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 Six Months Ended December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 Revenue $ 167,468 $ 318,677 $ 350,239 $ 656,774 Cost of revenue 152,155 288,676 320,576 594,308 Gross profit 15,313 30,001 29,663 62,466 Selling, general and administrative expenses 16,724 23,165 34,852 46,856 Goodwill and other intangible asset impairments — 38,515 — 38,515 Restructuring costs 5,045 — 4,725 — Operating loss ( 6,456 ) ( 31,679 ) ( 9,914 ) ( 22,905 ) Other income (expense): Interest expense ( 358 ) ( 444 ) ( 733 ) ( 833 ) Interest income 38 417 71 891 Other 973 396 2,006 399 Loss before income tax benefit ( 5,803 ) ( 31,310 ) ( 8,570 ) ( 22,448 ) Benefit from federal, state and foreign income taxes ( 1,212 ) ( 3,302 ) ( 942 ) ( 591 ) Net loss $ ( 4,591 ) $ ( 28,008 ) $ ( 7,628 ) $ ( 21,857 ) Basic loss per common share $ ( 0.17 ) $ ( 1.04 ) $ ( 0.29 ) $ ( 0.81 ) Diluted loss per common share $ ( 0.17 ) $ ( 1.04 ) $ ( 0.29 ) $ ( 0.81 ) Weighted average common shares outstanding: Basic 26,489 26,925 26,377 26,930 Diluted 26,489 26,925 26,377 26,930 See accompanying notes. -1- Table of Contents Matrix Service Company Condensed Consolidated Statements of Comprehensive Income (In thousands) (unaudited) Three Months Ended Six Months Ended December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 Net loss $ ( 4,591 ) $ ( 28,008 ) $ ( 7,628 ) $ ( 21,857 ) Other comprehensive loss, net of tax: Foreign currency translation gain (net of tax expense of $41 and $53 for the three and six months ended December 31, 2020, respectively, and $59 and $37 for the three and six months ended December 31, 2019, respectively) 819 523 1,223 129 Comprehensive loss $ ( 3,772 ) $ ( 27,485 ) $ ( 6,405 ) $ ( 21,728 ) See accompanying notes. -2- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands) (unaudited) December 31, 2020 June 30, 2020 Assets Current assets: Cash and cash equivalents $ 93,481 $ 100,036 Accounts receivable, less allowances (December 31, 2020—$853 and June 30, 2020—$905) 151,068 160,671 Costs and estimated earnings in excess of billings on uncompleted contracts 41,398 59,548 Inventories 6,764 6,460 Income taxes receivable 4,287 3,919 Other current assets 7,769 4,526 Total current assets 304,767 335,160 Property, plant and equipment at cost: Land and buildings 43,243 42,695 Construction equipment 94,893 94,154 Transportation equipment 52,182 55,864 Office equipment and software 42,143 39,356 Construction in progress 2,065 4,427 Total property, plant and equipment - at cost 234,526 236,496 Accumulated depreciation ( 158,774 ) ( 155,748 ) Property, plant and equipment - net 75,752 80,748 Operating lease right-of-use assets 18,308 21,375 Goodwill 60,605 60,369 Other intangible assets, net of accumulated amortization 7,743 8,837 Deferred income taxes 6,815 5,988 Other assets 5,920 4,833 Total assets $ 479,910 $ 517,310 See accompanying notes. -3- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands, except share data) (unaudited) December 31, 2020 June 30, 2020 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 51,269 $ 73,094 Billings on uncompleted contracts in excess of costs and estimated earnings 62,244 63,889 Accrued wages and benefits 16,373 16,205 Accrued insurance 7,795 7,301 Operating lease liabilities 5,359 7,568 Other accrued expenses 7,087 7,890 Total current liabilities 150,127 175,947 Deferred income taxes 75 61 Operating lease liabilities 17,521 19,997 Borrowings under senior secured revolving credit facility — 9,208 Other liabilities 7,898 4,208 Total liabilities 175,621 209,421 Commitments and contingencies Stockholders’ equity: Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of December 31, 2020 and June 30, 2020; 26,502,960 and 26,141,528 shares outstanding as of December 31, 2020 and June 30, 2020 279 279 Additional paid-in capital 133,957 138,966 Retained earnings 198,774 206,402 Accumulated other comprehensive loss ( 7,150 ) ( 8,373 ) 325,860 337,274 Less: Treasury stock, at cost — 1,385,257 shares as of December 31, 2020, and 1,746,689 shares as of June 30, 2020 ( 21,571 ) ( 29,385 ) Total stockholders' equity 304,289 307,889 Total liabilities and stockholders’ equity $ 479,910 $ 517,310 See accompanying notes. -4- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Six Months Ended December 31, 2020 December 31, 2019 Operating activities: Net loss $ ( 7,628 ) $ ( 21,857 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 9,287 9,702 Goodwill and other intangible asset impairment — 38,515 Stock-based compensation expense 4,199 5,813 Operating lease impairment due to restructuring 242 — Deferred income tax ( 760 ) ( 2,934 ) Gain on sale of property, plant and equipment ( 1,186 ) ( 285 ) Provision for uncollectible accounts ( 41 ) 1,193 Other 200 ( 213 ) Changes in operating assets and liabilities increasing (decreasing) cash: Accounts receivable 9,644 18,173 Costs and estimated earnings in excess of billings on uncompleted contracts 18,150 38,860 Inventories ( 304 ) 832 Other assets and liabilities ( 6,095 ) 1,547 Accounts payable ( 21,788 ) ( 38,182 ) Billings on uncompleted contracts in excess of costs and estimated earnings ( 1,645 ) 4,936 Accrued expenses 3,549 ( 17,475 ) Net cash provided by operating activities 5,824 38,625 Investing activities: Capital expenditures ( 3,068 ) ( 14,492 ) Proceeds from asset sales 1,634 377 Net cash used by investing activities $ ( 1,434 ) $ ( 14,115 ) See accompanying notes. -5- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Six Months Ended December 31, 2020 December 31, 2019 Financing activities: Advances under senior secured revolving credit facility $ 1,125 $ 17,395 Repayments of advances under senior secured revolving credit facility ( 10,913 ) ( 8,126 ) Payment of debt amendment fees ( 663 ) — Open market purchase of treasury shares — ( 9,913 ) Proceeds from issuance of common stock under employee stock purchase plan 155 157 Repurchase of common stock for payment of statutory taxes due on equity-based compensation ( 1,549 ) ( 3,491 ) Net cash used by financing activities ( 11,845 ) ( 3,978 ) Effect of exchange rate changes on cash and cash equivalents 900 248 Increase (decrease) in cash and cash equivalents ( 6,555 ) 20,780 Cash and cash equivalents, beginning of period 100,036 89,715 Cash and cash equivalents, end of period $ 93,481 $ 110,495 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 197 $ 4,751 Interest $ 1,039 $ 947 Non-cash investing and financing activities: Purchases of property, plant and equipment on account $ 11 $ 682 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, October 1, 2020 $ 279 $ 132,687 $ 203,365 $ ( 22,342 ) $ ( 7,969 ) $ 306,020 Net loss — — ( 4,591 ) — — ( 4,591 ) Other comprehensive income — — — — 819 819 Issuance of deferred shares (35,615 shares) — ( 632 ) — 632 — — Treasury shares sold to Employee Stock Purchase Plan (8,585 shares) — ( 79 ) — 152 — 73 Treasury shares purchased to satisfy tax withholding obligations (1,436 shares) — — — ( 13 ) — ( 13 ) Stock-based compensation expense — 1,981 — — — 1,981 Balances, December 31, 2020 $ 279 $ 133,957 $ 198,774 $ ( 21,571 ) $ ( 7,150 ) $ 304,289 Balances, October 1, 2019 $ 279 $ 132,936 $ 245,627 $ ( 13,270 ) $ ( 8,145 ) $ 357,427 Net loss — — ( 28,008 ) — — ( 28,008 ) Other comprehensive income — — — — 523 523 Issuance of deferred shares (40,786 shares) — ( 673 ) — 673 — — Treasury shares sold to Employee Stock Purchase Plan (4,468 shares) — 5 — 69 — 74 Open market purchase of treasury shares (500,000 shares) — — — ( 9,913 ) — ( 9,913 ) Treasury shares purchased to satisfy tax withholding obligations (4,586 shares) — — — ( 97 ) — ( 97 ) Stock-based compensation expense — 2,789 — — — 2,789 Balances, December 31, 2019 $ 279 $ 135,057 $ 217,619 $ ( 22,538 ) $ ( 7,622 ) $ 322,795 -7- 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 — — ( 7,628 ) — — ( 7,628 ) Other comprehensive income — — — — 1,223 1,223 Issuance of deferred shares (514,318 shares) — ( 9,067 ) — 9,067 — — Treasury shares sold to Employee Stock Purchase Plan (17,315 shares) — ( 141 ) — 296 — 155 Treasury shares purchased to satisfy tax withholding obligations (170,201 shares) — — — ( 1,549 ) — ( 1,549 ) Stock-based compensation expense — 4,199 — — — 4,199 Balances, December 31, 2020 $ 279 $ 133,957 $ 198,774 $ ( 21,571 ) $ ( 7,150 ) $ 304,289 Balances, July 1, 2019 $ 279 $ 137,712 $ 239,476 $ ( 17,759 ) $ ( 7,751 ) $ 351,957 Net loss — — ( 21,857 ) — — ( 21,857 ) Other comprehensive income — — — — 129 129 Issuance of deferred shares (535,060 shares) — ( 8,486 ) — 8,486 — — Treasury shares sold to Employee Stock Purchase Plan (8,521 shares) — 18 — 139 — 157 Open market purchase of treasury shares (500,000 shares) — — — ( 9,913 ) — ( 9,913 ) Treasury shares purchased to satisfy tax withholding obligations (178,670 shares) — — — ( 3,491 ) — ( 3,491 ) Stock-based compensation expense — 5,813 — — — 5,813 Balances, December 31, 2019 $ 279 $ 135,057 $ 217,619 $ ( 22,538 ) $ ( 7,622 ) $ 322,795 See accompanying notes. -8- 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 and six month periods ended December 31, 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 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: -9- 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 configuration, 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, hydrogen 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 $ 418.0 million of remaining performance obligations yet to be satisfied as of December 31, 2020 . The Company expects to recognize $ 315.3 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: December 31, 2020 June 30, 2020 Change (in thousands) Costs and estimated earnings in excess of billings on uncompleted contracts $ 41,398 $ 59,548 $ ( 18,150 ) Billings on uncompleted contracts in excess of costs and estimated earnings ( 62,244 ) ( 63,889 ) 1,645 Net contract liabilities $ ( 20,846 ) $ ( 4,341 ) $ ( 16,505 ) 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 six months ended December 31, 2020 that was included in the June 30, 2020 BIE balance was $ 52.8 million. This revenue consists primarily of work performed during the period on contracts with customers that had advance billings. -10- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Progress billings in accounts receivable at December 31, 2020 and June 30, 2020 included retentions to be collected within one year of $ 35.4 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 $ 2.2 million as of December 31, 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 Six Months Ended December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 (In thousands) United States $ 146,200 $ 291,348 $ 307,577 $ 605,765 Canada 19,132 24,703 38,743 45,872 Other international 2,136 2,626 3,919 5,137 Total Revenue $ 167,468 $ 318,677 $ 350,239 $ 656,774 Contract Type Disaggregation: Three Months Ended Six Months Ended December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 (In thousands) Fixed-price contracts $ 113,871 $ 174,773 $ 247,227 $ 351,093 Time and materials and other cost reimbursable contracts 53,597 143,904 103,012 305,681 Total Revenue $ 167,468 $ 318,677 $ 350,239 $ 656,774 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. Other In the three and six months ended December 31, 2020, our results of operations were materially impacted by changes in estimate of the forecasted costs to complete a large crude oil storage terminal capital project. The changes in estimate resulted in decreases in operating income of $ 5.8 million and $ 7.7 million during the three and six months ended December 31, 2020, respectively. The Company has achieved mechanical completion and is demobilizing from the project. We continue to work through final closeout and outstanding change orders with the client. -11- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) 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 92 % of all right-of-use assets as of December 31, 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 six months ended December 31, 2020, the Company recognized $ 0.2 million of impairments of a right-of-use asset in connection with the closure of a leased office space. The impairments are included in restructuring costs in the condensed consolidated statements of income. The components of lease expense in the condensed consolidated statements of income are as follows: Three Months Ended Six Months Ended December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 Lease expense Location of Expense (in thousands) Operating lease expense Cost of revenue and selling, general and administrative expenses $ 2,310 $ 3,256 $ 4,798 $ 6,372 Short-term lease expense (1) Cost of revenue 6,274 11,007 12,248 20,615 Total lease expense $ 8,584 $ 14,263 $ 17,046 $ 26,987 (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: December 31, 2020 Maturity Analysis: (in thousands) Remainder of Fiscal 2021 $ 3,767 Fiscal 2022 5,350 Fiscal 2023 3,845 Fiscal 2024 2,822 Fiscal 2025 2,282 Thereafter 9,601 Total future operating lease payments 27,667 Less: imputed interest ( 4,787 ) Net present value of future lease payments 22,880 Less: current portion of operating lease liabilities 5,359 Non-current operating lease liabilities $ 17,521 The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of December 31, 2020 : Weighted-average remaining lease term (in years) 6.8 years Weighted-average discount rate 5.6 % -12- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Supplemental cash flow information related to leases is as follows: Six Months Ended December 31, 2020 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 5,972 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 1,098 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) 72 22 142 236 Net balance at December 31, 2020 $ 6,977 $ 26,868 $ 26,760 $ 60,605 (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 December 31, 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 December 31, 2020 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,483 $ ( 1,946 ) $ 537 Customer-based 6 to 15 17,243 ( 10,037 ) 7,206 Total amortizing intangible assets $ 19,726 $ ( 11,983 ) $ 7,743 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 $ 0.5 million and $ 1.1 million during the three and six months ended December 31, 2020 and $ 0.9 million and $ 1.9 million during the three and six months ended December 31, 2019, respectively. -13- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) We estimate that the remaining amortization expense related to December 31, 2020 amortizing intangible assets will be as follows (in thousands): Period ending: Remainder of Fiscal 2021 $ 1,131 Fiscal 2022 1,816 Fiscal 2023 1,729 Fiscal 2024 1,416 Fiscal 2025 1,126 Fiscal 2026 167 Thereafter 358 Total estimated remaining amortization expense at December 31, 2020 $ 7,743 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 June 30, 2020, 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. 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 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. -14- 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 December 31, 2020 , the Company is in compliance with all affirmative, negative, and financial covenants under the Credit Agreement. Availability at December 31, 2020 and June 30, 2020 under the new and prior senior secured revolving credit facilities, respectively, were as follows: December 31, 2020 June 30, 2020 (In thousands) Senior secured revolving credit facility $ 200,000 $ 300,000 Capacity constraint due to the Leverage Ratio 131,690 162,864 Capacity under the credit facility 68,310 137,136 Letters of credit 34,899 34,529 Borrowings outstanding — 9,208 Availability under the senior secured revolving credit facility $ 33,411 $ 93,399 Availability under the new $200.0 million senior secured revolving credit facility at June 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 and six months ended December 31, 2020 were 20.9 % and 11.0 %, respectively; compared to 10.5 % and 2.6 % for the three and six months ended December 31, 2019, respectively. We expect our effective tax rate to be approximately 27.0 % for the remainder of fiscal 2021. The effective tax rate in fiscal 2021 was negatively impacted by deferred tax asset adjustments of $ 0.2 million and $ 1.2 million during the three and six months ended December 31, 2020, respectively. -15- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Deferred Payroll Taxes The Company has deferred $ 11.1 million of U.S. payroll tax as of December 31, 2020 through provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the "CARES Act"). The deferred payroll taxes are included within other accrued expenses and 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 $ 13.0 million at December 31, 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 accounts receivable from an iron and steel customer following the deterioration of the relationship in the second quarter of fiscal 2020. The unpaid receivable balance at December 31, 2020 was $ 16.9 million. 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. -16- 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 Six Months Ended December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 (In thousands, except per share data) Basic EPS: Net loss $ ( 4,591 ) $ ( 28,008 ) $ ( 7,628 ) $ ( 21,857 ) Weighted average shares outstanding 26,489 26,925 26,377 26,930 Basic loss per share $ ( 0.17 ) $ ( 1.04 ) $ ( 0.29 ) $ ( 0.81 ) Diluted EPS: Diluted weighted average shares 26,489 26,925 26,377 26,930 Diluted loss per share $ ( 0.17 ) $ ( 1.04 ) $ ( 0.29 ) $ ( 0.81 ) The following securities are considered antidilutive and have been excluded from the calculation of Diluted EPS: Three Months Ended Six Months Ended December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 (In thousands) Stock options 54 26 54 25 Nonvested deferred shares 305 718 436 870 Total antidilutive securities 359 744 490 895 -17- 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 configuration 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, hydrogen 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. -18- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Results of Operations (In thousands) Three Months Ended Six Months Ended December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 Gross revenue Utility and Power Infrastructure $ 52,023 $ 49,155 $ 112,694 $ 96,882 Process and Industrial Facilities 51,747 143,769 98,475 299,221 Storage and Terminal Solutions 65,434 128,008 143,030 264,009 Total gross revenue $ 169,204 $ 320,932 $ 354,199 $ 660,112 Less: Inter-segment revenue Process and Industrial Facilities $ 485 $ 886 $ 1,282 $ 1,461 Storage and Terminal Solutions 1,251 1,369 2,678 1,877 Total inter-segment revenue $ 1,736 $ 2,255 $ 3,960 $ 3,338 Consolidated revenue Utility and Power Infrastructure $ 52,023 $ 49,155 $ 112,694 $ 96,882 Process and Industrial Facilities 51,262 142,883 97,193 297,760 Storage and Terminal Solutions 64,183 126,639 140,352 262,132 Total consolidated revenue $ 167,468 $ 318,677 $ 350,239 $ 656,774 Gross profit (loss) Utility and Power Infrastructure $ 5,597 $ ( 1,226 ) $ 12,510 $ ( 1,394 ) Process and Industrial Facilities 7,864 13,838 11,523 27,428 Storage and Terminal Solutions 1,852 18,026 5,630 37,768 Corporate — ( 637 ) — ( 1,336 ) Total gross profit $ 15,313 $ 30,001 $ 29,663 $ 62,466 Selling, general and administrative expenses Utility and Power Infrastructure $ 2,576 $ 2,778 $ 4,798 $ 5,410 Process and Industrial Facilities 3,387 7,385 7,437 14,323 Storage and Terminal Solutions 3,919 6,791 9,062 13,777 Corporate 6,842 6,211 13,555 13,346 Total selling, general and administrative expenses $ 16,724 $ 23,165 $ 34,852 $ 46,856 Intangible asset impairments and restructuring costs Utility and Power Infrastructure $ 812 $ 24,900 $ 823 $ 24,900 Process and Industrial Facilities 3,364 13,615 2,864 13,615 Storage and Terminal Solutions 641 — 654 — Corporate 228 — 384 — Total asset impairments and restructuring costs $ 5,045 $ 38,515 $ 4,725 $ 38,515 Operating income (loss) Utility and Power Infrastructure $ 2,209 $ ( 28,904 ) $ 6,889 $ ( 31,704 ) Process and Industrial Facilities 1,113 ( 7,162 ) 1,222 ( 510 ) Storage and Terminal Solutions ( 2,708 ) 11,235 ( 4,086 ) 23,991 Corporate ( 7,070 ) ( 6,848 ) ( 13,939 ) ( 14,682 ) Total operating loss $ ( 6,456 ) $ ( 31,679 ) $ ( 9,914 ) $ ( 22,905 ) -19- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Total assets by segment were as follows: December 31, 2020 June 30, 2020 Utility and Power Infrastructure $ 80,664 $ 67,398 Process and Industrial Facilities 106,053 138,734 Storage and Terminal Solutions 164,735 187,167 Corporate 128,458 124,011 Total segment assets $ 479,910 $ 517,310 Note 10 – Restructuring Costs During the third quarter of fiscal 2020, the Company initiated a business improvement plan to increase profitability and reduce its cost structure 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 decline in revenue caused by the ongoing effects of the COVID-19 pandemic and related market disruptions. The business improvement plan consists of discretionary cost reductions, workforce reductions, reduction of capital expenditures and the reduction in size or closure 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 revenue volumes. The Company incurred $ 14.0 million of restructuring costs during fiscal 2020 and $4.7 million during the first half of fiscal 2021. The restructuring costs consist primarily of severance costs, facility closure costs, intangible asset impairments and other liabilities as a result of exiting certain operations. Activities under this plan are essentially complete with remaining costs of $ 1.0 million to $ 1.5 million expected in the third quarter. -20- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Restructuring costs under our business improvement plan are classified as follows: Three months ended December 31, 2020 Six months ended December 31, 2020 Since Inception of Business Improvement Plan (In thousands) Utility and Power Infrastructure Severance and other personnel-related costs $ 811 $ 818 $ 2,158 Facility costs 1 5 240 Other intangible asset impairments — — 1,150 Total Utility and Power Infrastructure $ 812 $ 823 $ 3,548 Process and Industrial Facilities Severance and other personnel-related costs $ 3,082 $ 2,590 $ 8,758 Facility costs 134 15 2,770 Other intangible asset impairments — — 375 Other costs 148 259 259 Total Process and Industrial Facilities $ 3,364 $ 2,864 $ 12,162 Storage and Terminal Solutions Severance and other personnel-related costs $ 640 $ 653 $ 1,000 Facility costs 1 1 721 Total Storage and Terminal Solutions $ 641 $ 654 $ 1,721 Corporate Severance and other personnel-related costs $ 155 $ 161 $ 1,081 Facility costs 73 223 223 Total Corporate $ 228 $ 384 $ 1,304 Restructuring Costs by Type: Severance and other personnel-related costs $ 4,688 $ 4,222 $ 12,997 Facility costs 209 244 3,954 Other intangible asset impairments — — 1,525 Other costs 148 259 259 Total restructuring costs $ 5,045 $ 4,725 $ 18,735 The restructuring reserve is included in other accrued expenses and other liabilities in the condensed consolidated balance sheets. The table below is a reconciliation of the beginning and ending restructuring reserve balance under the business improvement plan (in thousands): Balance as of June 30, 2020 $ 2,403 Restructuring costs incurred 3,422 Cash payments ( 1,214 ) Adjustment to liability ( 510 ) Balance as of December 31, 2020 $ 4,101 -21- Table of Contents