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Item 7. Management’s Discussion and Analysis

2021-09-13 compared with 2020-09-03 · 378 added, 420 removed, 100 unchanged (89% of the section changed)

7 unchanged sentences

The following is a discussion of our most critical accounting policies, estimates, judgments and uncertainties that are inherent in our application of GAAP.

RESULTS OF OPERATIONS

Change in Reportable Segments

Due to changing markets facing our clients and to better align our financial reporting 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.

We also provide construction and maintenance services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configuration and provide 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.

We also serve 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.

Our 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.

We also include work related to cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum, hydrogen and other specialty vessels such as spheres in this segment, as well work related to marine structures and truck and rail loading/offloading facilities.

Our services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals.

Finally, we offer 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, we separately report corporate selling, general and administrative expenses and other corporate expenses that were previously allocated to the segments.

The majority of the work for all segments is performed in the United States, with 10.2% of revenue generated internationally during fiscal 2021, 7.3% in fiscal 2020 and 3.4% in fiscal 2019.

The percentage of revenue generated internationally increased in fiscal 2021 compared to fiscal 2020 and fiscal 2019 due to higher levels of work in Canada.

Significant period to period changes in revenue, gross profits and operating results between fiscal 2021 and fiscal 2020 and fiscal 2020 and fiscal 2019 are discussed below on a consolidated basis and for each segment.

Matrix Service Company

Results of Operations

(In thousands)

Utility and Power Infrastructure Process and Industrial Facilities Storage and Terminal Solutions Corporate Total

Fiscal Year 2021

Consolidated revenue $ 210,052 $ 199,917 $ 263,429 $ — $ 673,398

Gross profit 1,506 17,642 13,617 — 32,765

Gross profit % 0.7 % 8.8 % 5.2 % — % 4.9 %

Selling, general and administrative expenses 9,882 14,756 18,644 26,474 69,756

Restructuring costs 1,312 3,807 1,391 246 6,756

Operating loss (9,688) (921) (6,418) (26,720) (43,747)

Operating loss % (4.6) % (0.5) % (2.4) % — % (6.5) %

Fiscal Year 2020

Consolidated revenue $ 212,001 $ 421,871 $ 467,066 $ — $ 1,100,938

Gross profit (loss) 7,081 36,349 61,413 (2,667) 102,176

Gross profit % 3.3 % 8.6 % 13.1 % — % 9.3 %

Selling, general and administrative expenses 10,047 24,266 26,386 25,577 86,276

Intangible asset impairments and restructuring costs 27,625 22,914 1,066 920 52,525

Operating income (loss) (30,591) (10,831) 33,961 (29,164) (36,625)

Operating income (loss) % (14.4) % (2.6) % 7.3 % — % (3.3) %

Variances Fiscal Year 2021 to Fiscal Year 2020 Increase/(Decrease)

Consolidated revenue $ (1,949) $ (221,954) $ (203,637) $ — $ (427,540)

Gross profit (5,575) (18,707) (47,796) 2,667 (69,411)

Selling, general and administrative expenses (165) (9,510) (7,742) 897 (16,520)

Intangible asset impairments and restructuring costs (26,313) (19,107) 325 (674) (45,769)

Operating income (loss) 20,903 9,910 (40,379) 2,444 (7,122)

Matrix Service Company

Results of Operations

(In thousands)

Utility and Power Infrastructure Process and Industrial Facilities Storage and Terminal Solutions Corporate Total

Fiscal Year 2020

Consolidated revenue $ 212,001 $ 421,871 $ 467,066 $ — $ 1,100,938

Gross profit (loss) 7,081 36,349 61,413 (2,667) 102,176

Gross profit % 3.3 % 8.6 % 13.1 % — % 9.3 %

Selling, general and administrative expenses 10,047 24,266 26,386 25,577 86,276

Intangible asset impairments and restructuring costs 27,625 22,914 1,066 920 52,525

Operating income (loss) (30,591) (10,831) 33,961 (29,164) (36,625)

Operating income (loss) % (14.4) % (2.6) % 7.3 % — % (3.3) %

Fiscal Year 2019

Consolidated revenue $ 249,867 $ 654,014 $ 512,799 $ — $ 1,416,680

Gross profit (loss) 21,161 58,853 54,600 (2,663) 131,951

Gross profit % 8.5 % 9.0 % 10.6 % — % 9.3 %

Selling, general and administrative expenses 9,842 26,932 30,319 26,928 94,021

Operating income (loss) 11,319 31,921 24,281 (29,591) 37,930

Operating income % 4.5 % 4.9 % 4.7 % — % 2.7 %

Variances Fiscal Year 2020 to Fiscal Year 2019 Increase/(Decrease)

Consolidated revenue $ (37,866) $ (232,143) $ (45,733) $ — $ (315,742)

Gross profit (loss) (14,080) (22,504) 6,813 (4) (29,775)

Selling, general and administrative expenses 205 (2,666) (3,933) (1,351) (7,745)

Intangible asset impairments and restructuring costs 27,625 22,914 1,066 920 52,525

Operating income (loss) (41,910) (42,752) 9,680 427 (74,555)

Operational Update

Throughout the course of the COVID-19 pandemic, our top priority has been to maintain a safe working environment for all field and office employees, customers and business partners.

Our project teams, in coordination with our clients, are monitoring the impact of new variants of COVID-19 and continue to operate under enhanced work processes to protect the health and safety of everyone on our job sites.

Since the beginning of the pandemic we have reduced our cost structure in excess of $60 million, or approximately 25%, with a third of those reductions related to SG&A and the rest related to construction overhead, which is included in cost of revenue in the Consolidated Statements of Income.

In order to achieve these cost savings, we incurred $14.0 million of restructuring costs during fiscal 2020 and $6.8 million during fiscal 2021.

Despite these significant reductions in construction overhead, our revenue volume in fiscal 2021 did not allow for complete recovery of overhead, which reduced gross margin.

In fiscal 2021, we engaged a third party consultant to help us perform a strategic review of our end markets in support of updating our business strategy and to ensure that our organizational structure is properly designed to support our updated strategy.

Based on the preliminary results of this review, we believe there are opportunities for us to be more competitive, which will require organizational and process changes and will likely result in additional restructuring costs.

We expect to substantially complete this initiative in fiscal 2022.

In order to more clearly depict our core profitability, the following tables present our operating results after certain adjustments:

Reconciliation of Adjusted Net Income (Loss) and Diluted Earnings (Loss) per Common Share (1)

(In thousands, except per share data)

Fiscal Years Ended

June 30, 2021 June 30, 2020 June 30, 2019

Net income (loss), as reported $ (31,224) $ (33,074) $ 27,982

Restructuring costs incurred 6,756 14,010 —

Goodwill and intangible asset impairments — 38,515 —

Tax impact of adjustments and other net tax items (1,739) (8,644) —

Adjusted net income (loss) $ (26,207) $ 10,807 $ 27,982

Loss per fully diluted share, as reported $ (1.18) $ (1.24) $ 1.01

Adjusted earnings (loss) per fully diluted share $ (0.99) $ 0.40 $ 1.01

(1) This table presents non-GAAP financial measures of our adjusted net income (loss) and adjusted diluted earnings (loss) per common share for fiscal 2021, 2020 and 2019.

The most directly comparable financial measures are net loss and net loss per diluted share, respectively, presented in the Consolidated Statements of Income.

We have presented these non-GAAP financial measures because we believe they more clearly depict our core operating results during the periods presented and provide a more comparable measure of our operating results to other companies considered to be in similar businesses.

Since adjusted net income (loss) and adjusted diluted earnings (loss) per common share are not measures of performance calculated in accordance with GAAP, they should be considered in addition to, rather than as a substitute for, the most directly comparable GAAP financial measures.

Reconciliation of Net Income (Loss) to Adjusted EBITDA (1)

Fiscal Years Ended

2021 June 30,

2020 June 30,

(in thousands)

Net income (loss) $ (31,224) $ (33,074) $ 27,982

Goodwill and other intangible asset impairment — 38,515 —

Restructuring costs 6,756 14,010 —

Stock-based compensation 8,156 9,877 11,908

Interest expense 1,559 1,597 1,296

Provision (benefit) for federal, state and foreign income taxes (12,039) (3,570) 10,430

Depreciation and amortization 17,858 19,124 18,224

Adjusted EBITDA $ (8,934) $ 46,479 $ 69,840

(1) This table presents Adjusted EBITDA, which we define as net income (loss) before impairment of goodwill and other intangible assets, restructuring costs, stock-based compensation expense, interest expense, income taxes, depreciation and amortization, because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses.

We believe that the line item on our Consolidated Statements of Income entitled “Net income (loss)” is the most directly comparable GAAP measure to Adjusted EBITDA.

Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance.

Adjusted EBITDA, as we calculate it, may not be comparable to similarly titled measures employed by other companies.

In addition, this measure is not a measure of our ability to fund our cash needs.

As Adjusted EBITDA excludes certain financial information compared with net income (loss), the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions that are excluded.

Adjusted EBITDA has certain material limitations as follows:

• It does not include impairments to goodwill and other intangible assets.

While impairments to intangible assets are non-cash expenses in the period recognized, cash or other consideration was still transferred in exchange for the intangible assets in the period of the acquisition.

Any measure that excludes impairments to intangible assets has material limitations since these expenses represent the loss of an asset that was acquired in exchange for cash or other assets.

• It does not include restructuring costs.

Restructuring costs represent material costs that we incurred and are oftentimes cash expenses.

Therefore, any measure that excludes restructuring costs has material limitations.

• It does not include stock-based compensation.

Stock-based compensation represents material amounts of equity that are awarded to our employees and directors for services rendered.

While the expense is non-cash, we release vested shares out of our treasury stock, which has historically been replenished by using cash to periodically repurchase our stock.

Therefore, any measure that excludes stock-based compensation has material limitations.

• It does not include interest expense.

Because we have borrowed money to finance our operations and to acquire businesses, pay commitment fees to maintain our senior secured revolving credit facility, and incur fees to issue letters of credit under the senior secured revolving credit facility, interest expense is a necessary and ongoing part of our costs and has assisted us in generating revenue.

Therefore, any measure that excludes interest expense has material limitations.

• It does not include income taxes.

Because the payment of income taxes is a necessary and ongoing part of our operations, any measure that excludes income taxes has material limitations.

• It does not include depreciation or amortization expense.

Because we use capital and intangible assets to generate revenue, depreciation and amortization expense is a necessary element of our cost structure.

Therefore, any measure that excludes depreciation or amortization expense has material limitations.

Fiscal 2021 Versus Fiscal 2020

Consolidated revenue was $673.4 million for the fiscal year ended June 30, 2021, compared to $1.101 billion in fiscal 2020.

On a segment basis, revenue decreased for the Process and Industrial Facilities, Storage and Terminal Solutions, and Utility and Power Infrastructure segments by $222.0 million, $203.7 million, and $1.9 million respectively.

Consolidated gross profit was $32.8 million in fiscal 2021 compared to $102.2 million in fiscal 2020.

Gross margin was 4.9% in fiscal 2021 compared to 9.3% in fiscal 2020.

Gross margins in fiscal 2021 were negatively impacted by lower than forecasted volume, which led to under recovery of construction overhead costs, lower than previously forecasted margins on large capital projects in the Utility and Power Infrastructure and Storage and Terminal Solutions segments, and an unfavorable settlement on a contract dispute in the Storage and Terminal Solutions segment.

Gross margins in fiscal 2020 were the result of strong project execution, offset by the under recovery of construction overhead costs due to lower than anticipated revenue volume, particularly in the fourth quarter as the COVID-19 pandemic began impacting our operations.

Consolidated SG&A expenses were $69.8 million in fiscal 2021 compared to $86.3 million in fiscal 2020.

The decrease in fiscal 2021 was primarily attributable to implemented cost reductions.

We recorded non-cash goodwill and other intangible asset impairments of $38.5 million during the second quarter of fiscal 2020.

Financial Statements, Note 4 - Goodwill and Other Intangible Assets for more information about the impairments.

As a result of actions taken to reduce our cost structure, we recorded $6.8 million and $14.0 million of restructuring costs in fiscal 2021 and fiscal 2020, respectively.

See "Operational Update" in this Results of Operations section and Item 8.

Financial Statements and Supplementary Data, Note 14 - Restructuring Costs, for more information.

Interest expense was $1.6 million in fiscal 2021 and fiscal 2020.

Interest income was $0.1 million during fiscal 2021 compared to $1.3 million in fiscal 2020.

The decrease in interest income was primarily due to lower interest rates in the current period.

Our effective tax rate for fiscal 2021 was 27.8% compared to 9.7% in fiscal 2020.

Through provisions in the CARES Act, we have an income tax benefit of $5.2 million from the ability to carryback the fiscal 2021 federal net operating loss to a period with a higher statutory federal income tax rate.

The carryback benefit was offset by $2.8 million of valuation allowances on various deferred tax assets and $1.8 million of excess tax expense related to the vesting of stock-based compensation.

The effective tax rate for fiscal 2020 was negatively impacted by $3.1 million of valuation allowances placed on deferred tax assets that were created by net operating loss carryforwards and other tax credits primarily in Canada, the non-deductible portion of the goodwill impairments that would have resulted in a $1.8 million reduction of income tax expense, and $1.7 million of other non-deductible expenses.

These negative impacts were partially offset by $1.8 million of research and development and other tax credits.

In fiscal 2021 and 2020, net loss was $31.2 million and $33.1 million, respectively;

or $1.18 and $1.24 per fully diluted share, respectively.

Utility and Power Infrastructure

Revenue for the Utility and Power Infrastructure segment decreased $1.9 million to $210.1 million in fiscal 2021 compared to $212.0 million in fiscal 2020.

The decrease is primarily due lower volume of power delivery and power generation work, partially offset by a higher volume of LNG utility peak shaving work.

The segment gross margin was 0.7% in fiscal 2021 compared to 3.3% in fiscal 2020.

Our results of operations in fiscal 2021 were materially impacted by increases in the forecasted costs to complete a large capital project.

This project reduced gross profit by $5.8 million in fiscal 2021.

The changes in estimate were due to lower than previously forecasted productivity caused by excessive rain at the project site, the continuing impact of COVID-19, and rework which led to higher costs and schedule compression.

This project was nearly complete at year-end and we are performing start-up and commissioning work in the first quarter of fiscal 2022.

In addition, segment gross margin was negatively impacted by low volume, which led to the under recovery of construction overhead costs.

These negative impacts were partially offset by good project execution in the remainder of the segment.

The fiscal 2020 segment gross margin was negatively impacted by poor execution in the first and second quarters, including a lower than previously expected margin on a capital project due to costs to remediate faulty equipment designed by a subcontractor.

In addition, low volume led to the under recovery of construction overhead costs.

Process and Industrial Facilities

Revenue for the Process and Industrial Facilities segment was $199.9 million in fiscal 2021 compared to $421.9 million in fiscal 2020.

The decrease of $222.0 million is primarily due to our strategic exit from the domestic iron and steel industry in the third quarter of fiscal 2020, lower volume of midstream natural gas projects, and the completion of a small number of major capital projects.

The decrease was partially offset by an increase in refinery turnaround and maintenance work, primarily in the fourth quarter.

The segment gross margin was 8.8% in fiscal 2021 compared to 8.6% in fiscal 2020.

Segment gross margin in fiscal 2021 was positively impacted by strong project execution and the positive impact of a one-time workers' compensation item recorded in the second quarter, but these positive impacts were partially offset by lower revenue volume, which led to the under recovery of construction overhead costs.

The fiscal 2020 segment gross margin was supported by good project execution on both capital and repair and maintenance iron and steel projects in the first and second quarters, partially offset by a lower volume of turnaround work, which led to the under recovery of construction overhead costs.

Storage and Terminal Solutions

Revenue for the Storage and Terminal Solutions segment was $263.4 million in fiscal 2021 compared to $467.1 million in fiscal 2020, a decrease of $203.7 million.

The decrease in segment revenue is primarily a result of lower volume of crude oil tank and terminal capital work and lower repair and maintenance work.

The segment gross margin was 5.2% in fiscal 2021 compared to 13.1% in fiscal 2020.

The fiscal 2021 segment gross margin was negatively impacted by increases in the costs to complete a large crude oil terminal project, partially offset by an increase in the estimated recovery of those costs.

During the third quarter, we achieved mechanical completion on the project, demobilized and completed our assessment of unpriced change orders.

The project's financial impact for fiscal 2021 was a $3.8 million reduction to gross profit.

In addition, a settlement on a contract dispute over the construction of a crude oil terminal negatively impacted gross profit by $2.9 million in the fourth quarter.

The settlement resulted in a cash receipt of $8.9 million in the first quarter of fiscal 2022, which enabled us to avoid future legal costs and litigation risk.

Fiscal 2021 gross margin was also negatively impacted by low volume, which led to the under recovery of construction overhead costs.

The fiscal 2020 segment gross margin was positively impacted by strong project execution on large capital projects and higher volume than fiscal 2021, which resulted in better recovery of construction overhead costs.

Unallocated corporate expenses were $26.7 million during fiscal 2021 compared to $29.2 million in the same period last year.

The decrease is primarily attributable to cost reductions we implemented.

Fiscal 2020 Versus Fiscal 2019

Consolidated revenue was $1.101 billion for the fiscal year ended June 30, 2020, compared to $1.417 billion in fiscal 2019.

On a segment basis, revenue decreased for the Process and Industrial Facilities, Storage and Terminal Solutions, and Utility and Power Infrastructure segments by $232.1 million, $45.7 million, and $37.9 million, respectively.

Consolidated gross profit was $102.2 million in fiscal 2020 compared to $132.0 million in fiscal 2019.

Gross margin was 9.3% in fiscal 2020 and fiscal 2019.

Gross margins in fiscal 2020 are the result of strong project execution, offset by the under recovery of construction overhead costs due to lower than anticipated revenue volume, particularly in the fourth quarter.

Fiscal 2019 was positively impacted by higher revenue volume, which led to an over recovery of construction overhead costs.

Consolidated SG&A expenses were $86.3 million in fiscal 2020 compared to $94.0 million in fiscal 2019.

The decrease in fiscal 2020 was primarily attributable to lower incentive compensation due to weaker operating results in fiscal 2020 and savings from the business improvement plan described in Item 8.

Financial Statements, Note 14 - Restructuring Costs.

We recorded non-cash goodwill and other intangible asset impairments of $38.5 million during the second quarter of fiscal 2020.

Financial Statements, Note 4 - Goodwill and Other Intangible Assets for more information about the impairments.

In addition, we recorded $14.0 million of restructuring costs in the third and fourth quarters of fiscal 2020 due to actions taken under our business improvement plan.

See Operational Update in this Results of Operations section and Item 8.

Financial Statements, Note 14 - Restructuring Costs, for more information.

Interest expense was $1.6 million in fiscal 2020 and $1.3 million in fiscal 2019.

The increase in interest expense was primarily due to a higher average debt balance during fiscal 2020, partially offset by lower interest rates in fiscal 2020.

Interest income was $1.3 million during fiscal 2020 compared to $1.2 million in fiscal 2019 due to an increase in our average cash balance during fiscal 2020, partially offset by lower interest rates in fiscal 2020.

Our effective tax rate for fiscal 2020 was 9.7% compared to 27.2% in fiscal 2019.

The tax benefit for fiscal 2020 was negatively impacted by a $3.1 million of valuation allowances placed on deferred tax assets that were created by net operating loss carryforwards and other tax credits primarily in Canada, the non-deductible portion of the goodwill impairments that would have resulted in a $1.8 million reduction of income tax expense, and $1.7 million of other non-deductible expenses.

These negative impacts were partially offset by $1.8 million of research and development and other tax credits.

The effective tax rate in fiscal 2019 was negatively impacted by $4.5 million of valuation allowances placed on net operating loss carryforwards and foreign tax credits generated by our branch operations in Canada, and $1.2 million of non-deductible expenses.

These negative impacts were largely offset by the reversal of $3.5 million of branch liabilities associated with the valuation allowances placed on our Canadian branch net operating loss carryforwards and foreign tax credits, $2.0 million of research and development and other tax credits and $0.3 million of excess tax benefits related to the vesting of stock-based compensation.

A full analysis of our provision for income taxes is included in Item 8.

Financial Statements and Supplementary Data, Note 6 - Income Taxes.

In fiscal 2020, net loss was $33.1 million, or $1.24 per fully diluted share, compared to net income of $28.0 million, or $1.01 per fully diluted share, in fiscal 2019.

Utility and Power Infrastructure

Revenue for the Utility and Power Infrastructure segment decreased $37.9 million to $212.0 million in fiscal 2020 compared to $249.9 million in fiscal 2019.

The decrease is primarily due to lower volume of power delivery and power generation work.

The segment gross margin was 3.3% in fiscal 2020 compared to 8.5% in fiscal 2019.

The fiscal 2020 segment gross margin was negatively impacted by poor execution in the first and second quarters and lower volume throughout the year, which led to the under recovery of construction overhead costs.

The segment gross margin in fiscal 2019 was positively impacted by strong project execution on power generation package work, partially offset by lower than previously forecasted margins on a limited number of power delivery projects and proceeds from the settlement of a customer dispute that were less than previously anticipated.

Process and Industrial Facilities

Revenue for the Process and Industrial Facilities segment was $421.9 million in fiscal 2020 compared to $654.0 million in fiscal 2019.

The decrease of $232.1 million is primarily due to our strategic exit from the domestic iron and steel industry in the third quarter of fiscal 2020, and lower volume of turnaround, refinery maintenance, and thermal vacuum chamber work.

The segment gross margin was 8.6% in fiscal 2020 compared to 9.0% in fiscal 2019.

The fiscal 2020 segment gross margin was negatively impacted by sharply lower volume and under recovery of overhead costs during the second half of the year due to the wind down of the domestic iron and steel business.

The fiscal 2019 segment gross margin was negatively impacted by a lower than previously forecasted margin on a thermal vacuum chamber project, partially offset by good project execution in the remainder of the segment and higher volume, which led to the over recovery of construction overhead costs.

Storage and Terminal Solutions

Revenue for the Storage and Terminal Solutions segment was $467.1 million in fiscal 2020 compared to $512.8 million in fiscal 2019, a decrease of $45.7 million.

The decrease in segment revenue is primarily a result of lower volume of crude oil tank and terminal capital work.

The segment gross margin was 13.1% in fiscal 2020 compared to 10.6% in fiscal 2019.

The fiscal 2020 segment gross margin was positively impacted by strong project execution on large capital projects.

During the first half of fiscal 2019, the segment gross margin was negatively impacted by the wind down of lower margin work awarded in a highly competitive environment and lower than previously forecasted margins on a limited number of those projects.

Unallocated corporate expenses were $29.2 million during fiscal 2020 compared to $29.6 million in the same period last year.

The decrease is primarily attributable to cost reductions we implemented in the second half of fiscal 2020.

LIQUIDITY AND CAPITAL RESOURCES

We define liquidity as the ongoing ability to pay our liabilities as they become due, fund business operations and meet all monetary contractual obligations.

Our primary sources of liquidity as of June 30, 2021 were cash and cash equivalents of $83.9 million and cash flows from operations.

On September 9, 2021, we entered into a new Credit Agreement, which had availability of $25.9 million as of the closing date of the agreement.

See the "ABL Credit Facility" section below for more information about our new Credit Agreement.

There continues to be significant uncertainty regarding the near- and intermediate-term business impacts from the COVID-19 pandemic and its disruption of our markets.

However, we continue to maintain a strong balance sheet, which we believe is sufficient to support our near- to intermediate-term needs.

We are taking the following actions:

• strategic review of business processes and organizational structure;

• proactive management of the cost structure and working capital;

• eliminating all non-critical capital expenditures.

Factors that routinely impact our short-term liquidity and may impact our long-term liquidity include, but are not limited to:

• changes in costs and estimated earnings in excess of billings on uncompleted contracts and billings on uncompleted contracts in excess of costs due to contract terms that determine the timing of billings to customers and the collection of those billings:

◦ some cost plus and fixed price customer contracts are billed based on milestones which may require us to incur significant expenditures prior to collections from our customers;

◦ some fixed price customer contracts allow for significant upfront billings at the beginning of a project, which temporarily increases liquidity near term;

◦ time and material contracts are normally billed in arrears.

Therefore, we are routinely required to carry these costs until they can be billed and collected;

◦ some of our large construction projects may require security in the form of letters of credit or significant retentions.

The timing of collection of retentions is often uncertain;

• other changes in working capital;

• capital expenditures.

Other factors that may impact both short and long-term liquidity include:

• contract disputes, which can be significant;

• collection issues, including those caused by weak commodity prices, economic slowdowns or other factors which can lead to credit deterioration of our customers;

• issuances of letters of credit;

• strategic investments in new operations.

Other factors that may impact long-term liquidity include:

• borrowing constraints under our credit facility and maintaining compliance with all covenants contained in the Credit Agreement;

• acquisitions and disposals of businesses;

• purchases of shares under our stock buyback program.

Cash Flows Used by Operating Activities

Cash flows used by operating activities for the fiscal year ended June 30, 2021 totaled $3.0 million.

Major components of cash flows used by operating activities for the year ending June 30, 2021 are as follows:

Net Cash Used by Operating Activities

(In thousands)

Net loss $ (31,224)

Non-cash expenses 25,352

Deferred income tax 889

Cash effect of changes in operating assets and liabilities 1,552

Net cash used by operating activities $ (2,971)

Cash effect of changes in operating assets and liabilities at June 30, 2021 in comparison to June 30, 2020 include the following:

• Accounts receivable, net of credit losses recognized during the period, decreased $11.1 million during fiscal 2021, which increased cash flows from operating activities.

The variance is primarily attributable to lower business volume and the timing of billing and collections.

• Costs and estimated earnings in excess of billings on uncompleted contracts ("CIE") decreased $28.8 million, which increased cash flows from operating activities.

Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") decreased $8.6 million, which decreased cash flows from operating activities.

CIE and BIE balances can experience significant fluctuations based on business volume and the timing of when job costs are incurred and the timing of customer billings and payments.

• Inventories, income taxes receivable, other current assets, operating right-of-use lease assets and other assets increased $21.8 million during fiscal 2021, which decreased cash flows from operating activities.

These operating assets can fluctuate based on the timing of inventory builds and draw-downs, accrual and receipt of income taxes receivable, prepayments of certain expenses, leasing activity, business volume, and other timing differences.

• Accounts payable, accrued wages and benefits, accrued insurance, operating lease liabilities and other accrued expenses decreased by $11.7 million during fiscal 2021, which decreased cash flows from operating activities.

These operating liabilities can fluctuate based on the timing of vendor payments, accruals, leasing activities, business volume, and other timing differences.

• Other liabilities increased by $3.6 million, which increased cash flows from operating activities.

This increase was primarily due to deferred payroll tax associated with the CARES Act.

See Part II., Item 8.

Financial Statements and Supplementary Data, Note 6 - Income Taxes for more information.

Cash Flows Used for Investing Activities

Investing activities used $2.3 million of cash in the fiscal year ended June 30, 2021 primarily due to $4.4 million of capital expenditures, partially offset by $2.1 million of proceeds from other asset sales.

Capital expenditures consisted of $2.4 million for facilities, office equipment and software, and $2.0 million for construction, fabrication, and transportation equipment.

Cash Flows Used by Financing Activities

Financing activities used $12.3 million of cash in the fiscal year ended June 30, 2021 primarily due to the net repayment of $9.8 million on our senior secured revolving credit facility, $1.6 million paid to repurchase our stock for payment of withholding taxes due on equity-based compensation, and $1.3 million paid in fees to amend our former credit agreement.

ABL Credit Facility

On September 9, 2021, we and our primary U.S.

and Canada operating subsidiaries entered into an asset-backed credit agreement (the "ABL Facility") as borrowers with Bank of Montreal, as Administrative Agent, Swing-Line Lender, a Letter of Credit Issuer and a Lender.

The ABL Facility is guaranteed by substantially all of our remaining U.S.

and Canadian subsidiaries.

The ABL Facility provides for available borrowings of up to $100.0 million, which may be increased further by an amount not to exceed $15.0 million, subject to certain conditions, including obtaining additional commitments.

The ABL Facility is intended to be used for working capital, capital expenditures, issuances of letters of credit and other lawful purposes.

Our obligations under the ABL Facility are secured by a first lien on all our assets and the assets of our co-borrowers and guarantors under the ABL Facility.

The maximum amount that we may borrow under the ABL Facility is subject to a borrowing base, which is based on restricted cash plus a percentage of the value of certain accounts receivable, inventory and equipment, reduced for certain reserves.

We are required to maintain a minimum of $25.0 million of restricted cash at all times, but such amounts are also included in the borrowing base.

At September 9, 2021, availability under the ABL Facility was $25.9 million and there were $43.5 million in letters of credit outstanding.

The ABL Facility matures and any outstanding amounts become due and payable on September 9, 2026.

Borrowings under the ABL Facility bear interest through maturity at a variable rate based upon, at our option, an annual rate of either a base rate (“Base Rate”), CDOR rate or a LIBOR rate, plus an applicable margin.

The Base Rate is defined as a fluctuating interest rate equal to the greatest of (i) rate of interest announced by Bank of Montreal from time to time as its prime rate;

(ii) the U.S.

federal funds rate plus 0.50%, and (iii) LIBOR rate for one month period plus 1.00%.

Depending on the amount of average availability, the applicable margin is between 1.00% to 1.50% for Base Rate, which includes either U.S.

or Canadian prime rate, and between 2.00% and 2.50% for CDOR and LIBOR rate borrowings.

Interest is payable either (i) monthly for Base Rate borrowings or (ii) the last day of the interest period for LIBOR or CDOR rate borrowings, as set forth in the Credit Agreement.

The fee for undrawn amounts is 0.25% per annum and is due quarterly.

The ABL Facility contains customary conditions to borrowings, events of default and covenants, including, but not limited to, covenants that restrict our ability to sell assets, engage in mergers and acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay cash dividends, issue equity instruments, make distribution or redeem or repurchase capital stock.

In the event that our availability is less than the greater of (i) $15.0 million and (ii) 15.00% of the lesser of (1) the current borrowing base and (2) the commitments under the ABL Facility then in effect, a consolidated Fixed Charge Coverage Ratio of at least 1.00 to 1.00 must be maintained.

Senior Secured Revolving Credit Facility

The ABL Facility replaced the Fifth Amended and Restated Credit Agreement (the "Prior Credit Agreement"), that was entered into on November 2, 2020, and subsequently amended on May 4, 2021, by and among us and certain foreign subsidiaries, as Borrowers, various subsidiaries of ours, as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole Book Runner, and the other Lenders party thereto.

The Prior Credit Agreement provided for a three-year senior secured revolving credit facility of $200.0 million that expired November 2, 2023.

We had no borrowings and $41.3 million of letters of credit outstanding under the Prior Credit Agreement as of June 30, 2021.

We had $9.2 million of borrowings and $34.5 million of letters of credit outstanding under the Prior Credit Agreement as of June 30, 2020.

Each revolving borrowing under the Prior Credit Agreement bore interest at a rate per annum equal to a base rate, plus a margin of 1.00% to 3.50%.

The unused credit facility fee was between 0.35% and 0.50% based on the Leverage Ratio as defined in the Prior Credit Agreement.

The Prior Credit Agreement contained customary financial, negative and affirmative covenants and limited our borrowing availability based on our EBITDA, as it was defined in the Prior Credit Agreement.

The Prior Credit Agreement also limited our ability to make acquisitions, repurchase shares, make capital expenditures and dispose of assets.

Dividend Policy

We have never paid cash dividends on our common stock and the terms of our Credit Agreement limit dividends to stock dividends only.

Any future dividend payments will depend on the terms of our Credit Agreement, our financial condition, capital requirements and earnings as well as other relevant factors.

Treasury Shares

The terms of our Credit Agreement limit share repurchases to $2.5 million per fiscal year provided that that we do not violate our Fixed Charge Coverage Ratio financial covenant.

We may repurchase common stock pursuant to the Stock Buyback Program, which was approved by the board of directors in November 2018.

Under the program, the aggregate number of shares repurchased may not exceed 2,707,175 shares.

We may repurchase our stock from time to time in the open market at prevailing market prices or in privately negotiated transactions and are not obligated to purchase any shares.

The program will continue unless and until it is modified or revoked by the Board of Directors.

We made no repurchases under the program in the fourth quarter of fiscal 2021 and have no current plans to repurchase stock in the near-term.

As of June 30, 2021, there were 1,349,037 shares available for repurchase under the Stock Buyback Program.

We had 1,338,779 treasury shares as of June 30, 2021 and intend to utilize these treasury shares in connection with equity awards under the our stock incentive plans and for sales to the Employee Stock Purchase Plan.

Off-Balance Sheet Arrangements

As of June 30, 2021, the following off-balance sheet arrangements were in place to support our ordinary course obligations:

Expiration Period

Year 1–3 Years 3–5 Years More than 5

(In thousands)

Letters of credit (1)

$ 41,314 $ — $ — $ — $ 41,314

Surety bonds 96,268 536 20 — 96,824

Total $ 137,582 $ 536 $ 20 $ — $ 138,138

(1) All letters of credit issued under our senior secured revolving credit facility support our workers’ compensation insurance programs or certain construction contracts.

The letters of credit that support our workers’ compensation programs are expected to renew annually through the term of our credit facility.

The letters of credit that support construction contracts carry expiration dates into calendar year 2022.

Contractual Obligations

Contractual obligations at June 30, 2021 are summarized below:

Contractual Obligations by Expiration Period

Year 1-3 Years 3-5 Years More than 5

(In thousands)

Operating leases 6,548 8,284 6,009 11,224 32,065

Purchase obligations 2,951 3,408 — — 6,359

Total contractual obligations $ 9,499 $ 11,692 $ 6,009 $ 11,224 $ 38,424

CRITICAL ACCOUNTING POLICIES

2 unchanged sentences

Our revenue comes from contracts to provide engineering, procurement, fabrication and construction, repair and maintenance and other services.

Our engineering, procurement and fabrication and construction services are usually provided in association with capital projects, which commonly are fixed price contracts and are billed based on project milestones.

Our engineering, procurement and fabrication and construction services are usually provided in association with capital projects, which are commonly fixed-price contracts that are billed based on project milestones.

Our repair and maintenance services typically are cost reimbursable or time and material based contracts and are billed monthly or, for projects of short duration, at the conclusion of the project.

The elapsed time from award to completion of performance may be in excess of one year for capital projects.

The elapsed time from award to completion of performance may exceed one year for capital projects.

Contract Identification

1 unchanged sentence

A contract with a customer exists when it has approval and commitment from both parties, the rights and obligations of the parties are identified, payment terms are identified, the contract has commercial substance, and collectibility is probable.

We also evaluate whether a contract should be combined with other contracts and accounted for as one single contract.

We also evaluate whether a contract should be combined with other contracts and accounted for as a single contract.

This evaluation requires judgment and could change the timing of the amount of revenue and profit recorded for a given period.

33 unchanged sentences

Typically, customer contracts will include standard warranties that provide assurance that products and services will function as expected.

The Company does not sell separate warranties.

We do not sell separate warranties.

We have numerous contracts that are in various stages of completion which require estimates to determine the forecasted costs at completion.

15 unchanged sentences

Claims are more fully discussed in Note 7 - Commitments and Contingencies of the Notes to Financial Statements.

Unpriced Change Orders and Claims

Costs and estimated earnings in excess of billings on uncompleted contracts included revenue for unpriced change orders and claims of $14.6 million at June 30, 2021 and $14.5 million at June 30, 2020.

The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings.

Generally, collection of amounts related to unpriced change orders and claims is expected within twelve months.

However, customers may not pay these amounts until final resolution of related claims, and accordingly, collection of these amounts may extend beyond one year.

Loss Contingencies

Various legal actions, claims, and other contingencies arise in the normal course of our business.

Contingencies are recorded in the consolidated financial statements, or are otherwise disclosed, in accordance with Accounting Standard Codification ("ASC") Topic 450-20, “Loss Contingencies”.

Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and estimable.

We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes known.

We believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results of operations or liquidity.

However, the results of litigation are inherently unpredictable and the possibility exists that the ultimate resolution of one or more of these matters could result in a material effect on our financial position, results of operations or liquidity.

Legal costs are expensed as incurred.

Generally we expect collection of amounts related to unpriced change orders and claims within twelve months.

However, customers may not pay these amounts until final resolution of related claims, which may extend beyond one year.

Goodwill represents the excess of the purchase price of acquisitions over the acquisition date fair value of the net identifiable tangible and intangible assets acquired.

10 unchanged sentences

The use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate and could result in the recognition of additional impairment charges in the financial statements.

As a test for reasonableness, we also consider the combined carrying values of our reporting units to our market capitalization.

In the second quarter of fiscal 2020, the Company concluded that a goodwill impairment indicator existed in the Electrical Infrastructure segment based on the recent history of depressed gross margins and the second quarter’s downward acceleration of revenue and gross margin.

Accordingly, the Company performed an interim impairment test as of December 31, 2019, reflecting updated revenue and gross margin assumptions, and concluded that the reporting unit's $24.9 million of goodwill was fully impaired.

Additionally, the Company concluded that a goodwill impairment indicator existed for an Industrial segment reporting unit based on several second quarter events.

These events included the deterioration of our relationship with a significant customer in the iron and steel industry in the second quarter.

As a result, the customer canceled other previously awarded work and the Company is expecting little to no new business from this customer in the foreseeable future.

Accordingly, the Company performed an interim impairment test as of December 31, 2019 and concluded that the reporting unit's $8.0 million of goodwill was fully impaired.

During the third quarter of fiscal 2020, the Company concluded that goodwill impairment indicators existed based on the uncertainties caused by the COVID-19 pandemic and the significant decline in the price of crude oil.

These uncertainties resulted in lowered revenue expectations for the remainder of fiscal 2020 and fiscal 2021 and led to significant volatility in the Company's stock price.

Accordingly, the Company performed an interim test as of March 31, 2020, which did not result in any additional impairments.

The Company performed its annual goodwill impairment test as of May 31, 2020, which resulted in no impairment.

The fiscal 2020 test indicated that three reporting units with a combined total of $ 14.2 million of goodwill as of June 30, 2020 were at higher risk of future impairment than others.

If the Company's view of project opportunities or gross margins deteriorates, particularly for the higher risk reporting units, then the Company may be required to record a material impairment of goodwill.

As a test for reasonableness, we also consider the combined fair values of our reporting units to our market capitalization.

We performed our annual goodwill impairment test as of May 31, 2021, which resulted in no impairment.

The fiscal 2021 test indicated that four reporting units with a combined total of $37.7 million of goodwill as of June 30, 2021 were at higher risk of future impairment than others.

If our view of project opportunities or gross margins deteriorates, particularly for the higher risk reporting units, then we may be required to record a material impairment of goodwill.

We considered the amount of headroom for each reporting unit when determining whether an impairment existed.

10 unchanged sentences

Reporting Unit 3 $ 3,946 12% 3% -52% -6%

Reporting Unit 4 $ 2,659 24% 17% 0% 15%

All other reporting units $ 22,977 64% to 114% 56% to 105% 10% to 75% 43% to 99%

2 unchanged sentences

Valuation allowances based on our judgments and estimates are established when necessary to reduce deferred tax assets to the amount expected to be realized in future operating results.

Company management believes that realization of deferred tax assets in excess of the valuation allowance is more likely than not.

We believe that realization of deferred tax assets in excess of the valuation allowance is more likely than not.

Our estimates are based on facts and circumstances in existence as well as interpretations of existing tax regulations and laws applied to the facts and circumstances, with the help of professional tax advisors.

Therefore, we estimate and provide for amounts of additional income taxes that may be assessed by the various taxing authorities.

The Company enters into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business.

The Company determines if an arrangement is or contains a lease at inception of the arrangement.

An arrangement is determined to be a lease if it conveys the right to control the use of identified property and equipment for a period of time in exchange for consideration.

Operating lease right-of-use assets are recognized as the present value of future lease payments over the lease term as of the commencement date, plus any lease payments made prior to commencement, and less any lease incentives received.

Operating lease liabilities are recognized as the present value of the future lease payments over the lease term as of the commencement date.

Operating lease expense is recognized based on the undiscounted future lease payments over the remaining lease term on a straight-line basis.

Lease expense related to short-term leases is recognized on a straight-line basis over the lease term.

Determinations with respect to lease term (including any renewals and terminations), incremental borrowing rate used to discount lease payments, variable lease expense and future lease payments require the use of judgment based on the facts and circumstances related to each lease.

The Company considers various factors, including economic incentives, intent, past history and business need, to determine the likelihood that a renewal option will be exercised.

Right-of-use assets are evaluated for impairment in accordance with our policy for impairment of long-lived assets.

Recently Issued Accounting Standards

Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments

On June 16, 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, which will change how the Company accounts for its allowance for uncollectible accounts.

The amendments in this update require a financial asset (or a group of financial assets) to be presented at the net amount expected to be collected.

The income statement will reflect any increases or decreases of expected credit losses that have taken place during the period.

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 amount.

Previous GAAP delays the recognition of the full amount of credit losses until the loss is probable of occurring.

The amendments in this update eliminate the probable initial recognition threshold and, instead, reflect the Company's current estimate of all expected credit losses.

In addition, current guidance limits the information the Company may consider in measuring a credit loss to its past events and current conditions.

The amendments in this update broaden the information the Company may consider in developing its expected credit loss estimate to include forecasted information.

The Company adopted the standard on July 1, 2020 with no material impact to its estimate of the allowance for uncollectible accounts.

Results of Operations

In fiscal 2020, we operated our business through four reportable segments:

Electrical Infrastructure;

Oil Gas & Chemical;

Storage Solutions;

and Industrial.

The Electrical Infrastructure segment consists of power delivery services provided to investor owned utilities, including construction of new substations, upgrades of existing substations, short-run transmission line installations, distribution upgrades and maintenance, as well as emergency and storm restoration services.

We also provide construction and maintenance services to a variety of power generation facilities, such as combined cycle plants and other natural gas fired power stations.

The Oil Gas & Chemical segment serves customers primarily 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.

We also perform work in the petrochemical, and sulfur extraction, recovery and processing markets.

Our services include plant maintenance, turnarounds, engineering and capital construction.

We also offer industrial cleaning services, including hydro-blasting, hydro-excavating, advanced chemical cleaning and vacuum services.

The Storage Solutions segment consists of work related to aboveground storage tanks ("AST") and terminals.

Also included in this segment are cryogenic and other specialty storage tanks and terminals including liquefied natural gas, 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.

Our services include engineering, fabrication and construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals.

Finally, we offer AST products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.

The Process and Industrial Facilities segment includes engineering, maintenance, turnarounds and capital projects for the refining, chemical and petrochemical industries;

midstream natural gas processing;

other industrial processing facilities including biofuels, fertilizer, and sulfur;

mining and minerals infrastructure;

and thermal vacuum chambers.

This segment is similar to the former Oil Gas & Chemical segment described above, but includes mining and minerals, thermal vacuum chambers, and work in other industrial facilities which were historically reported in the Industrial segment.

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 are changing our reporting segments.

Beginning in fiscal 2021, the Company’s financial results will be reported under the following three segments:

Utility and Power Infrastructure;

Process and Industrial Facilities;

and Storage and Terminal Solutions.

The services provided by each of these segments is described below.

The Utility and Power Infrastructure segment includes services provided in power delivery and power generation, as well as natural gas utility peak shaving.

This segment is similar to the former Electrical Infrastructure segment described above, but includes natural gas utility peak shaving facilities that have been historically reported in the Storage Solutions segment.

The Process and Industrial Facilities segment includes engineering, maintenance, turnarounds and capital projects for the refining, chemical and petrochemical industries;

midstream natural gas processing;

other industrial processing facilities including biofuels, fertilizer, and sulfur;

mining and minerals infrastructure;

and thermal vacuum chambers.

This segment is similar to the former Oil Gas & Chemical segment described above, but includes mining and minerals as well as thermal vacuum chambers, which were historically reported in the Industrial segment.

The Storage and Terminal Solutions segment includes engineering, construction, maintenance and repair for aboveground storage tanks and terminals;

LNG facilities for import/export fueling and bunkering;

NGL and other specialty vessels;

aboveground storage tank products;

and other renewable energy storage and terminal solutions.

This segment is similar to the former Storage Solutions segment described above, but does not include the natural gas utility peak shaving facilities, which will be reported as part of the Utility and Power Infrastructure segment.

The majority of the work for all segments is performed in the United States, with 7.3% of revenue generated internationally during fiscal 2020, 3.4% in fiscal 2019 and 10.1% in fiscal 2018.

The percentage of revenue generated internationally increased in fiscal 2020 compared to fiscal 2019 due to higher levels of work in Canada.

The percentage of revenue generated internationally decreased in fiscal 2019 compared to fiscal 2018 due to the completion of a significant Canadian power generation project in our Electrical Infrastructure segment in fiscal 2018.

Significant period to period changes in revenue, gross profits and operating results between fiscal 2020 and fiscal 2019 are discussed below on a consolidated basis and for each segment.

A discussion of results of operations changes between fiscal 2019 and fiscal 2018 is included in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended June 30, 2019, which was filed with the SEC on September 4, 2019.

Matrix Service Company

Results of Operations

(In thousands)

Infrastructure Oil Gas &

Chemical Storage

Solutions Industrial Total

Fiscal Year 2020

Consolidated revenue $ 112,890 $ 200,950 $ 559,199 $ 227,899 $ 1,100,938

Gross profit (loss) (1,105) 15,822 71,934 15,525 102,176

Gross profit (loss) % (1.0) % 7.9 % 12.9 % 6.8 % 9.3 %

Selling, general and administrative expenses 7,543 19,300 43,332 16,101 86,276

Intangible asset impairments and restructuring costs 27,855 3,850 1,296 19,524 52,525

Operating income (loss) (36,503) (7,328) 27,306 (20,100) (36,625)

Operating income (loss) % (32.3) % (3.6) % 4.9 % (8.8) % (3.3) %

Fiscal Year 2019

Consolidated revenue $ 217,417 $ 319,867 $ 521,932 $ 357,464 $ 1,416,680

Gross profit 15,470 35,987 56,011 24,483 131,951

Gross profit % 7.1 % 11.3 % 10.7 % 6.8 % 9.3 %

Selling, general and administrative expenses 11,802 23,003 41,914 17,302 94,021

Intangible asset impairments and restructuring costs — — — — —

Operating income 3,668 12,984 14,097 7,181 37,930

Operating income % 1.7 % 4.1 % 2.7 % 2.0 % 2.7 %

Variances Fiscal Year 2020 to Fiscal Year 2019 Increase/(Decrease)

Consolidated revenue $ (104,527) $ (118,917) $ 37,267 $ (129,565) $ (315,742)

Gross profit (16,575) (20,165) 15,923 (8,958) (29,775)

Selling, general and administrative expenses (4,259) (3,703) 1,418 (1,201) (7,745)

Intangible asset impairments and restructuring costs 27,855 3,850 1,296 19,524 52,525

Operating income (40,171) (20,312) 13,209 (27,281) (74,555)

Operational Update

As the COVID-19 pandemic persists, the Company's top priority has been to maintain a safe working environment for all employees, customers and business partners.

We transitioned the majority of our administrative and engineering team members to remote working conditions in March 2020.

At this time, we have returned to the office in select locations where predetermined criteria have been met, but the majority of our administrative and engineering team members continue to work remotely.

Our project teams in coordination with our clients created work processes to integrate the guidance from governmental agencies and leading health organizations to protect the health and safety of everyone on our job sites while maintaining productivity.

There continues to be significant uncertainty regarding the near- and intermediate-term economic impacts from the COVID-19 pandemic, which has disrupted the markets we serve.

As a result, the Company expanded its previously announced business improvement plan, which 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 our revenue expectations.

The Company's previously announced business improvement plan was in response to underperformance in the Company's Electrical Infrastructure segment, which led to a $24.9 million impairment of goodwill during the second quarter of fiscal 2020.

In addition, the Company recorded $13.6 million of goodwill and other intangible asset impairments during the second quarter of fiscal 2020 in connection with the deterioration of our relationship with a significant customer in the iron and steel industry.

The Company made a strategic decision to exit the domestic iron and steel business early in the third quarter of fiscal 2020, which resulted in incurring restructuring costs to exit the business.

Finally, during the second quarter of 2020, the Company placed a $2.4 million valuation allowance on a deferred tax asset that was created by net operating loss carryforwards and other tax credits in Canada, which was determined to be unrecoverable.

The Company incurred $14.0 million of restructuring costs in fiscal 2020 in connection with its business improvement plan, other restructuring activities, and the wind down of the domestic iron and steel business.

These initiatives were substantially completed as of June 30, 2020.

As a result of these actions, the Company expects to save approximately $45 million in planned annual operating costs.

In order to more clearly depict the core profitability of the Company, the following table presents our net income and earnings per fully diluted share for fiscal 2020 after adjusting for restructuring costs, impairments, and the Canadian tax valuation allowance:

Reconciliation of Adjusted Net Income and Diluted Earnings per Common Share (1)

(In thousands, except per share data)

Fiscal Year Ended June 30, 2020

Charge Income Tax Effect of Charge Net

(Loss) Earnings (Loss) Per Diluted Share

Net loss per common share, as reported $ (33,074) $ (1.24)

Restructuring costs incurred

$ 14,010 $ (3,369) 10,641 0.39

Electrical Infrastructure segment goodwill impairment

24,900 (4,889) 20,011 0.74

Industrial segment goodwill and other intangible asset impairment

13,615 (2,803) 10,812 0.40

Valuation allowance placed on a deferred tax asset

2,417 — 2,417 0.09

Adjustment for dilutive effect of using basic shares for net loss — 0.02

Adjusted net income and diluted earnings per common share

$ 10,807 $ 0.40

Weighted average common shares outstanding - diluted:

Previously anti-dilutive common shares

Adjusted weighted average common shares outstanding - diluted

(1) This table presents non-GAAP financial measures of our adjusted net income and adjusted diluted earnings per common share for fiscal 2020.

The most directly comparable financial measures are net loss and net loss per common share, respectively, presented in the Consolidated Statements of Income.

We have presented these non-GAAP financial measures because we believe they more clearly depict the core operating results of the Company during the period presented and provide a more comparable measure of the Company's operating results to other companies considered to be in similar businesses.

Since adjusted net income and adjusted diluted earnings per common share are not measures of performance calculated in accordance with GAAP, they should be considered in addition to, rather than as a substitute for, the most directly comparable GAAP financial measures.

Fiscal 2020 Versus Fiscal 2019

Consolidated revenue was $1.101 billion for the fiscal year ended June 30, 2020, compared to $1.417 billion in fiscal 2019.

On a segment basis, consolidated revenue decreased in the Industrial, Oil Gas & Chemical, and Electrical Infrastructure segments by $129.6 million, $118.9 million and $104.5 million, respectively.

These decreases were partially offset by an increase in the Storage Solutions segment of $37.3 million.

Consolidated gross profit was $102.2 million in fiscal 2020 compared to $132.0 million in fiscal 2019.

Gross margin was 9.3% in fiscal 2020 and fiscal 2019.

Fiscal 2019 was positively impacted by higher revenue volumes, which led to an over recovery of construction overhead costs.

Consolidated SG&A expenses were $86.3 million in fiscal 2020 compared to $94.0 million in fiscal 2019.

The decrease in fiscal 2020 was primarily attributable to lower incentive compensation due to weaker operating results in the current year.and savings from executing the previously announced business improvement plan.

The Company recorded non-cash goodwill and other intangible asset impairments of $38.5 million during the second quarter of fiscal 2020.

Financial Statements, Note 4 - Goodwill and other intangible assets for more information about the impairments.

In addition, the Company recorded $14.0 million of restructuring costs in the third and fourth quarters of fiscal 2020 due to actions taken under our business improvement plan.

See Operational Update in this Results of Operations section and Item 8.

Financial Statements, Note 14 - Restructuring Costs, for more information.

Interest expense was $1.6 million in fiscal 2020 and $1.3 million in fiscal 2019.

The increase in interest expense was primarily due to a higher average debt balance during fiscal 2020, partially offset by lower interest rates in fiscal 2020.

Our effective tax rate for fiscal 2020 was 9.7% compared to 27.2% in fiscal 2019.

These negative impacts were partially offset by $1.8 million of research and development and other tax credits.

A full analysis of the Company's provision for income taxes is included in Item 8.

Financial Statements and Supplementary Data, Note 6 - Income Taxes.

In fiscal 2020, net loss was $33.1 million, or $1.24 per fully diluted share, compared to net income of $28.0 million, or $1.01 per fully diluted share, in fiscal 2019.

Electrical Infrastructure

Revenue for the Electrical Infrastructure segment decreased $104.5 million to $112.9 million in fiscal 2020 compared to $217.4 million in fiscal 2019.

The decrease is primarily due to lower volumes of power delivery and power generation work.

The segment gross margin (loss) was (1.0)% in fiscal 2020 compared to 7.1% in the same period last year.

The fiscal 2020 segment gross loss was negatively impacted by poor execution in the first and second quarters and lower volumes throughout the year, which led to the under recovery of construction overhead costs.

The segment gross margin in fiscal 2019 was negatively impacted by lower than previously forecasted margins on a limited number of power delivery projects.

In fiscal 2019, we expanded our power delivery business geographically, however, the margins on this work did not meet our expectations.

The fiscal 2019 segment margin was also negatively impacted when the proceeds from the settlement of a customer dispute were less than previously anticipated.

The negative impacts to the fiscal 2019 segment gross margin were partially offset by strong project execution on power generation package work.

In the second quarter of fiscal 2020, the Company announced a business improvement plan for this segment.

The plan included significant changes to the operations and management of the business, including changes to leadership and mid-level operational personnel, modifications to operational processes, and increased business development resources.

During the second half of fiscal 2020, we implemented the planned personnel changes, added business development resources and strengthened business processes, which has led to improved project execution.

However, it is still too early to assess the long-term effectiveness of the business improvement plan.

Furthermore, an improvement in the operating performance of this segment will be dependent upon the effectiveness and execution of the improvement plan, the markets we serve, the spending volumes of our existing clients and other external factors.

As a result of the COVID-19 pandemic, we have experienced suspensions of work at certain job sites and client proposal activity has slowed as customers manage other pandemic-related challenges.

We will continue to assess conditions in the areas we serve and resume normal operations based on the needs of our clients and safety guidelines to ensure the protection of our employees and customers.

Oil Gas & Chemical

Revenue for the Oil Gas & Chemical segment was $201.0 million in fiscal 2020 compared to $319.9 million in the same period a year earlier.

The decrease of $118.9 million is primarily due to lower volumes of turnaround and refinery maintenance work.

The segment gross margin was 7.9% in fiscal 2020 compared to 11.3% in the same period last year.

The fiscal 2020 segment gross margin was negatively impacted by lower volumes, which led to the under recovery of construction overhead costs, partially offset by strong project execution.

Project execution was strong in fiscal 2019 and higher volumes led to an over recovery of construction overhead costs.

The short-term impact to the Company's refinery turnaround and maintenance operations as a result of the global pandemic has been significant.

The impact has been exacerbated by the timing of the onset of the pandemic during what is normally a busy spring turnaround season.

Although there have been project delays and temporary suspensions of planned seasonal work, in most cases the revenue volumes are moving out in time, but not eliminated.

The updated start dates on many of the delayed activities are uncertain and will depend on the needs of our clients, safety guidelines, and the market.

Storage Solutions

Revenue for the Storage Solutions segment was $559.2 million in fiscal 2020 compared to $521.9 million in fiscal 2019, an increase of $37.3 million.

The increase in segment revenue is primarily a result of increased tank and terminal construction work and higher levels of work in Canada.

The segment gross margin was 12.9% in fiscal 2020 compared to 10.7% in fiscal 2019.

The fiscal 2020 segment gross margin was positively impacted by strong project execution on large capital projects.

As a result of the COVID-19 pandemic, global energy demand, and regulatory issues, we experienced short-term suspensions of work on a limited number of projects, but work on most of these projects has resumed.

In addition, some project awards and starts were delayed for durations varying from a few weeks to a few quarters.

Revenue for the Industrial segment was $227.9 million in fiscal 2020 compared to $357.5 million in fiscal 2019, a decrease of $129.6 million.

The decrease in revenue is primarily attributable to our strategic decision to exit the domestic iron and steel industry early in the third quarter, and lower volumes of thermal vacuum chamber work.

We no longer have a continuous presence in any domestic iron and steel facility and final wind-down of the business is substantially complete.

The segment gross margin was 6.8% in fiscal 2020 and fiscal 2019.

The fiscal 2020 segment gross margin was negatively impacted by sharply lower volumes and under recovery of overhead costs during the second half of the year due to the wind down of the domestic iron and steel business.

These negative impacts to segment gross margin were partially offset by good project execution on both capital and repair and maintenance projects during the first half of the year and a favorable project closeout on a thermal vacuum chamber project in the fourth quarter.

The fiscal 2019 segment gross margin was negatively impacted by a lower than previously forecasted margin on a thermal vacuum chamber project, partially offset by improved gross margins on iron and steel work.

Non-GAAP Financial Measures

Adjusted EBITDA

We have presented Adjusted EBITDA, which we define as net income (loss) before impairment of goodwill and other intangible assets, restructuring costs, interest expense, income taxes, depreciation and amortization, because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses.

We believe that the line item on our Consolidated Statements of Income entitled “Net income (loss)” is the most directly comparable GAAP measure to Adjusted EBITDA.

Adjusted EBITDA, as we calculate it, may not be comparable to similarly titled measures employed by other companies.

In addition, this measure is not a measure of our ability to fund our cash needs.

Our non-GAAP performance measure, Adjusted EBITDA, has certain material limitations as follows:

• It does not include impairments to goodwill and other intangible assets.

Any measure that excludes impairments to intangible assets has material limitations since these expenses represent the loss of an asset that was acquired in exchange for cash or other assets.

• It does not include restructuring costs.

Restructuring costs represent material costs that were incurred by the Company and are oftentimes cash expenses.

Therefore, any measure that excludes restructuring costs has material limitations.

• It does not include interest expense.

Therefore, any measure that excludes interest expense has material limitations.

• It does not include income taxes.

Because the payment of income taxes is a necessary and ongoing part of our operations, any measure that excludes income taxes has material limitations.

• It does not include depreciation or amortization expense.

Because we use capital and intangible assets to generate revenue, depreciation and amortization expense is a necessary element of our cost structure.

Therefore, any measure that excludes depreciation or amortization expense has material limitations.

A reconciliation of Adjusted EBITDA to net income (loss) follows:

Fiscal Years Ended

2020 June 30,

2019 June 30,

(in thousands)

Net income (loss) $ (33,074) $ 27,982 $ (11,480)

Goodwill and other intangible asset impairment 38,515 — 17,998

Restructuring costs 14,010 — —

Interest expense 1,597 1,296 2,600

Provision (benefit) for federal, state and foreign income taxes (3,570) 10,430 (668)

Depreciation and amortization 19,124 18,224 20,347

Adjusted EBITDA $ 36,602 $ 57,932 $ 28,797

LIQUIDITY AND CAPITAL RESOURCES

We define liquidity as the ability to pay our liabilities as they become due, fund business operations and meet all contractual and financial obligations.

Our primary sources of liquidity in fiscal 2020 were cash and cash equivalents on hand, capacity under our senior secured revolving credit facility and cash generated from operations.

Cash and cash equivalents on hand at June 30, 2020 totaled $100.0 million and availability under the senior secured revolving credit facility totaled $93.4 million, resulting in total liquidity of $193.4 million.

There continues to be significant uncertainty regarding the near- and intermediate-term business impacts from the COVID-19 pandemic.

However, the Company entered this environment with a strong balance sheet and liquidity, which it expects to be sufficient to support its near- to intermediate-term needs.

In fiscal 2020, the Company implemented steps to preserve its financial position including:

• restructuring the business to right-size the cost structure to the expected near-term revenue;

• eliminating all non-critical capital expenditures;

• suspending share repurchases.

We believe the cost reduction efforts were appropriate given the circumstances.

These reductions were significant, but did not impact our capabilities nor our ability to execute work.

These reductions will enable us to be more competitive and profitable in the future and preserve liquidity.

The following table provides a summary of changes in our liquidity for the fiscal year ended June 30, 2020 (in thousands):

Liquidity as of June 30, 2019 $ 241,898

Net increase in cash and cash equivalents 10,321

Increase in credit facility capacity constraint (68,541)

Net borrowings on credit facility (4,210)

Decrease in letters of credit outstanding 13,618

Foreign currency translation of outstanding borrowings 349

Liquidity as of June 30, 2020 $ 193,435

Factors that routinely impact our short-term liquidity and that may impact our long-term liquidity include, but are not limited to:

• Changes in costs and estimated earnings in excess of billings on uncompleted contracts and billings on uncompleted contracts in excess of costs due to contract terms that determine the timing of billings to customers and the collection of those billings:

• Some cost plus and fixed price customer contracts are billed based on milestones which may require us to incur significant expenditures prior to collections from our customers.

• Some fixed price customer contracts allow for significant upfront billings at the beginning of the project, which temporarily increases liquidity near-term.

• Time and material contracts are normally billed in arrears.

Therefore, we are routinely required to carry these costs until they can be billed and collected.

• Some of our large construction projects may require security in the form of letters of credit or significant retentions.

The timing of collection of retentions is often uncertain.

• Other changes in working capital.

• Capital expenditures.

Other factors that may impact both short and long-term liquidity include:

• Acquisitions and disposals of businesses.

• Strategic investments in new operations.

• Purchases of shares under our stock buyback program.

• Contract disputes which can be significant.

• Collection issues, including those caused by weak commodity prices, economic slowdowns or other factors which can lead to credit deterioration of our customers.

• Capacity constraints under our senior secured revolving credit facility and remaining in compliance with all covenants contained in the Credit Agreement.

• Issuances of letters of credit.

Cash Flows Provided by Operating Activities

Cash flows provided by operating activities for the fiscal year ended June 30, 2020 totaled $44.1 million.

Major components of cash flows from operating activities for the year ending June 30, 2020 are as follows:

Net Cash Provided by Operating Activities

(In thousands)

Net loss $ (33,074)

Goodwill and other intangible asset impairment 38,515

Non-cash expenses 34,607

Deferred income tax (3,630)

Cash effect of changes in working capital 7,674

Net cash provided by operating activities $ 44,085

Working capital changes at June 30, 2020 in comparison to June 30, 2019 include the following:

• Accounts receivable, net of bad debt expense recognized during the period, decreased by $56.6 million during fiscal 2020, which increased cash flows from operating activities.

The increase is primarily due to lower volumes of business and the timing of billing and collections.

• Costs and estimated earnings in excess of billings on uncompleted contracts ("CIE") decreased $36.5 million, which increased cash flows from operating activities.

Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") decreased $41.7 million, which decreased cash flows from operating activities.

CIE and BIE balances declined primarily due to lower volumes of business in the second half of the year.

These balances routinely experience significant fluctuations based on the timing of when job costs are incurred and the invoicing of those job costs to the customer.

• Other assets and liabilities decreased $11.0 million, which increased cash flows from operating activities.

The decrease is primarily related to lower retentions that are expected to be collected beyond one year in connection with large projects, partially offset by an increase in net income taxes receivable.

• Accounts payable and other accrued expenses decreased by $56.3 million, which decreased cash flows from operating activities.

The variance is primarily attributable to lower volumes of business and the timing of vendor payments.

These decreases were partially offset by $3.8 million of deferred payroll tax associated with the CARES Act (see Item 8.

Financial Statements and Supplementary Data, Note 6 - Income Taxes).

Cash Flows Used for Investing Activities

Investing activities used $17.1 million of cash in the fiscal year ended June 30, 2020 primarily due to $18.5 million of capital expenditures, partially offset by $1.4 million of proceeds from asset sales.

Capital expenditures consisted of:

$7.4 million for transportation equipment, $5.1 million for construction and fabrication equipment, $5.0 million for software and office equipment, and $1.1 million for facilities.

Cash Flows Used by Financing Activities

Financing activities used $16.0 million of cash in the fiscal year ended June 30, 2020 primarily due to share repurchases of $17.0 million and the repurchase of $3.5 million of Company stock for payment of withholding taxes due on equity-based compensation, partially offset by net borrowings of $4.2 million under the Company's senior secured revolving credit facility.

Senior Secured Revolving Credit Facility

On February 8, 2017, the Company entered into the Fourth 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.

The Credit Agreement provides for a five-year senior secured revolving credit facility of $300.0 million that expires February 8, 2022.

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.

• The Canadian Prime Rate or the CDOR rate, in the case of revolving loans denominated in Canadian Dollars;

• The Adjusted LIBO Rate, in the case of revolving loans denominated in Pounds Sterling or Australian Dollars;

• The EURIBO 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, as defined in the Credit Agreement.

The Applicable Margin on ABR loans ranges between 0.625% and 1.625%.

The Applicable Margin for Adjusted LIBO, EURIBO and CDOR loans ranges between 1.625% and 2.625% and the Applicable Margin for Canadian Prime Rate loans ranges between 2.125% and 3.125%.

The unused credit facility fee is between 0.25% and 0.45% based on the Leverage Ratio.

At June 30, 2020, the Company was at the lowest margin tier for all categories of loans and the unused revolving credit facility fee under the Credit Agreement.

The Credit Agreement includes the following covenants and borrowing limitations:

• 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.

• We are required to maintain a Fixed Charge Coverage Ratio, determined as of the end of each fiscal quarter, greater than or equal to 1.25 to 1.00.

The Fixed Charge Coverage Ratio covenant requires that, as of the end of any fiscal quarter, Covenant EBITDA, after deducting capital expenditures, dividends and share repurchases, 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 and scheduled maturities of certain indebtedness for the next four quarters.

• 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.

Covenant EBITDA differs from Adjusted EBITDA, as reported under "Results of Operations - Non-GAAP Financial Measure," in Item 7 primarily because it permits the Company to:

• exclude non-cash stock-based compensation expense,

• include pro forma EBITDA of acquired businesses as if the acquisition occurred at the beginning of the previous four quarters, and

• exclude certain other extraordinary items, as defined in the Credit Agreement.

The Company is in compliance with all affirmative, negative, and financial covenants under the Credit Agreement.

Availability under the senior secured revolving credit facility is as follows:

2020 June 30,

(In thousands)

Senior secured revolving credit facility $ 300,000 $ 300,000

Capacity constraint due to the Leverage Ratio 162,864 94,323

Capacity under the senior secured revolving credit facility 137,136 205,677

Letters of credit (1)

34,529 48,147

Borrowings outstanding 9,208 5,347

Availability under the senior secured revolving credit facility $ 93,399 $ 152,183

(1) The Credit Agreement allows exclusion of letters of credit that support our workers' compensation programs when calculating availability under the credit facility.

At June 30, 2020, there were $6.5 million of letters of credit that support our workers' compensation programs.

Dividend Policy

We have never paid cash dividends on our common stock, and the terms of our Credit Agreement limit the amount of cash dividends we can pay.

Under our Credit Agreement, we may declare and pay cash dividends on our capital stock during any fiscal year up to an amount which, when added to all other cash dividends paid during such fiscal year, does not exceed 50% of our cumulative net income for such fiscal year to date.

While we currently do not intend to pay cash dividends, any future dividend payments will depend on our financial condition, capital requirements and earnings as well as other relevant factors.

Treasury Shares

On November 6, 2018, the Board of Directors approved a stock buyback program (the "November 2018 Program"), which replaced the previous program that had been in place since December 2016 and was set to expire in December 2018.

Under the November 2018 Program, the Company may repurchase common stock up to a maximum of $30.0 million per calendar year provided that the aggregate number of shares repurchased may not exceed 10%, or approximately 2.7 million, of the Company's shares outstanding as of November 6, 2018.

The Company may repurchase its stock from time to time in the open market at prevailing market prices or in privately negotiated transactions and is not obligated to purchase any shares.

The November 2018 Program will continue unless and until it is modified or revoked by the Board of Directors.

In fiscal 2020, the Company repurchased 1,047,606 shares of its common stock for $17.0 million under the November 2018 Program.

There were 1,349,037 shares available for repurchase under the November 2018 Program as of June 30, 2020.

In addition to the stock buyback program, the Company may withhold shares of common stock to satisfy the tax withholding obligations upon vesting of an employee’s deferred shares.

The Company withheld 181,081 and 79,111 shares of common stock during fiscal 2020 and 2019, respectively, to satisfy these obligations.

These shares were returned to the Company’s pool of treasury shares.

The Company has 1,746,689 treasury shares as of June 30, 2020 and intends to utilize these treasury shares in connection with equity awards under the Company’s stock incentive plans and for sales to the Employee Stock Purchase Plan.

Off-Balance Sheet Arrangements

As of June 30, 2020, the following off-balance sheet arrangements were in place to support our ordinary course obligations:

Expiration Period

Year 1–3 Years 3–5 Years More than 5

(In thousands)

Letters of credit (1)

$ 40,991 $ — $ — $ — $ 40,991

Surety bonds 200,520 1,455 1 — 201,976

Total $ 241,511 $ 1,455 $ 1 $ — $ 242,967

(1) All letters of credit issued under our senior secured revolving credit facility are in support of our workers’ compensation insurance programs or certain construction contracts.

The letters of credit that support our workers’ compensation programs are expected to renew annually through the term of our senior secured revolving credit facility.

The letters of credit that support construction contracts carry expiry dates into calendar year 2021.

Our Credit Agreement allows exclusion of letters of credit that support our workers' compensation programs when calculating our compliance with the leverage ratio covenant.

At June 30, 2020, there were $6.5 million of letters of credit that support our workers' compensation programs.

Contractual Obligations

Contractual obligations at June 30, 2020 are summarized below:

Contractual Obligations by Expiration Period

Year 1-3 Years 3-5 Years More than 5

(In thousands)

Borrowings under senior secured revolving credit facility (1)

$ — $ 9,208 $ — $ — $ 9,208

Interest payments on debt (1)

1,634 736 — — 2,370

Operating leases 8,719 9,408 5,362 9,630 33,119

Purchase obligations 3,413 1,545 — — 4,958

Total contractual obligations $ 13,766 $ 20,897 $ 5,362 $ 9,630 $ 49,655

(1) Assumes total debt principal at June 30, 2020 is carried to maturity with no future borrowings or repayments and no changes to total letters of credit outstanding as of June 30, 2020.

Interest payments on debt assumes the margin tier that the Company was at on June 30, 2020, which is the lowest margin tier under the Credit Agreement.

Loss Contingencies

Various legal actions, claims and other contingencies arise in the normal course of our business.

Contingencies are recorded in the consolidated financial statements, or are otherwise disclosed, in accordance with ASC 450-20, “Loss Contingencies”.

Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and estimable.

We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes known.

We believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results of operations or liquidity.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis