Thank you for joining Mistras Group's Conference Call for its Third Quarter Ended September 30, 2022. My name is Andrea, and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. Participating on the call for Mistras Group will be Dennis Bertolotti, the company's President and Chief Executive Officer; Ed Prajzner, Executive Vice President Chief Financial Officer and Treasurer; and Jon Wolk, Senior Executive Vice President and Chief Operating Officer. I want to remind everyone that remarks made during this conference call will include forward-looking statements. The company's actual results could differ materially from those projected. Some of those 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 financial measures that were not prepared in accordance with US GAAP. Reconciliation of these non-GAAP – non-US GAAP financial measures to the most directly comparable US 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 and in the Investors section on the SEC's website. I will now turn the conference over to Dennis Bertolotti.

All right. Thank you, Andrea. Good morning, everyone, and thank you for joining us today. Mistras reported its ninth consecutive quarter of revenue growth. Our legacy operations continued to deliver improving performance, while the investments we are making in our strategic initiatives across renewable energy, data and new markets are beginning to contribute to our overall success. Consequently, we believe the top line obscures the financial and fundamental growth of the business, with both foreign translation and the continued under-realization of expectations in the downstream market masking what was otherwise a quarter of strong growth. On the bottom line, both net income and earnings per share were up more than 28% from a year ago, whereas adjusted EBITDA for the third quarter was essentially unchanged as both gross margin and overhead are battling a rising cost environment. We are addressing this by implementing price increases and are making progress breaking through customer resistance, primarily in the energy markets, where budgets do remain tight. However, there remains a significant lag between the time we increase our labor rate and the recovery time for the higher billing rate. We are also currently taking a hard look at all company-wide overhead to identify efficiency and productivity improvements that can better leverage our footprint, enabling us to focus more quickly on moving to our long-term goal of SG&A being 20% of revenue. Reflecting some of the rebound that we anticipated from the delays experienced in the second quarter, revenues were up 11% in upstream and 8% in downstream. Year-to-date, our revenue across the overall oil and gas industry is up 6%. The typically more stable midstream business was a bit soft in the third quarter other than our onstream business, but we expect that sector to show steady performance over the longer term driven by higher production levels and the corresponding increase in demand for inspection services across the transportation and distribution infrastructure. Onstream again had a record high revenue in the third quarter of 2022, and we expect its growth to benefit both our revenue top line as well as bottom line profitability. Business in our aerospace and defense industry remains strong. Recovery in commercial aerospace, growth in private space and expansion into adjacent services continues to drive strong growth. We are increasing investment in this business as we believe we are building a strong foundation in a market where the demand for NDT is large and growing. For instance, inspections for defense sectors, machining operations, cycle time reduction capabilities and other services integral to inspection represent just some of the new markets we are seeing powering strong growth in this vertical. All of these opportunities are in fast-growing markets, which carry a prospective gross margin higher than our current consolidated gross margin, and we look for significant contributions from these new verticals. Our renewables business also has anticipated. It now appears that we will outpace our previous objectives and end the year with more turbine systems being delivered or already monitored than our originally anticipated numbers. While this market is in the early stages for monitoring solutions, it is a large and growing market, with hundreds of thousands of wind turbines in operation globally, and more being added every year. Every day our installed technology is delivering further evidence of Sensoria's significant advantage relative to conventional inspection techniques, wherein we foresee an inflection point in the near future resulting in faster market adoption and an acceleration in our growth trajectory. Importantly, once operators contact us for monitoring service, we expect to add incremental revenue for the repair and maintenance of any damage our sensors identify. Repair and maintenance services revenue should be lucrative, along with higher margins and multiples for monitoring adding to our already $15 million plus per year business in renewable wind. Our data solutions business continues to grow with strong results at PCMS and OneSuite. We are constantly seeing new examples of how our data solutions are leading to stronger relationships and thus new opportunities with our customers. Customers that are looking for the best value for their spend represent an opportunity to rise above the competition and avoid commodity pricing. This continues to be a point of emphasis as we integrate data solutions across our organization. The new credit facility negotiated this quarter has not only added much greater liquidity but is also freeing up financial resources that had previously been limited, allowing us to invest and build upon these strategic initiatives. Now with additional financial flexibility, we are doubling down on growth, which we expect to accelerate in 2023 and beyond. Overall, it was a solid quarter at Mistras. We are certainly confident in our future opportunities, but there are challenges. Exchange rates created an $11 million revenue headwind for the first nine months of 2022, with the related impact on margins. Tight budgets in our largest market and the lag being experienced in passing on the impact of our inflationary costs are also pressuring margins. Since the onset of the pandemic, our primary focus has been on actions that will enable us to weather the storm and emerge stronger and better equipped for a more normalized world. In 2020, when our two largest markets were virtually collapsing, we had one of our best years of cash flow, and we have reduced debt by $80 million over the past three years. This year, we negotiated a new bank facility that created much greater flexibility to invest in both organic and non-organic growth. Although our largest markets are improving, they are still below pre-pandemic levels while undergoing their own structural changes. This has certainly been a challenge for us, especially on the cost side, where we are experiencing labor cost pressures that lag and can be difficult to pass along to customers. While we see this as transitory, it is a near-term factor. With the worst of the pandemic behind us, we can now focus more of our resources on our goal to grow our strategic initiatives. We are making great strides building new capabilities that will define our future, as a greater mix of higher-value products that are more technologically sophisticated, predictive in nature, and compatible with the directive of energy markets such as wind. Much has been accomplished, but there is more to do. I'm extremely honored to be leading Mistras at this important and exciting time in our evolution, and I believe the future is very bright. I will now turn the call over to Ed, to give you more detail on our financial results for the third quarter and the first nine months of 2022.

Thank you, Dennis, and good morning, everyone. Revenue in the third quarter increased again, driven by record revenue in our Services segment. Consolidated revenue rose approximately 2.2% to $179 million, and was up 5.1% when excluding the negative impact of foreign exchange. Revenue from our Services segment's top two markets grew year-over-year in the third quarter, with overall oil and gas revenue surpassing pre-pandemic levels of 2019. Our upstream sector showed significant strength, particularly in the offshore Gulf and Alaska regions. While downstream revenue improved from the previous quarter, it did not meet our Q3 expectations and remains below pre-pandemic activity levels. The midstream recovery paused in the third quarter, yet is still up year-over-year for the full year. Within midstream, our onstream in-line inspection testing business achieved its best quarterly revenue and profit performance since inception. Aerospace and defense saw substantial growth, increasing by 27% year-over-year in the quarter. Thus, we believe that our top-line figures mask the underlying growth of the business, as unfavorable foreign exchange and ongoing weakness in some secondary markets counterbalanced what was otherwise a strong quarter in our primary markets. Gross profit for the quarter was roughly $54 million, an increase of 3% from last year, with gross margin expanding by 20 basis points to a little over 30%. This gross margin performance showcases the advantages of faster growth in our aerospace and defense market. In the short term, our gross margin will hinge on how effectively we can implement price increases in response to inflationary pressures we are facing. As we mentioned during our second quarter earnings call, starting this current quarter, we are now comparing against a year-ago period where most pandemic-related benefits had ended. Therefore, this comparison will better illustrate the progress made in gross margin due to increased volumes, improved sales mix, and efficiency enhancements. Our selling general and administrative expenses were $41.6 million in the third quarter, up $2.4 million, or 6% from last year, partly due to bank refinancing costs of about $700,000 and an additional $600,000 from costs that were restored in the third quarter compared to the same period last year, accounting for around half of the overall increase. We are continually working to align our overhead with revenue levels, and are intensifying our efforts in this crucial area. Despite ongoing inflationary pressures, as Dennis stated earlier, we aim to reduce overhead as we transition from 2022 into 2023, as this is key to leveraging our growing operating leverage. Interest expense for the quarter was $2.7 million, compared to $2.3 million for the same quarter last year. This increase is due to the generally higher interest rate environment and some temporary borrowings that raised our average outstanding debt for the quarter. For the third quarter, we reported net income of $4.4 million or $0.14 per diluted share, reflecting increases of 29% and 27%, respectively. Adjusted EBITDA for the quarter was $18.6 million, consistent with the previous year. For forecasting, we anticipate an effective income tax rate of about 30%, excluding any unusual items. Free cash flow for the quarter was $0.2 million compared to roughly $0.9 million in negative cash flow a year ago. Our operating cash flow in the third quarter was affected by a significant rise in working capital, primarily due to September being our peak billing month. We project cash flow to improve in the fourth quarter, driven not only by continued positive operating results but also by a decrease in working capital. Historically, the fourth quarter has been one of our strongest for cash flow. We have a $4.5 million payroll tax payment due in the fourth quarter, which was deferred and accrued earlier under the CARES Act, fulfilling all remaining CARES Act obligations. Additionally, we made a $2.4 million payment at the start of the fourth quarter to settle an accrued legal matter. Capital expenditures stood at $2.5 million for the quarter and $9.6 million for the first nine months of the year. We now anticipate total capital expenditures for the year to be below the original $20 million budget, likely falling between $12 million and $14 million. As of September 30, 2022, we had gross debt of about $201 million, down from just under $203 million at year-end, and net debt of $183.1 million compared to $178.5 million at the end of last year. Since our primary use of residual free cash flow continues to be reducing outstanding debt, we believe our forecasted full-year free cash flow will allow us to pay down debt in the fourth quarter of 2022. Our goal is to drop below a 3 times leverage level, even though our new credit facility offers significantly more flexibility. Once we achieve this level in 2023, we will reassess our capital allocation strategy and consider using cash flow to accelerate growth and enhance shareholder value. Under our new credit facility, the maximum allowable total funded indebtedness to adjusted EBITDA is 4 times until the second quarter of 2023, with a reduction to 3.75 times for the Q3 2023 measurement period and onward. We are very comfortable operating under these terms. As noted in yesterday's release, we are updating our full-year guidance to reflect our current market views. We now expect revenue to be between $683 million and $693 million, adjusted EBITDA between $53 million and $58 million, and free cash flow between $15 million and $18 million. Please note that unfavorable foreign exchange is expected to reduce revenue and adjusted EBITDA after translation into US dollars by around $15 million and $2 million respectively for the full year 2022 compared to our original outlook. We foresee both operating and free cash flow to improve in the fourth quarter of 2022, due to continued positive operating results as well as an expected decline in working capital from September 30, 2022. I will now hand the call back to Dennis for his closing remarks before we move on to your questions.

All right. Thanks, Ed. I am very optimistic about the potential for Mistras to capitalize on the technology development projects that we have been working on for the past few years. On the heightened activities with Sensoria, the customer acceptance of Mistras Digital additional service lines with our aerospace to our corrosion under insulation crawlers, we are giving the market a new way to see and visualize value. There is certainly no lack of initiatives at Mistras in creating differentiators for our offerings. After having operated for the past 2.5 years in violent disruptive end markets and under an onerous financing facility, we now feel free to more aggressively implement the strategic growth initiatives that have been otherwise minimally resourced. We are seeing the early results with increasing contributions from data and renewable energy and the ongoing expansion of our services in aerospace and defense industry. With greater freedom, we believe these initiatives will only further accelerate. At the same time, we are intently looking at expenses to make sure our cost profile calibrates with our revenue level. The ultimate goal is to get overhead to approximately 20% of revenues over time, which should significantly improve the operating leverage in our model. There are many macro factors that we believe provide a tailwind to our NDT market including government compliance and safety standards and aging infrastructure, evolving industries in need of new and innovative inspection solutions, and the growing complexity of the supply chain. These are all areas in which Mistras has an unmatched reputation. This is the long-term vision that is being strengthened every day. But before taking your questions, I would like to thank all Mistras' employees for their continued dedication to delivering a safe and superior product in this ever-changing environment we face on a daily basis. I'm proud of our team and know that the financial results we are seeing are not reflective of the quality of our professionals or their expectations. Everyone that comes to work for Mistras expects to deliver a safe and conscientious product for our customers. By adopting our Caring Connects tonnage, we provide a better workplace for the entire Mistras family and add to our legacy. Andrea with that please open up the lines for questions.

Thank you. We will now start a question-and-answer session. Our first question is from Chris Sakai from Singular Research. Please go ahead.

Hi, good morning, Dennis and Ed. I had a question on your price increases you say are expected to help with inflation. When are we supposed to expect these price increases to occur?

So what's happening Chris, it's a good question that they are occurring but they're occurring behind the increases being given to the employees. So as the market changes so too does the pricing to the local employees. The skill sets go up at that customer and then we start negotiating – will probably start before we pay it out, but what happens is you don't get the increases with the customer immediately. So, there's always a lag between getting the increases paid to us versus paying them out to the employees. So with the inflationary thing we're in right now, this market is going to keep us trailing that a little bit. So we are getting increases. But as the inflation stays at this higher rate, normally you do this on an annual basis. We have COLAs built into our contracts, the cost-of-living allowance that allows for these discussions to happen every year. Now the timing is such that things just don't wait for the anniversary of the MSA or the contract, right? So you got to do them one or two times a year versus just one time at the MSA time. So it causes a lot of continuous increases that you keep battling. But for the most part, the customers are giving us the skill set increase that they don't do it across the board but they do it for the sets that they see and recognize. It's just that all customers going into those refineries and plants and everything else are better than the same problem.

Okay. Thanks. And then with Sensoria and its recent deal with Bledina, can you sort of quantify what that will do for the top line?

Yes. So, I mean we've already been representing on the conferences that they hold, and they are a major European player in various markets of repair and maintenance on blades and they're promoting us as a very good way to get in front of understanding what's happening with your blades before they become very difficult to repair types of damage. So we've already been in conferences with them and talking to some other customers, which is also us using it both ways. So it's already helped us get revenue. I wouldn't have the amount of dollars yet. It's still early on. But it's just another way to add our exposure and give Sensoria credibility, because you got to remember we're new to the market. There's right now probably five or six competing technologies, none of which really measure the blade. They measure the effects the blade has on the wobble or the distortion on the shaft and other components that you could interpret are probably coming from a blade defect or taking a picture and hoping that it is a surface level and things like that. So we're still being run against other technologies. We're being put on test beds currently with different owners and manufacturers to see how we hold up against these other technologies. So having somebody with the reputation of Bledina helping us and saying that this is something they believe in, which they've seen a lot of other technologies and ideas, really helps in that credibility part.

Okay. Great. And then the last one for me. With the new credit facility, how – and it's supposed to help inorganic and organic growth. Can you provide any color there as to what type of growth will this help?

Hey, Chris, essentially a couple of things, Chris. Number one, it gives us more liquidity. Number two, it gives us more leverage flexibility. And thirdly, there's less required term loan amortization. So it is much more or less constrictive on the previous credit agreement, we can flex into putting more of that capital to work. Again, job one is to still continue to pay down leverage, and we are doing that, but it gives us more upside again, more flexibility. It dropped the credit spread, was lowered, the availability was increased. Again, required amortization went down. It just uncuffs us to effectively use that credit for growth going forward. That's the benefits it gives us.

And Chris, specifically, things like machining for aerospace and space customers, where we're getting new inspections because we're bringing on machining. We do the machining pre-inspection and then we do the inspection. So we're doing parts that we hadn't done the inspection on previously because the machining was located somewhere else, and geographically, it was easier to get the inspection done somewhere else. We're adding on more of these crawlers that we use for the corrosion under insulation. We call them ART for automated RT crawlers, but things like that that we under the old facility we had to be more careful on how much money we're spending on things like that versus just keeping up our facility payments and all those constraints. So there are things that we're doing inside and that's what we mean by we're adding into the renewables and other sectors, even building on more of these, buying more sensor chips and everything for all these Sensoria components. We're trying to build up for that to get ahead of and not have component problems as customers are making orders for more Sensoria blades as well.

Okay. Thanks for the answers, Dennis.

Thank you. Our next question comes from Mitch Pinheiro from Sturdivant & Co. Please go ahead.

Yeah. Hey, good morning.

Good morning, Mitch.

Good morning.

So I want to just look at guidance for a second. How much of the guidance decline relates to foreign currency?

It's a significant piece. So on the revenue side, Mitch, the full year revenue impact of the FX is about $15 million was from FX, $2 million on the EBITDA line were due to pure FX translation differentials for the full year 2022.

For the full year, if I consider the midpoint of the fourth quarter, it seems that fourth quarter revenue will be around $170 million, which may be unchanged or slightly decreased compared to last year. Is there anything apart from foreign currency that we need to be aware of?

For the fourth quarter, we anticipate a slightly stronger performance due to some delays from the third quarter. It started later than expected, and we're uncertain about how far into the fourth quarter the ongoing projects will extend. Based on our current insights, we expect results to be slightly lower than 2021, which was a robust quarter for us. We anticipate a decline, likely around $4 million to $5 million related to foreign exchange translation within the quarter. The key concern is whether customers will engage as long as they did in 2021 for the turnarounds and how strong the activity will remain through the end of this month. Typically, December isn't very active, so it really depends on how late into November the work progresses.

In the third quarter, midstream was down. You mentioned that onstream was performing reasonably well. What caused the weakness in the other business?

I think some of it was just timing of larger projects that repeat from Q3 of 2021 to 2022. I didn't see anything there as far as loss of customers or major differences. I think it's just activity levels customer-to-customer year-to-year.

As you consider your price increases, I understand there is a delay. Is this delay typically a quarter, or does it extend beyond that? Additionally, how do you handle any pushback on price increases, if at all? Given the evident inflationary pressures, it seems reasonable to expect that you would achieve these price increases a few months later.

Right. So I'll start with your second question. You're absolutely right. Everyone sees and recognizes it. Customers just don't have the same urgency to recover it to us as fast as we have to pay it to the employees. So we get it out as we see what's going on and while we're talking to customers, they say yes, we understand it. But then they want to see a document as to proving which one and why, and the questions are all these needed, and you get into those kinds of granular parts of looking at the increase. Again, they don't generally fight you on it. They just delay it and take their time because I'm sure we're not the only ones coming at them. So it's probably a process that they're getting swamped with, and it just kind of makes it a slow reply in getting it back. So the second half isn't so much that it's un-understandable. It's just that it doesn't come with the same sense of urgency that we have to pay it out. And to your point on the increases, I mean truthfully the increases can be the first day of the quarter or the last day of the quarter. So they don't really fall neatly into the quarters in the month. What does happen, though, is it's continuously happening, and it's still happening now. You pick a region sometimes one region is faster or more aggressive than the other, but in areas of high density of this kind of work, there's really a lot of pressure out there. You get a lot of price increases from other folks that they're not controlling and then the customers having to keep up with it. So what happens is we're constantly fighting this. And the truth is what we're trying to say is as long as the inflation stays high like this, we're going to always be dragging a little bit of this behind us. Once the inflation slows down, we'll catch up. We'll get back to a normal and things will be there. But we had a better gross margin quarter, this quarter, while still trying to drag these on, right? So it's always keeping probably anywhere from 50 to 90, 100 basis point pressure on our gross margin. Essentially, we're not trying to be cute about it. What it is, it's going to be there until the inflation slows down a little bit. So we'll be keeping up with it, but always a little bit behind it.

Okay. Just a couple of other questions. So with your company, why your overhead goal, you still got a little ways to go. What kind of things are you working on? Where do you see the opportunity to get that down to 20%?

Yeah, Ed I'll let you take that if you want.

Sure, Dennis. Yeah. So Mitch, it's more just focusing on our productivity, our efficiency making sure we're getting the best spend of our investment. I mean, we're looking at how do we automate things? How do we get more process throughput on the footprint we have and leverage that? So, we're looking at all SG&A items even some of the overheads up in the COGS line just making sure we're getting the best return there, being as efficient as we can, and kind of looking internally at how we can maximize that. So, it's really just an efficiency productivity review of all things we're doing — kind of zero-based budget things make sure that there is true value in what you do there. Does the customer appreciate it? Do they let us build them for that and pass this through as valuable activity? Obviously, all that stays. We're not trying to affect the top-line growth. We want to keep doing those investments. But if it's not mission-critical or not value-added, it's fair game, and that's the kind of things we're looking at. We always do it. It's just we're doing it more urgently now where that top line is not where we wanted it to be. We're obviously taking a much harder look at this as we get deep into our budget cycle. So that's where we are, and we're just taking a much harder look at things as we kind of roll the budget together here shortly in the next couple of months.

Do you expect to see productivity improvement in 2023?

Yes. In fact, we said that just minutes ago in the script. Yes, absolutely, as we exit the year and look into next year, we absolutely see this being able to help productivity and profitability next year. Yes, we're looking at this at a very holistic level. So, yes, we do expect some immediate benefits here, and it's something we look at all the time. But yes, we are looking at it in a very immediate term absolutely.

Okay. What is causing the decrease in CapEx this year?

Again that's just one of those things we look at intently. I mean it's driven by volume a little bit. But it's really just challenging the need for that. And hey, can you go a little longer on the existing asset to preserve that capital? Again we do focus very intently on it and there's a controllable level there. But it is scaling to revenue to a certain extent. But we're just looking at every item there and doubling down on the return making sure it's something we really want to do now is what it is. So, we've just really clamped down and going to just the essentials there and letting the existing assets go a little longer. As long as there's no risk there we do that. But that's just kind of a whole bunch of little things in the CapEx bucket is what we controlled. And that's just a part of the same studying the asset base we need to get our jobs done making sure we're being very efficient with it.

We are still pursuing opportunities and haven't slowed down our business growth. We are evaluating our recent investments to determine their necessity. The initiatives we are undertaking in aerospace, machining, crawlers, and software development continue to generate opportunities as we plan for the future. We want to ensure that any capital expenditures we make are well justified, but we are not slowing down our growth in that respect.

I seem to estimate that the capital expenditures would be around 3% of revenue. Is that still a reasonable expectation for the coming years, or is it perhaps lower now?

3% would be a high side. If we do as Dennis is describing, investing more in our internal labs in any given period, it might drift up a little higher closer to 3%. But more historically, it's been averaging closer to 2.5%. But yes in a high year, it could be slightly higher than that, but 2.5% of revenue is a pretty good approximation for long-term CapEx requirements for us. And again, as Dennis said, we will be leaning into our labs a little bit, trying to grow them a little faster than not organically but 2.5% is a good number for CapEx modeling.

Okay. And then for my last question, Dennis or maybe Ed, from an interest rate perspective regarding your debt in the fourth quarter, what do you think the rate should model?

The interest rate, I mean we're going to be pushing five in a fraction probably percent. So, yes, so you're all in with all the uncommitted pieces maybe closer to 5.75%. So, yes, in that range.

Okay. All right. Thank you much.

All right. Thank you.

Thank you. Our next question comes from Brian Russo with Sidoti. Please go ahead.

Hi, good morning.

Good morning, Brian.

Hey. So, just looking at the revenue breakdown by industry third quarter 2022 versus the year ago quarter. It looks like you're seeing a nice recovery in oil and gas and aerospace and defense, but we're clearly not showing up in the top line first of all? And do you attribute all of that to the negative sensitivity to the strong dollar, or is there something fundamental that might be going on in this third quarter and/or maybe this fourth quarter that had you moderate the top line of the guidance?

I don't think so. I'll pass it to Jon in a moment. The sectors we anticipated to be growing, such as aerospace and some others, are performing as expected. However, there is some inconsistency in aerospace regarding the entire supply chain. Our customers are expressing frustration about their inability to increase their output. There is definitely a desire to ramp up production in aerospace, and the demand exists; they just haven't figured out how to increase their deliveries yet. So, we can expect that to progress a bit more slowly than anticipated. There are structural issues like that, but I don't foresee any other significant problems. Jon, do you have any thoughts on this?

Yes. Thank you, Dennis, and thanks for the question, Brian. I think supply chain, believe it or not, is still wreaking havoc. So we've got some customers, for instance, that were testing raw materials that they just can't get the material. And that's been an ongoing challenge as kind of as the years rolled on. They were good earlier in the year. And as the years rolled on they haven't had material available to test. So I think that's one of these realities that it's hard to plan on. And when you give guidance, you don't anticipate those kind of things that are outside of your control but they're real factors too.

Okay. Got it. And remind me and I apologize if you conveyed this earlier, but you mentioned what the full year FX impact is on revenue? What was it year-to-date? And then, to follow on a prior question that just backing into the fourth quarter relative to year-to-date and full year fourth quarter is basically flat versus a year ago. And I'm curious if there is a headwind on FX that maybe masking some of the overall improvement in your end markets and your business model?

Hey, Brian. The full year effect on revenue is expected to be about $15 million. So far, it has been around $11 million through nine months, which means we anticipate an additional $4 million headwind in Q4 on the revenue line due to foreign exchange.

Okay. Got it. And what was your leverage ratio as of September 30?

We're right around 3.75, 3.70 or so.

Okay. And that's including what was a relatively weak first quarter, right? So it looks like you're on track to be under three times. I'm curious how much of that will come from debt reduction versus improvement in EBITDA or a combination of both. Could you also share your quarterly debt amortization payments? Are you aiming to exceed that with your free cash flow?

Yes, those are good questions, Brian. So, two things. A combination of higher trailing EBITDA and lower funded debt will improve both the numerator and the denominator in our favor. Q4 is typically a strong free cash flow period for us, as it was last year, and we expect the same this year, which will certainly help drive that downwards. Amortization is currently very low; the new credit agreement effective in August reduced amortization from 20% to 2.5%, resulting in a modest level of amortization. However, as stated in the prepared remarks, we plan to continue paying down leverage. We will pay more than the required amortization to reduce leverage below three, which I believe will happen sometime before the end of next year. In the meantime, we will use that residual free cash flow to go well beyond what the required term loan necessitates. To Dennis' earlier point, we now have optionality and flexibility, and we can pursue organic growth to enhance our revenue stream. We will do that without affecting the leverage reduction to 3.0, which will continue. We have a bit more flexibility if we decide to pursue growth with a high ROI in the interim. Overall, we are in a good position to keep reducing that leverage. I believe the combination of increasing EBITDA and decreasing funded debt will help continue to lower leverage as we move into next year and beyond.

Okay. And then just lastly, when we look forward to 2023, with the understanding that you don't have guidance, but it seems as if oil and gas has normalized and maybe we're still seeing an aerospace and defense recovery. But where does the growth in your core end markets come from post 2022? Is it gaining market share from the digital offerings, or is it from top line diversification through some of these emerging markets like wind remote sensing, etc.?

Yes. I'll pass that to Jon for his response. Thanks, Brian. Oil and gas is recovering, but I wouldn't say it's fully there yet in the downstream sector. There's still considerable hesitance to spend money that was available before the pandemic. I frequently talk to customers who are surprised by how much more efficient they've become, focusing on maintenance rather than expansion. Over time, something will likely compel them to change this approach. So I believe that the recovery in 2023 for oil and gas still has a considerable way to go. Regarding aerospace and defense, I view the situation as a bit more cautious than Jon does. He’s correct that some of our customers are waiting for materials, and the spending has been lower than expected due to delays in material fabrication. We expect this situation to improve, but factors beyond our control play a role in the pace and extent of this improvement. We are actively pursuing initiatives like Sensoria and Mistras Digital to accelerate our efforts and enhance customer understanding, while also engaging with our crawlers and other solutions. We are not just waiting for the market to return to us. Both the defense and aerospace sectors, as well as oil and gas, are showing signs of recovery, even though it may not happen as quickly as we'd like. Nevertheless, with our ongoing efforts, we feel optimistic about establishing ourselves as a stronger presence while demonstrating value through digital initiatives. Although it's still a small part of our business, we are seeing numerous indications that digital tools are not only helping us build stronger relationships but are also attracting new projects, as customers begin to recognize the benefits of having centralized data. In response to your question, I believe the growth will stem from a combination of factors. I wouldn't attribute it to any single element. As the supply chain stabilizes, oil and gas will likely resume higher levels of spending. Our shop businesses are beginning to achieve production levels we haven't seen before, and we expect this trend to continue. However, we acknowledge there is additional demand that can't yet be fulfilled. Overall, it’s about normalizing these various factors. We don't foresee anything currently that would significantly obstruct our path forward. We will update our guidance for 2023 later, but at this moment, we don’t see any major structural issues. While inflation is a current drag on margins, we don’t see it negatively impacting customer behavior or spending, unless there are dramatic shifts, particularly in the healthcare sector where inflation could severely impact us.

Okay. Got it. And then one more on the free cash flow conversion. Historically, you were averaging about 50%. Obviously, a lot lower than that in 2022 due to some one-time payroll CARES type repayments and another discrete item you mentioned. But when we look forward over the next several years, is that historical 50% cash conversion still kind of achievable?

Brian, it's Ed. Absolutely. In fact, it's been trickling up ever so slightly that average as well. So yes, you're right, a couple of discrete items this year are knocking that down, and our AR, which is accounts receivable and with deferred costs on the balance sheet that number is up significantly — almost $132 million at the end of September. That number will come back down. So there is that just delay in the collection side this year that's a little bit slower. But no, 50% plus a little — our goal and I believe very achievable.

All right. Thank you very much.

Thanks, Brian.

Thank you. I'm showing no further questions at this time. I'd now like to turn it back to Dennis Bertolotti for closing remarks.

All right, Andrea. So I'd like to thank everyone for joining the call today and we look forward to updating you on our progress on our various initiatives. Have a great day. Thank you, folks.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.