MATRIX SERVICE CO 10-Q

Item 1. Financial Statements Matrix Service Company Condensed Consolidated Statements of Income (In thousands, except per share data) (unaudited) Three Months Ended September 30, 2020 September 30, 2019 Revenue $ 182,771 $ 338,097 Cost of revenue 168,421 305,632 Gross profit 14,350 32,465 Selling, general and administrative expenses 18,128 23,691 Restructuring costs ( 320 ) — Operating income (loss) ( 3,458 ) 8,774 Other income (expense): Interest expense ( 375 ) ( 389 ) Interest income 33 474 Other 1,033 3 Income (loss) before income tax expense ( 2,767 ) 8,862 Provision for federal, state and foreign income taxes 270 2,711 Net income (loss) $ ( 3,037 ) $ 6,151 Basic earnings (loss) per common share $ ( 0.12 ) $ 0.23 Diluted earnings (loss) per common share $ ( 0.12 ) $ 0.22 Weighted average common shares outstanding: Basic 26,265 26,935 Diluted 26,265 27,575 See accompanying notes. -1- Table of Contents Matrix Service Company Condensed Consolidated Statements of Comprehensive Income (In thousands) (unaudited) Three Months Ended September 30, 2020 September 30, 2019 Net income (loss) $ ( 3,037 ) $ 6,151 Other comprehensive gain (loss), net of tax: Foreign currency translation gain (loss) (net of tax expense (benefit) of $12 and ($22) for the three months ended September 30, 2020, and 2019, respectively) 404 ( 394 ) Comprehensive income (loss) $ ( 2,633 ) $ 5,757 See accompanying notes. -2- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands) (unaudited) September 30, 2020 June 30, 2020 Assets Current assets: Cash and cash equivalents $ 82,175 $ 100,036 Accounts receivable, less allowances (September 30, 2020—$830 and June 30, 2020—$905) 171,504 160,671 Costs and estimated earnings in excess of billings on uncompleted contracts 57,694 59,548 Inventories 6,751 6,460 Income taxes receivable 4,071 3,919 Other current assets 9,144 4,526 Total current assets 331,339 335,160 Property, plant and equipment at cost: Land and buildings 42,845 42,695 Construction equipment 95,332 94,154 Transportation equipment 53,460 55,864 Office equipment and software 41,896 39,356 Construction in progress 2,648 4,427 Total property, plant and equipment - at cost 236,181 236,496 Accumulated depreciation ( 156,743 ) ( 155,748 ) Property, plant and equipment - net 79,438 80,748 Operating lease right-of-use assets 20,152 21,375 Goodwill 60,437 60,369 Other intangible assets, net of accumulated amortization 8,287 8,837 Deferred income taxes 5,684 5,988 Other assets 6,893 4,833 Total assets $ 512,230 $ 517,310 See accompanying notes. -3- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands, except share data) (unaudited) September 30, 2020 June 30, 2020 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 68,615 $ 73,094 Billings on uncompleted contracts in excess of costs and estimated earnings 63,523 63,889 Accrued wages and benefits 16,682 16,205 Accrued insurance 7,657 7,301 Operating lease liabilities 6,585 7,568 Other accrued expenses 7,157 7,890 Total current liabilities 170,219 175,947 Deferred income taxes 34 61 Operating lease liabilities 18,820 19,997 Borrowings under senior secured revolving credit facility 9,383 9,208 Other liabilities 7,754 4,208 Total liabilities 206,210 209,421 Commitments and contingencies Stockholders’ equity: Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of September 30, 2020 and June 30, 2020; 26,460,196 and 26,141,528 shares outstanding as of September 30, 2020 and June 30, 2020 279 279 Additional paid-in capital 132,687 138,966 Retained earnings 203,365 206,402 Accumulated other comprehensive loss ( 7,969 ) ( 8,373 ) 328,362 337,274 Less: Treasury stock, at cost — 1,428,021 shares as of September 30, 2020, and 1,746,689 shares as of June 30, 2020 ( 22,342 ) ( 29,385 ) Total stockholders' equity 306,020 307,889 Total liabilities and stockholders’ equity $ 512,230 $ 517,310 See accompanying notes. -4- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Three Months Ended September 30, 2020 September 30, 2019 Operating activities: Net income (loss) $ ( 3,037 ) $ 6,151 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 4,639 4,779 Stock-based compensation expense 2,218 3,024 Operating lease impairment due to restructuring 150 — Deferred income tax 289 1,990 Gain on sale of property, plant and equipment ( 941 ) ( 93 ) Provision for uncollectible accounts ( 64 ) 224 Other 101 84 Changes in operating assets and liabilities increasing (decreasing) cash: Accounts receivable ( 10,769 ) 3,594 Costs and estimated earnings in excess of billings on uncompleted contracts 1,854 30,087 Inventories ( 291 ) 456 Other assets and liabilities ( 8,018 ) ( 297 ) Accounts payable ( 4,431 ) ( 15,240 ) Billings on uncompleted contracts in excess of costs and estimated earnings ( 366 ) 24,565 Accrued expenses 3,646 ( 3,220 ) Net cash provided (used) by operating activities ( 15,020 ) 56,104 Investing activities: Capital expenditures ( 2,777 ) ( 8,684 ) Proceeds from asset sales 1,074 151 Net cash used by investing activities $ ( 1,703 ) $ ( 8,533 ) See accompanying notes. -5- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Three Months Ended September 30, 2020 September 30, 2019 Financing activities: Advances under senior secured revolving credit facility $ — $ 8,984 Repayments of advances under senior secured revolving credit facility — ( 2,872 ) Proceeds from issuance of common stock under employee stock purchase plan 82 83 Repurchase of common stock for payment of statutory taxes due on equity-based compensation ( 1,536 ) ( 3,394 ) Net cash provided (used) by financing activities ( 1,454 ) 2,801 Effect of exchange rate changes on cash and cash equivalents 316 ( 198 ) Increase (decrease) in cash and cash equivalents ( 17,861 ) 50,174 Cash and cash equivalents, beginning of period 100,036 89,715 Cash and cash equivalents, end of period $ 82,175 $ 139,889 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 122 $ 5,069 Interest $ 470 $ 417 Non-cash investing and financing activities: Purchases of property, plant and equipment on account $ — $ 263 See accompanying notes. -6- Table of Contents Matrix Service Company Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share data) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income(Loss) Total Balances, July 1, 2020 $ 279 $ 138,966 $ 206,402 $ ( 29,385 ) $ ( 8,373 ) $ 307,889 Net loss — — ( 3,037 ) — — ( 3,037 ) Other comprehensive income — — — — 404 404 Issuance of deferred shares (478,703 shares) — ( 8,435 ) — 8,435 — — Treasury shares sold to Employee Stock Purchase Plan (8,730 shares) — ( 62 ) — 144 — 82 Treasury shares purchased to satisfy tax withholding obligations (168,765 shares) — — — ( 1,536 ) — ( 1,536 ) Stock-based compensation expense — 2,218 — — — 2,218 Balances, September 30, 2020 $ 279 $ 132,687 $ 203,365 $ ( 22,342 ) $ ( 7,969 ) $ 306,020 Balances, July 1, 2019 $ 279 $ 137,712 $ 239,476 $ ( 17,759 ) $ ( 7,751 ) $ 351,957 Net income — — 6,151 — — 6,151 Other comprehensive loss — — — — ( 394 ) ( 394 ) Issuance of deferred shares (494,274 shares) — ( 7,813 ) — 7,813 — — Treasury shares sold to Employee Stock Purchase Plan (4,053 shares) — 13 — 70 — 83 Treasury shares purchased to satisfy tax withholding obligations (174,084 shares) — — — ( 3,394 ) — ( 3,394 ) Stock-based compensation expense — 3,024 — — — 3,024 Balances, September 30, 2019 $ 279 $ 132,936 $ 245,627 $ ( 13,270 ) $ ( 8,145 ) $ 357,427 See accompanying notes. -7- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 – Basis of Presentation and Significant Accounting Policies Basis of Presentation The condensed consolidated financial statements include the accounts of Matrix Service Company and its subsidiaries (“Matrix”, “we”, “our”, “us”, “its” or the “Company”), unless otherwise indicated. Intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. The information furnished reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations, cash flows and financial position for the interim periods presented. The accompanying condensed financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2020, included in the Company’s Annual Report on Form 10-K for the year then ended. The results of operations for the three month period ended September 30, 2020 may not necessarily be indicative of the results of operations for the full year ending June 30, 2021. Significant Accounting Policies The Company has updated its significant accounting policies to include its accounting policy for recognizing credit losses as a result of adopting the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments-Credit Losses (Topic 326) on July 1, 2020, and our change in reportable segments effective July 1, 2020. The Company's other significant accounting policies are detailed in “Note 1 - Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended June 30, 2020. Credit Losses Adoption of New Credit Losses Standard On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which changed how the Company accounts for credit losses, including those related to its accounts receivable and contract assets. Under this guidance, a financial asset (or a group of financial assets) are required to be presented at the net amount expected to be collected. The income statement reflects any increases or decreases of expected credit losses that have taken place during the period. The amendments in this update eliminate the probable initial recognition threshold and, instead, reflect the Company's current estimate of all lifetime expected credit losses on its accounts receivable and contract asset balances. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amounts. The Company determines its allowance for credit losses by using a loss-rate methodology, in which it assesses historical write-offs against total receivables and contract asset balances over several periods. In addition, the Company places reserves on specific balances as needed based on the most recent estimates of collectibility. The Company's adoption of this standard on July 1, 2020 did not have a material impact on its estimate of the allowance for credit losses. Change in Reportable Segments Due to changing markets facing our clients and to better align the financial reporting of the Company with our long-term strategic growth areas, we began reporting our financial results under new reportable segments effective July 1, 2020. The new reportable segments along with a description of each are as follows: -8- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) • Utility and Power Infrastructure : consists of power delivery services provided to investor owned utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, upgrades and maintenance, as well as emergency and storm restoration services. The Company also provides construction and maintenance services to a variety of power generation facilities, including gas fired facilities in simple or combined cycle design, and provides engineering, fabrication, and construction services for liquefied natural gas ("LNG") utility peak shaving facilities. • Process and Industrial Facilities : primarily serves customers in the downstream and midstream petroleum industries who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. The Company also serves customers in various other industries such as petrochemical, sulfur, mining and minerals companies engaged primarily in the extraction of non-ferrous metals, aerospace and defense, cement, agriculture, and other industrial customers. The Company's services include plant maintenance, turnarounds, industrial cleaning services, engineering, fabrication, and capital construction. • Storage and Terminal Solutions : consists of work related to aboveground storage tanks and terminals. Also included in this segment are cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum and other specialty vessels such as spheres, as well as marine structures and truck and rail loading/offloading facilities. The Company's services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, the Company offers tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals. All prior period segment information has been restated to conform with our new reportable segments. In addition, beginning July 1, 2020, the Company is reporting separately corporate selling, general and administrative expenses and other corporate expenses that were previously allocated to the segments. Refer to Note 9 - Segment Information, and Part I, Item 2 - Management's Discussion and Analysis - Results of Operations, for more information. Note 2 – Revenue Remaining Performance Obligations The Company had $ 490.4 million of remaining performance obligations yet to be satisfied as of September 30, 2020 . The Company expects to recognize $ 386.0 million of its remaining performance obligations as revenue within the next twelve months. Contract Balances Contract terms with customers include the timing of billing and payment, which usually differs from the timing of revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets and liabilities are calculated on a contract-by-contract basis and reported on a net basis at the end of each period and are classified as current. We present our contract assets in the balance sheet as Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts ("CIE"). CIE consists of revenue recognized in excess of billings. We present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and Estimated Earnings ("BIE"). BIE consists of billings in excess of revenue recognized. The following table provides information about CIE and BIE: September 30, 2020 June 30, 2020 Change (in thousands) Costs and estimated earnings in excess of billings on uncompleted contracts $ 57,694 $ 59,548 $ ( 1,854 ) Billings on uncompleted contracts in excess of costs and estimated earnings ( 63,523 ) ( 63,889 ) 366 Net contract liabilities $ ( 5,829 ) $ ( 4,341 ) $ ( 1,488 ) The difference between the beginning and ending balances of the Company's CIE and BIE primarily results from the timing of revenue recognized relative to its billings. The amount of revenue recognized during the three months ended September 30, 2020 that was included in the June 30, 2020 BIE balance was $ 41.2 million. This revenue consists primarily of work performed during the period on contracts with customers that had advance billings. -9- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Progress billings in accounts receivable at September 30, 2020 and June 30, 2020 included retentions to be collected within one year of $ 33.0 million and $ 37.3 million, respectively. Contract retentions collectible beyond one year are included in other assets in the Condensed Consolidated Balance Sheet and totaled $ 3.8 million as of September 30, 2020 and $ 1.6 million as of June 30, 2020. Disaggregated Revenue Revenue disaggregated by reportable segment is presented in Note 9 - Segment Information. The following series of tables presents revenue disaggregated by geographic area where the work was performed and by contract type: Geographic Disaggregation: Three Months Ended September 30, 2020 September 30, 2019 (In thousands) United States $ 161,377 $ 314,416 Canada 19,611 21,170 Other international 1,783 2,511 Total Revenue $ 182,771 $ 338,097 Contract Type Disaggregation: Three Months Ended September 30, 2020 September 30, 2019 (In thousands) Fixed-price contracts $ 133,356 $ 176,320 Time and materials and other cost reimbursable contracts 49,415 161,777 Total Revenue $ 182,771 $ 338,097 Typically, the Company assumes more risk with fixed-price contracts since increases in costs to perform the work may not be recoverable. However, these types of contracts typically offer higher profits than time and materials and other cost reimbursable contracts when completed at or below the costs originally estimated. The profitability of time and materials and other cost reimbursable contracts is typically lower than fixed-price contracts and is usually less volatile than fixed-price contracts since the profit component is factored into the rates charged for labor, equipment and materials, or is expressed in the contract as a percentage of the reimbursable costs incurred. Note 3 – Leases The Company enters into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. Real estate leases accounted for approximately 90 % of all right-of-use assets as of September 30, 2020 . Most real estate and information technology equipment leases generally have fixed payments that follow an agreed upon payment schedule and have remaining lease terms ranging from less than a year to 15 years. Construction equipment leases generally have "month-to-month" lease terms that automatically renew as long as the equipment remains in use. During the three months ended September 30, 2020, the Company recognized a $ 0.2 million impairment of a right-of-use asset in connection with the closure of a leased office space. The impairment is included in restructuring costs in the condensed consolidated statements of income. -10- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) The components of lease expense in the condensed consolidated statements of income are as follows: Three Months Ended September 30, 2020 September 30, 2019 Lease expense Location of Expense in Statements of Income (in thousands) Operating lease expense Cost of revenue and selling, general and administrative expenses $ 2,488 $ 3,117 Short-term lease expense (1) Cost of revenue 5,975 9,608 Total lease expense $ 8,463 $ 12,725 (1) Primarily represents the lease expense of construction equipment that is subject to month-to-month rental agreements with expected rental durations of less than one year. The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in the Company's Condensed Consolidated Balance Sheets, were as follows: September 30, 2020 Maturity Analysis: (in thousands) Remainder of Fiscal 2021 $ 6,313 Fiscal 2022 5,542 Fiscal 2023 3,871 Fiscal 2024 2,862 Fiscal 2025 2,300 Thereafter 9,647 Total future operating lease payments 30,535 Less: imputed interest ( 5,130 ) Net present value of future lease payments 25,405 Less: current portion of operating lease liabilities 6,585 Non-current operating lease liabilities $ 18,820 The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of September 30, 2020 : Weighted-average remaining lease term (in years) 6.4 years Weighted-average discount rate 5.6 % Supplemental cash flow information related to leases is as follows: Three Months Ended September 30, 2020 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 3,102 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 902 -11- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 4 – Intangible Assets Including Goodwill Goodwill The changes in the carrying value of goodwill by segment are as follows: Utility and Power Infrastructure Process and Industrial Facilities Storage and Terminal Solutions Total (In thousands) Net balance at June 30, 2020 $ 6,905 $ 26,846 $ 26,618 $ 60,369 Translation adjustment (1) 21 7 40 68 Net balance at September 30, 2020 $ 6,926 $ 26,853 $ 26,658 $ 60,437 (1) The translation adjustments relate to the periodic translation of Canadian Dollar and South Korean Won denominated goodwill recorded as a part of prior acquisitions in Canada and South Korea, in which the local currency was determined to be the functional currency. The Company tests its goodwill for impairment annually in May. While there continues to be uncertainty around the near-term level of spending by some of our customers due to the impacts of the COVID-19 pandemic on our markets and the economy, this uncertainty did not result in any impairment indicators as of September 30, 2020 . We will continue to monitor the latest developments and perform interim tests for goodwill impairment as needed. Other Intangible Assets Information on the carrying value of other intangible assets is as follows: At September 30, 2020 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,558 $ ( 1,979 ) $ 579 Customer-based 6 to 15 17,062 ( 9,354 ) 7,708 Total amortizing intangible assets $ 19,620 $ ( 11,333 ) $ 8,287 At June 30, 2020 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,579 $ ( 1,956 ) $ 623 Customer-based 6 to 15 21,840 ( 13,626 ) 8,214 Total amortizing intangible assets $ 24,419 $ ( 15,582 ) $ 8,837 Amortization expense totaled $ 0.6 million and $ 0.9 million during the three months ended September 30, 2020 and September 30, 2019, respectively. -12- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) We estimate that the remaining amortization expense related to September 30, 2020 amortizing intangible assets will be as follows (in thousands): Period ending: Remainder of Fiscal 2021 $ 1,679 Fiscal 2022 1,812 Fiscal 2023 1,729 Fiscal 2024 1,416 Fiscal 2025 1,096 Fiscal 2026 555 Total estimated remaining amortization expense at September 30, 2020 $ 8,287 Note 5 – Debt On November 2, 2020, the Company entered into the Fifth Amended and Restated Credit Agreement (the "Credit Agreement"), by and among the Company and certain foreign subsidiaries, as Borrowers, various subsidiaries of the Company, as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole Bookrunner, and the other Lenders party thereto, which replaced the Fourth Amended and Restated Credit Agreement (the "Prior Credit Agreement") that was in place at September 30, 2020, and which is described in Part II, Item 8. Financial Statements and Supplementary Data, Note 5 - Debt, in the Company's Annual Report on Form 10-K for the year ended June 30, 2020. The Credit Agreement provides for a three-year senior secured revolving credit facility of $ 200.0 million that expires November 2, 2023 . The credit facility may be used for working capital, acquisitions, capital expenditures, issuances of letters of credit and other lawful purposes. The credit facility includes a U.S. Dollar equivalent sublimit of $ 75.0 million for revolving loans denominated in Australian Dollars, Canadian Dollars, Euros and Pounds Sterling and letters of credit in Australian Dollars, Euros, and Pounds Sterling. The credit facility also includes a $ 200.0 million sublimit for total letters of credit. Each revolving borrowing under the Credit Agreement will bear interest at a rate per annum equal to: • The ABR or the Adjusted LIBO Rate, in the case of revolving loans denominated in U.S. Dollars; • The Canadian Prime Rate or the CDOR rate, in the case of revolving loans denominated in Canadian Dollars; • The Adjusted LIBO Rate or the Adjusted EURIBOR Rate, in the case of revolving loans denominated in Pounds Sterling or Australian Dollars; or • The Adjusted EURIBOR Rate, in the case of revolving loans denominated in Euros, in each case, plus the Applicable Margin, which is based on the Company's Leverage Ratio. The Applicable Margin on ABR loans ranges between 1.00 % and 2.00 %. The Applicable Margin for Adjusted LIBO, Adjusted EURIBOR and CDOR loans ranges between 2.00 % and 3.00 % and the Applicable Margin for Canadian Prime Rate loans ranges between 2.50 % and 3.50 %. The unused credit facility fee is between 0.35 % and 0.50 % based on the Leverage Ratio. Covenants and limitations under the Credit Agreement are effective for the quarter ended September 30, 2020 and include the following: • Our Leverage Ratio, determined as of the end of each fiscal quarter, may not exceed 3.00 to 1.00 . The Leverage Ratio covenant requires that Consolidated Funded Indebtedness, as defined in the Credit Agreement, as of the end of any fiscal quarter, may not exceed 3.0 times Consolidated EBITDA, as defined in the Credit Agreement, or "Covenant EBITDA," over the previous four quarters. -13- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) • We are required to maintain a Fixed Charge Coverage Ratio ("FCCR"), determined as of the end of each fiscal quarter, greater than or equal to 1.25 to 1.00 . The FCCR is calculated as follows: ◦ If no borrowings are outstanding at quarter end, then the FCCR covenant requires that, as of the end of any fiscal quarter, Covenant EBITDA, after deducting capital expenditures and dividends for the previous four quarters, may not be less than 1.25 times the total of interest expense and cash paid for income taxes over the previous four quarters plus scheduled maturities of certain indebtedness for the next four quarters. ◦ If borrowings are outstanding at quarter end: ▪ for the fiscal quarters ending September 30, 2020 through June 30, 2021, Covenant EBITDA, after deducting capital expenditures, dividends, and share repurchases in excess of $ 7.5 million for the previous four quarters, may not be less than 1.25 times the total of interest expense and cash paid for income taxes over the previous four quarters plus scheduled maturities of certain indebtedness for the next four quarters. ▪ for all fiscal quarters ending on or after September 30, 2021, the FCCR is calculated the same except that all share repurchases for the previous four quarters are deducted from Covenant EBITDA. • Asset dispositions (other than dispositions in which all of the net cash proceeds therefrom are reinvested into the Company and dispositions of inventory and obsolete or unneeded equipment in the ordinary course of business) are limited to $ 20.0 million per 12-month period. • Share repurchases are limited to $ 30.0 million per calendar year. As of September 30, 2020, the Company is in compliance with all affirmative, negative, and financial covenants under the Credit Agreement. Availability at September 30, 2020 under the senior secured revolving credit facility established under the Prior Credit Agreement was as follows: September 30, 2020 June 30, 2020 (In thousands) Senior secured revolving credit facility $ 300,000 $ 300,000 Capacity constraint due to the Leverage Ratio 204,135 162,864 Capacity under the credit facility 95,865 137,136 Letters of credit 34,766 34,529 Borrowings outstanding 9,383 9,208 Availability under the senior secured revolving credit facility $ 51,716 $ 93,399 Availability under the new $200.0 million senior secured revolving credit facility at September 30, 2020 would have been the same if the Credit Agreement had been in place on such date due to the capacity constraint. Note 6 – Income Taxes Effective Tax Rate Our effective tax rates for the three months ended September 30, 2020 and September 30, 2019 were ( 9.8 )% and 30.6 %, respectively. We expect our effective tax rate to be approximately 27.0 % in fiscal 2021. The effective tax rate for the three months ended September 30, 2020 was negatively impacted by a $ 1.0 million deferred tax asset adjustment. -14- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Deferred Payroll Taxes The Company has deferred $ 7.4 million of U.S. payroll tax as of September 30, 2020 through provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the "CARES Act"). The deferred payroll taxes are included within other liabilities in the consolidated balance sheets. The Company must repay half of the deferred payroll tax by December 31, 2021 and the remainder by December 31, 2022. Note 7 – Commitments and Contingencies Insurance Reserves The Company maintains insurance coverage for various aspects of its operations. However, exposure to potential losses is retained through the use of deductibles, self-insured retentions and coverage limits. Typically, our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of our services and provide warranties for materials and workmanship. The Company may also be required to name the customer as an additional insured up to the limits of insurance available, or we may be required to purchase special insurance policies or surety bonds for specific customers or provide letters of credit in lieu of bonds to satisfy performance and financial guarantees on some projects. Matrix maintains a performance and payment bonding line sufficient to support the business. The Company generally requires its subcontractors to indemnify the Company and the Company’s customer and name the Company as an additional insured for activities arising out of the subcontractors’ work. We also require certain subcontractors to provide additional insurance policies, including surety bonds in favor of the Company, to secure the subcontractors’ work or as required by the subcontract. There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against a valid claim or loss under the contracts with our customers. Unpriced Change Orders and Claims Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $ 13.9 million at September 30, 2020 and $ 14.5 million at June 30, 2020. Generally, collection of amounts related to unpriced change orders and claims is expected within twelve months. However, since customers may not pay these amounts until final resolution of related claims, collection of these amounts may extend beyond one year. Other During the third quarter of fiscal 2020, the Company commenced litigation in an effort to collect $ 17.8 million in accounts receivable from an iron and steel customer following the deterioration of the relationship in the second quarter of fiscal 2020. Litigation is unpredictable, however, based on the terms of the contract with this customer, the Company is entitled to collect the full amount owed under the contract. The Company and its subsidiaries are participants in various legal actions. It is the opinion of management that none of the other known legal actions, including a contract dispute with a customer involving the construction of a crude terminal, will have a material impact on the Company’s financial position, results of operations or liquidity. -15- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 8 – Earnings per Common Share Basic earnings per share (“Basic EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share (“Diluted EPS”) includes the dilutive effect of stock options and nonvested deferred shares. In the event we report a loss, stock options and nonvested deferred shares are not included since they are anti-dilutive. The computation of basic and diluted earnings per share is as follows: Three Months Ended September 30, 2020 September 30, 2019 (In thousands, except per share data) Basic EPS: Net income (loss) $ ( 3,037 ) $ 6,151 Weighted average shares outstanding 26,265 26,935 Basic earnings (loss) per share $ ( 0.12 ) $ 0.23 Diluted EPS: Weighted average shares outstanding – basic 26,265 26,935 Dilutive stock options — 25 Dilutive nonvested deferred shares — 615 Diluted weighted average shares 26,265 27,575 Diluted earnings (loss) per share $ ( 0.12 ) $ 0.22 The following securities are considered antidilutive and have been excluded from the calculation of Diluted EPS: Three Months Ended September 30, 2020 September 30, 2019 (In thousands) Stock options 54 — Nonvested deferred shares 882 269 Total antidilutive securities 936 269 -16- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 9 – Segment Information Change in Reportable Segments Due to changing markets facing our clients and to better align the financial reporting of the Company with our long-term strategic growth areas, we began reporting our financial results under new reportable segments effective July 1, 2020. The new reportable segments along with a description of each are as follows: • Utility and Power Infrastructure : consists of power delivery services provided to investor owned utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, upgrades and maintenance, as well as emergency and storm restoration services. The Company also provides construction and maintenance services to a variety of power generation facilities, including gas fired facilities in simple or combined cycle design, and provides engineering, fabrication, and construction services for LNG utility peak shaving facilities. • Process and Industrial Facilities : primarily serves customers in the downstream and midstream petroleum industries who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. The Company also serves customers in various other industries such as petrochemical, sulfur, mining and minerals companies engaged primarily in the extraction of non-ferrous metals, aerospace and defense, cement, agriculture, and other industrial customers. The Company's services include plant maintenance, turnarounds, industrial cleaning services, engineering, fabrication, and capital construction. • Storage and Terminal Solutions : consists of work related to aboveground storage tanks and terminals. Also included in this segment are cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum and other specialty vessels such as spheres, as well as marine structures and truck and rail loading/offloading facilities. The Company's services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, the Company offers tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals. All prior period segment information has been restated to conform with our new reportable segments. In addition, beginning July 1, 2020, the Company is reporting separately corporate selling, general and administrative expenses and other corporate expenses that were previously allocated to the segments. The Company evaluates performance and allocates resources based on operating income. Intersegment sales and transfers are recorded at cost; therefore, no intercompany profit or loss is recognized. Segment assets consist primarily of accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, property, plant and equipment, right-of-use lease assets, goodwill and other intangible assets. -17- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Results of Operations (In thousands) Three Months Ended September 30, 2020 September 30, 2019 Gross revenue Utility and Power Infrastructure $ 60,671 $ 47,727 Process and Industrial Facilities 46,728 155,452 Storage and Terminal Solutions 77,596 136,001 Total gross revenue $ 184,995 $ 339,180 Less: Inter-segment revenue Process and Industrial Facilities $ 797 $ 575 Storage and Terminal Solutions 1,427 508 Total inter-segment revenue $ 2,224 $ 1,083 Consolidated revenue Utility and Power Infrastructure $ 60,671 $ 47,727 Process and Industrial Facilities 45,931 154,877 Storage and Terminal Solutions 76,169 135,493 Total consolidated revenue $ 182,771 $ 338,097 Gross profit (loss) Utility and Power Infrastructure $ 6,913 $ ( 168 ) Process and Industrial Facilities 3,659 13,590 Storage and Terminal Solutions 3,778 19,742 Corporate — ( 699 ) Total gross profit $ 14,350 $ 32,465 Selling, general and administrative expenses Utility and Power Infrastructure $ 2,222 $ 2,632 Process and Industrial Facilities 4,050 6,938 Storage and Terminal Solutions 5,143 6,986 Corporate 6,713 7,135 Total selling, general and administrative expenses $ 18,128 $ 23,691 Restructuring costs Utility and Power Infrastructure $ 11 $ — Process and Industrial Facilities ( 500 ) — Storage and Terminal Solutions 13 — Corporate 156 — Total restructuring costs $ ( 320 ) $ — Operating income (loss) Utility and Power Infrastructure $ 4,680 $ ( 2,800 ) Process and Industrial Facilities 109 6,652 Storage and Terminal Solutions ( 1,378 ) 12,756 Corporate ( 6,869 ) ( 7,834 ) Total operating income (loss) $ ( 3,458 ) $ 8,774 -18- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Total assets by segment were as follows: September 30, 2020 June 30, 2020 Utility and Power Infrastructure $ 95,415 $ 67,398 Process and Industrial Facilities 115,056 138,734 Storage and Terminal Solutions 180,667 187,167 Corporate 121,092 124,011 Total segment assets $ 512,230 $ 517,310 Note 10 – Restructuring Costs During the second half of fiscal 2020, the Company implemented a business improvement plan related to: • its strategic initiative to exit the domestic iron and steel industry; • the implementation of business improvements in the power delivery portion of the Utility and Power Infrastructure segment; and • the reduction of its cost structure following the decline in revenue caused by the COVID-19 pandemic and related market disruption and the decline in the price of crude oil. The business improvement plan consisted of discretionary cost reductions, workforce reductions and closures of certain offices in order to increase the utilization of the Company's staff and bring the cost structure of the business in line with the expected near-term decrease in revenue. The Company incurred $ 14.0 million of restructuring costs during fiscal 2020 and substantially completed its restructuring activities under the business improvement plan. However, the Company recognized a $0.3 million gain on restructuring activities during the three months ended September 30, 2020 as a result of various trailing restructuring expenses and credits. The restructuring reserve was $ 0.9 million as of September 30, 2020, which primarily relates to the unpaid portion of severance costs. -19- Table of Contents