well as Canada where we have the most capabilities and then we have smaller labs where we can take the orders and be closer to the customers.

So we're expanding 2 things. We expanding capacity by building out those hubs as well as we are expanding capabilities where we're adding new services. We reported earlier in Q2 that we added welding accreditation. So we continue to add machining, repairs, rework, cleaning. So basically optimizing the supply chain for our customers. So you've seen our CapEx is a little bit up, that all goes into growth investments. So that's CapEx and we're advancing our UT capabilities, ultrasonic capabilities, in our labs. So that again will give us much better and bigger capacity to serve our clients because market is growing, right?

Market is -- our customers are disclosing publicly they have backlog. We're continuously talking to our customers and they are expecting growth. They are cautiously optimistic especially in the commercial aerospace sector, subsector. They're cautiously optimistic because there is some tightness in their own supply chain. Nevertheless, it's a growing business for us and it's growing not only in the U.S., but also in Europe. And another thing, don't forget is defense. Defense growth is obviously expected whether it's in Europe or military spend or U.S. So it goes also well for us.

Some of these same projects, Mitch, are being funded jointly with the customer. They need us to grow. They need this capacity. They want us to expand. So they're actually jointly funding some of this CapEx to help expand the footprint to service them going forward to help them catch up on their backlogs that they have and we're very happy to support them and we will expand capacity to do that.

Okay. Just 1 more question and I'll get back in the queue. On the last call, you were talking about new construction projects related to data centers, AI, electrical infrastructure. Can you talk a little bit more about anything that's developed over the last 3 months?

Yes. So we announced that new project with Batchelor & Kimball. So that's a good win for us. Again, as I mentioned last time, it's right now in an intersection where technology can no longer advance without the energy and we've been very prominent in the energy sector. So we're basically taking the same our testing methods and inspection methods and apply it to new use cases. So in data centers, it's the same. We're doing exactly the same what we've been doing all these years. It's ultrasonic testing, it's thermal infrared imaging to detect the heat issues.

So there's radiography, there's visual inspection and testing. So all of those services we provide for the data center. So it's more to come on that. It's a big sector for us. We're certainly already creating capabilities or having the separate teams that are working on data centers. I reported earlier that we have hired some sales executives that are continuously looking into this sector and developing the relationship with prospective customers, with new customers. So more to come on that. It's a good opportunity for us. We feel confident that it's a good market for us. Again, it's a part of our diversification strategy in our Vision 2030. It's part of our strategic plan.

Your next question will come from John Franzreb with Sidoti & Company.

We'll move on to Joichi Sakai with Singular Company.

On the margin side, can you help me quantify how much of that margin improvement is coming from deliberate lab or business exit versus pure operational execution? And how much of that runway remains for further portfolio pruning?

Certainly, absolutely. Certainly, the larger part of the margin improvement is attributed to the favorable business mix so that led to the improved gross profit. And then obviously operational efficiencies and the closure of unprofitable labs contributed to the improved EBITDA margin overall. But majority of the improvement comes from that the revenue improvement, gross profit improvement mostly in oil & gas attributed to our turnaround, very good traditional seasonality impact there and then growth in all the other sectors or industries. But in terms of operational efficiencies, obviously, it played a role there and closing of unprofitable labs as well.

Okay. And I know you commented a little bit about the aerospace industry and the data analytics industry. Which end markets are you really showing the most forward visibility into 2026 and then the kind of acceleration in spend from your key customers?

So what we are really seeing where we see -- first of all, kind of all markets right now and that's contributed to our Q3 results as well are quite stable. And we see growth is in aerospace & defense, in particular defense where we see the increased opportunities there as well as in infrastructure. Data centers are in our infrastructure segment. So that's where we see that there will be potential opportunities and growth as well as in power generation as well because again it's now infrastructure and energy and energy demand is coming from again technology expansion and advancement and so on.

So I would say those 3 sectors; aerospace & defense, infrastructure and power generation; we believe that we will see growth in 2026. Having said that, obviously a large percentage of our business mix is in oil & gas and so we're continuously working with our clients in that sector, in that market vertical to offer integrated solutions. So that first pillar or first priority of our strategic plan is to increase the wallet share with existing customers. And we believe with integrated solutions, we certainly can achieve that where we envision growth coming from our oil & gas customers using more than just field services inspections.

But we're adding additional services such as PCMS, such as other robotics, rope access and so on. So we're quite confident about the about the market as we're looking for next year. But of course what I can tell you right now, we will start making growth investments in those sectors to get this ability to grow and capitalize on opportunities.

Got you. And that CapEx that you were mentioning that you'll have to make, that's dependent on the cash conversion that you will be able to accomplish by the end of this year. Is that correct or would that -- are we trying to model increase in debt levels?

That's right. So obviously cash generation is one of our priorities internally. This is something that we can control and that is something that absolutely will take priority as we're stepping in into the new year.

Okay. And just 1 more question. You mentioned that the pricing environment is quite stable. As you transform into a more integrated solutions provider, what's the competitive environment like and what is kind of your early win rates as you maybe -- I don't know how early that is as you present yourself as a more integrated solution? What's the competitive environment like and how are you gaining traction?

Thanks for this question. Yes, we're tracking obviously the competitors. It's a slightly different set of competitors as we're reaching out to the other markets or they're looking at the other services and adding services, right? But this is not new to MISTRAS. This is not new to the company. So although we had the bulk of the services, so to speak, in our portfolio as our foundation so we know that environment. We're just integrating the solutions and we believe that we will produce more value with integrated solutions.

In terms of the early wins, yes, I can tell you it's one of our KPIs for our strategic plan is to measure the cross-selling and how we're tracking on cross-selling. About $3 million to $3.5 million this quarter already attributed to the cross-selling results or cross-selling efforts. So that, I can tell you, we will report as we're going forward. So how we're doing specifically on integrated solutions and what progress we're making in that regard.

For our next question, we'll return to John Franzreb with Sidoti & Company.

Congratulations on a good quarter. I'm actually curious about the quarter itself. Was there any revenue that was pulled forward from the fourth quarter into the third quarter?

No. That was all third quarter generated revenue.

Okay. And I'm also curious about the guide. It kind of suggests at least at the midpoint that there's more gross margin sensitivity than I was cognizant of or potentially SG&A goes up sequentially. Am I thinking about that properly or am I missing one of the puts and takes here?

You're talking about Q4. Is it correct, John?

Correct. Yes.

Yes. So the way we're modeling Q4 is that we certainly -- so we believe that we will be in line with our own expectations. We've already seen again good traditional seasonality for October. So our turnaround season was quite strong in October. We also know that again traditionally, Q4 is not as strong as Q3. So we're implying in our guidance some revenue growth versus prior year. We believe there will be a moderate growth in EBITDA. But we believe there's no surprises at this time that we can tell you about for Q4.

I'm sorry, do you want to say something?

No, nothing else to add there, John.

Okay. And I'm curious if you're starting to get orders for the upcoming spring season yet and if that's the case, can you give us some kind of qualitative thoughts on it?

Yes. So as we plan for '26 and now we're in the middle of the budgeting season as you can imagine. So we believe it will be a strong spring turnaround season. You might recall last year was quite different or this year rather was quite different. So spring was not as strong as the fall. So right now we see that we have won some of the turnaround awards and bids. So we anticipate a stronger turnaround season that was in 2025.

That's good to hear. Just an odd question I think. Do you have any impact in any of your business from the government shutdowns or is that a nonissue for you?

No, there is not an issue for us.

At this time, I see no callers in the queue. So I will hand back to Ms. Shuman for her closing remarks.

All right. Thank you, Laila, and thank you, everyone, for joining this call today and for your continued interest in MISTRAS. I look forward to providing you with an update on our business, Vision 2030 strategic plan and progress achieved towards our ongoing initiatives on our next call. Thank you.

This ends today's conference call. You may disconnect at this time.