MATRIX SERVICE CO 10-Q

Item 1. Financial Statements Matrix Service Company Condensed Consolidated Statements of Income (In thousands, except per share data) (unaudited) Three Months Ended September 30, 2021 September 30, 2020 Revenue $ 168,093 $ 182,771 Cost of revenue 171,601 168,421 Gross profit (loss) ( 3,508 ) 14,350 Selling, general and administrative expenses 16,629 18,128 Restructuring costs 605 ( 320 ) Operating loss ( 20,742 ) ( 3,458 ) Other income (expense): Interest expense (Note 5) ( 1,999 ) ( 375 ) Interest income 21 33 Other ( 83 ) 1,033 Loss before income tax benefit ( 22,803 ) ( 2,767 ) Provision (benefit) from federal, state and foreign income taxes ( 5,265 ) 270 Net loss $ ( 17,538 ) $ ( 3,037 ) Basic loss per common share $ ( 0.66 ) $ ( 0.12 ) Diluted loss per common share $ ( 0.66 ) $ ( 0.12 ) Weighted average common shares outstanding: Basic 26,611 26,265 Diluted 26,611 26,265 See accompanying notes. -1- Table of Contents Matrix Service Company Condensed Consolidated Statements of Comprehensive Income (In thousands) (unaudited) Three Months Ended September 30, 2021 September 30, 2020 Net loss $ ( 17,538 ) $ ( 3,037 ) Other comprehensive income (loss), net of tax: Foreign currency translation gain (loss) (net of tax expense of $54 and $12 for the three months ended September 30, 2021 and 2020, respectively ( 795 ) 404 Comprehensive loss $ ( 18,333 ) $ ( 2,633 ) See accompanying notes. -2- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands) (unaudited) September 30, 2021 June 30, 2021 Assets Current assets: Cash and cash equivalents (Note 1) $ 34,678 $ 83,878 Restricted cash (Note 1) 2,600 — Accounts receivable, less allowances (September 30, 2021—$586 and June 30, 2021—$898) 144,892 148,030 Costs and estimated earnings in excess of billings on uncompleted contracts 33,766 30,774 Inventories 6,314 7,342 Income taxes receivable 16,845 16,965 Other current assets 11,180 4,230 Total current assets 250,275 291,219 Property, plant and equipment at cost: Land and buildings 41,556 41,633 Construction equipment 94,209 94,453 Transportation equipment 50,068 50,510 Office equipment and software 43,010 42,706 Construction in progress 126 493 Total property, plant and equipment - at cost 228,969 229,795 Accumulated depreciation ( 163,171 ) ( 160,388 ) Property, plant and equipment - net 65,798 69,407 Restricted cash, non-current (Note 1) 25,000 — Operating lease right-of-use assets 21,515 22,412 Goodwill 60,540 60,636 Other intangible assets, net of accumulated amortization 6,094 6,614 Deferred income taxes 10,687 5,295 Other assets, non-current 10,368 11,973 Total assets $ 450,277 $ 467,556 See accompanying notes. -3- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands, except share data) (unaudited) September 30, 2021 June 30, 2021 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 65,973 $ 60,920 Billings on uncompleted contracts in excess of costs and estimated earnings 50,973 53,832 Accrued wages and benefits 20,216 21,008 Accrued insurance 6,627 6,568 Operating lease liabilities 5,570 5,747 Other accrued expenses 4,918 5,327 Total current liabilities 154,277 153,402 Deferred income taxes 29 34 Operating lease liabilities 19,951 20,771 Other liabilities, non-current 7,722 7,810 Total liabilities 181,979 182,017 Commitments and contingencies Stockholders’ equity: Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of September 30, 2021 and June 30, 2021; 26,697,028 and 26,549,438 shares outstanding as of September 30, 2021 and June 30, 2021 279 279 Additional paid-in capital 135,308 137,575 Retained earnings 157,640 175,178 Accumulated other comprehensive loss ( 7,544 ) ( 6,749 ) 285,683 306,283 Less: Treasury stock, at cost — 1,191,189 shares as of September 30, 2021, and 1,338,779 shares as of June 30, 2021 ( 17,385 ) ( 20,744 ) Total stockholders' equity 268,298 285,539 Total liabilities and stockholders’ equity $ 450,277 $ 467,556 See accompanying notes. -4- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Three Months Ended September 30, 2021 September 30, 2020 Operating activities: Net loss $ ( 17,538 ) $ ( 3,037 ) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 4,052 4,639 Stock-based compensation expense 1,869 2,218 Operating lease impairment due to restructuring — 150 Deferred income tax ( 5,343 ) 289 Gain on sale of property, plant and equipment ( 101 ) ( 941 ) Provision for uncollectible accounts 4 ( 64 ) Accelerated amortization of deferred debt amendment fees (Note 5) 1,518 — Other — 101 Changes in operating assets and liabilities increasing (decreasing) cash: Accounts receivable 3,134 ( 10,769 ) Costs and estimated earnings in excess of billings on uncompleted contracts ( 2,992 ) 1,854 Inventories 1,028 ( 291 ) Other assets and liabilities ( 5,921 ) ( 8,018 ) Accounts payable 5,108 ( 4,431 ) Billings on uncompleted contracts in excess of costs and estimated earnings ( 2,859 ) ( 366 ) Accrued expenses ( 1,112 ) 3,646 Net cash used by operating activities ( 19,153 ) ( 15,020 ) Investing activities: Capital expenditures ( 219 ) ( 2,777 ) Proceeds from asset sales 103 1,074 Net cash used by investing activities $ ( 116 ) $ ( 1,703 ) See accompanying notes. -5- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Three Months Ended September 30, 2021 September 30, 2020 Financing activities: Payment of debt amendment fees $ ( 922 ) $ — Proceeds from issuance of common stock under employee stock purchase plan 76 82 Repurchase of common stock for payment of statutory taxes due on equity-based compensation ( 853 ) ( 1,536 ) Other ( 118 ) — Net cash used by financing activities ( 1,817 ) ( 1,454 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 514 ) 316 Decrease in cash, cash equivalents and restricted cash ( 21,600 ) ( 17,861 ) Cash, cash equivalents and restricted cash, beginning of period (Note 1) 83,878 100,036 Cash, cash equivalents and restricted cash, end of period (Note 1) $ 62,278 $ 82,175 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ — $ 122 Interest, including payment of debt amendment fees $ 1,603 $ 470 Non-cash investing and financing activities: Purchases of property, plant and equipment on account $ 51 $ — See accompanying notes. -6- Table of Contents Matrix Service Company Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share data) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balances, July 1, 2021 $ 279 $ 137,575 $ 175,178 $ ( 20,744 ) $ ( 6,749 ) $ 285,539 Net loss — — ( 17,538 ) — — ( 17,538 ) Other comprehensive loss — — — — ( 795 ) ( 795 ) Issuance of deferred shares (217,084 shares) — ( 4,084 ) — 4,084 — — Treasury shares sold to Employee Stock Purchase Plan (7,209 shares) — ( 52 ) — 128 — 76 Treasury shares purchased to satisfy tax withholding obligations (76,703 shares) — — — ( 853 ) — ( 853 ) Stock-based compensation expense — 1,869 — — — 1,869 Balances, September 30, 2021 $ 279 $ 135,308 $ 157,640 $ ( 17,385 ) $ ( 7,544 ) $ 268,298 Balances, July 1, 2020 $ 279 $ 138,966 $ 206,402 $ ( 29,385 ) $ ( 8,373 ) $ 307,889 Net loss — — ( 3,037 ) — — ( 3,037 ) Other comprehensive income — — — — 404 404 Issuance of deferred shares (478,703 shares) — ( 8,435 ) — 8,435 — — Treasury shares sold to Employee Stock Purchase Plan (8,730 shares) — ( 62 ) — 144 — 82 Treasury shares purchased to satisfy tax withholding obligations (168,765 shares) — — — ( 1,536 ) — ( 1,536 ) Stock-based compensation expense — 2,218 — — — 2,218 Balances, September 30, 2020 $ 279 $ 132,687 $ 203,365 $ ( 22,342 ) $ ( 7,969 ) $ 306,020 -7- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 – Basis of Presentation and Significant Accounting Policies Basis of Presentation The condensed consolidated financial statements include the accounts of Matrix Service Company and its subsidiaries (“Matrix”, “we”, “our”, “us”, “its” or the “Company”), unless otherwise indicated. Intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. The information furnished reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations, cash flows and financial position for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2021, included in our Annual Report on Form 10-K for the year then ended. The results of operations for the three month period ended September 30, 2021 may not necessarily be indicative of the results of operations for the full year ending June 30, 2022. Significant Accounting Policies We updated our significant accounting policies as a result of entering into an asset-backed credit agreement (the "ABL Facility"), which requires us to maintain a restricted cash balance (See Note 5 - Debt for more information about the ABL Facility). Our other significant accounting policies are detailed in “Note 1 - Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended June 30, 2021. Cash, Cash Equivalents and Restricted Cash The ABL Facility requires us to maintain a minimum of $25.0 million of restricted cash at all times. Since this cash must be restricted through the maturity date of the ABL Facility, which is beyond one year, we have classified this restricted cash as non-current in our Condensed Consolidated Balance Sheets. In addition, we must maintain a restricted cash balance of $2.6 million in support of the purchase card program that is associated with our prior card administrator. We have included this restricted cash in current assets in our Condensed Consolidated Balance Sheets since we expect to dissolve the prior purchase card program during fiscal 2022. The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Condensed Consolidated Balance Sheets to the total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows (in thousands): September 30, 2021 June 30, 2021 Cash and cash equivalents $ 34,678 $ 83,878 Restricted cash, current 2,600 — Restricted cash, non-current 25,000 — Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows $ 62,278 $ 83,878 Note 2 – Revenue Remaining Performance Obligations We had $ 365.4 million of remaining performance obligations yet to be satisfied as of September 30, 2021 . We expect to recognize $ 302.2 million of our remaining performance obligations as revenue within the next twelve months. -8- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Contract Balances Contract terms with customers include the timing of billing and payment, which usually differs from the timing of revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets and liabilities are calculated on a contract-by-contract basis and reported on a net basis at the end of each period and are classified as current. We present our contract assets in the balance sheet as Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts ("CIE"). CIE consists of revenue recognized in excess of billings. We present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and Estimated Earnings ("BIE"). BIE consists of billings in excess of revenue recognized. The following table provides information about CIE and BIE: September 30, 2021 June 30, 2021 Change (in thousands) Costs and estimated earnings in excess of billings on uncompleted contracts $ 33,766 $ 30,774 $ 2,992 Billings on uncompleted contracts in excess of costs and estimated earnings ( 50,973 ) ( 53,832 ) 2,859 Net contract liabilities $ ( 17,207 ) $ ( 23,058 ) $ 5,851 The difference between the beginning and ending balances of our CIE and BIE primarily results from the timing of revenue recognized relative to its billings. The amount of revenue recognized during the three months ended September 30, 2021 that was included in the June 30, 2021 BIE balance was $ 44.3 million. This revenue consists primarily of work performed during the period on contracts with customers that had advance billings. Progress billings in accounts receivable at September 30, 2021 and June 30, 2021 included retentions to be collected within one year of $ 12.8 million and $ 19.9 million, respectively. Contract retentions collectible beyond one year are included in other assets, non-current in the Condensed Consolidated Balance Sheet and totaled $ 2.6 million as of September 30, 2021 and $ 3.1 million as of June 30, 2021. Disaggregated Revenue Revenue disaggregated by reportable segment is presented in Note 9 - Segment Information. The following series of tables presents revenue disaggregated by geographic area where the work was performed and by contract type: Geographic Disaggregation: Three Months Ended September 30, 2021 September 30, 2020 (In thousands) United States $ 153,284 $ 161,377 Canada 13,510 19,611 Other international 1,299 1,783 Total Revenue $ 168,093 $ 182,771 Contract Type Disaggregation: Three Months Ended September 30, 2021 September 30, 2020 (In thousands) Fixed-price contracts $ 102,065 $ 133,356 Time and materials and other cost reimbursable contracts 66,028 49,415 Total Revenue $ 168,093 $ 182,771 -9- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Typically, we assume more risk with fixed-price contracts since increases in costs to perform the work may not be recoverable. However, these types of contracts typically offer higher profits than time and materials and other cost reimbursable contracts when completed at or below the costs originally estimated. The profitability of time and materials and other cost reimbursable contracts is typically lower than fixed-price contracts and is usually less volatile than fixed-price contracts since the profit component is factored into the rates charged for labor, equipment and materials, or is expressed in the contract as a percentage of the reimbursable costs incurred. Other Our results of operations were materially impacted by an increase in the forecasted costs to complete a large capital project in the Utility and Power Infrastructure segment, which resulted in a decrease in gross profit of $ 5.9 million in the three months ended September 30, 2021. The change in estimate was principally due to unexpected equipment repairs during commissioning that delayed the scheduled completion and increased the estimated costs to complete. We achieved a critical performance milestone in the second quarter of fiscal 2022, which significantly reduced our financial exposure. Note 3 – Leases We enter into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. Real estate leases accounted for approximately 93 % of all right-of-use assets as of September 30, 2021 . Most real estate and information technology equipment leases generally have fixed payments that follow an agreed upon payment schedule and have remaining lease terms ranging from less than a year to 14 years. Construction equipment leases generally have "month-to-month" lease terms that automatically renew as long as the equipment remains in use. The components of lease expense in the Condensed Consolidated Statements of Income are as follows: Three Months Ended September 30, 2021 September 30, 2020 Lease expense Location of Expense (in thousands) Operating lease expense Cost of revenue and Selling, general and administrative expenses $ 2,092 $ 2,488 Short-term lease expense (1) Cost of revenue 5,571 5,975 Total lease expense $ 7,663 $ 8,463 (1) Primarily represents the lease expense of construction equipment that is subject to month-to-month rental agreements with expected rental durations of less than one year. The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in our Condensed Consolidated Balance Sheets, were as follows: September 30, 2021 Maturity Analysis: (in thousands) Remainder of Fiscal 2022 $ 5,412 Fiscal 2023 4,752 Fiscal 2024 3,608 Fiscal 2025 3,160 Fiscal 2026 2,882 Thereafter 11,220 Total future operating lease payments 31,034 Imputed interest ( 5,513 ) Net present value of future lease payments 25,521 Less: current portion of operating lease liabilities 5,570 Non-current operating lease liabilities $ 19,951 -10- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of September 30, 2021 : Weighted-average remaining lease term (in years) 7.2 years Weighted-average discount rate 5.2 % Supplemental cash flow information related to leases is as follows: Three Months Ended September 30, 2021 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating lease payments $ 2,188 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 882 Note 4 – Intangible Assets Including Goodwill Goodwill The changes in the carrying value of goodwill by segment are as follows: Utility and Power Infrastructure Process and Industrial Facilities Storage and Terminal Solutions Total (In thousands) Net balance at June 30, 2021 $ 6,984 $ 26,878 $ 26,774 $ 60,636 Translation adjustment (1) ( 30 ) ( 8 ) ( 58 ) ( 96 ) Net balance at September 30, 2021 $ 6,954 $ 26,870 $ 26,716 $ 60,540 (1) The translation adjustments relate to the periodic translation of Canadian Dollar and South Korean Won denominated goodwill recorded as a part of prior acquisitions in Canada and South Korea, in which the local currency was determined to be the functional currency. We test our goodwill for impairment annually as of May 31st. While there continues to be uncertainty around the near-term level of spending by some of our customers due to the impacts of the COVID-19 pandemic and the timing of the economic recovery in certain energy markets, we concluded, that based on the totality of both positive and negative factors, no impairment indicators existed at September 30, 2021. However, if customer spending levels do not improve or if the outlook in certain key markets deteriorates, we may need to perform an interim goodwill impairment test, which could result in an impairment. Other Intangible Assets Information on the carrying value of other intangible assets is as follows: At September 30, 2021 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,483 $ ( 2,074 ) $ 409 Customer-based 6 to 15 17,260 ( 11,575 ) 5,685 Total amortizing intangible assets $ 19,743 $ ( 13,649 ) $ 6,094 -11- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) At June 30, 2021 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,483 $ ( 2,031 ) $ 452 Customer-based 6 to 15 17,354 ( 11,192 ) 6,162 Total amortizing intangible assets $ 19,837 $ ( 13,223 ) $ 6,614 Amortization expense totaled $ 0.5 million and $ 0.6 million during the three months ended September 30, 2021 and September 30, 2020, respectively. We estimate that the remaining amortization expense related to September 30, 2021 amortizing intangible assets will be as follows (in thousands): Period ending: Remainder of Fiscal 2022 $ 1,297 Fiscal 2023 1,729 Fiscal 2024 1,416 Fiscal 2025 1,097 Fiscal 2026 555 Total estimated remaining amortization expense at September 30, 2021 $ 6,094 Note 5 – Debt 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 30, 2021, availability under the ABL Facility was $ 32.1 million and there were $ 43.1 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 equal to any of a base rate (“Base Rate”), Canadian prime 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 %; (iii) LIBOR rate for one month period plus 1.00 %; and (iv) 1.00 %. Depending on the amount of average availability, the applicable margin is between 1.00 % to 1.50 % for either U.S. Base Rate Loans 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. -12- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) 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 the date we commenced the ABL Facility. Interest expense during the three months ended September 30, 2021 included $1.5 million of accelerated amortization of deferred debt amendment fees associated with the Prior Credit Agreement. Note 6 – Income Taxes Effective Tax Rate Our effective tax rates were 23.1 % and ( 9.8 )% for the three months ended September 30, 2021 and September 30, 2020, respectively. The effective tax rate for the three months ended September 30, 2020 was negatively impacted by a $ 1.0 million deferred tax asset adjustment. Net Operating Loss Carryback and Refund of Prior Years Overpayment Through provisions in the CARES Act, we had income tax benefits of $ 5.2 million during fiscal 2021 and $ 0.3 million during the three months ended September 30, 2021 from the ability to carryback the fiscal 2021 federal net operating loss to a period with a higher statutory federal income tax rate. We estimate that we will receive a $ 13.6 million tax refund in connection with this carryback, which is included in income taxes receivable in the Condensed Consolidated Balance Sheets. In addition, we expect to receive a $ 2.4 million tax refund in connection with overpayments from prior years, which is included in income taxes receivable in the Condensed Consolidated Balance Sheets. Deferred Payroll Taxes We have deferred $ 11.1 million of U.S. payroll tax as of September 30, 2021 through provisions of CARES Act. We must repay half of the deferred payroll tax by December 31, 2021 and the remainder by December 31, 2022. The current portion of deferred payroll taxes is included within accrued wages and benefits and the non-current portion is included within other liabilities, non-current in the Condensed Consolidated Balance Sheets. Note 7 – Commitments and Contingencies Insurance Reserves We maintain insurance coverage for various aspects of its operations. However, exposure to potential losses is retained through the use of deductibles, self-insured retentions and coverage limits. -13- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Typically, our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of our services and provide warranties for materials and workmanship. We may also be required to name the customer as an additional insured up to the limits of insurance available, or we may be required to purchase special insurance policies or surety bonds for specific customers or provide letters of credit in lieu of bonds to satisfy performance and financial guarantees on some projects. We maintain a performance and payment bonding line sufficient to support the business. We generally require our subcontractors to indemnify us and our customer and name us as an additional insured for activities arising out of the subcontractors’ work. We also require certain subcontractors to provide additional insurance policies, including surety bonds in favor of us, to secure the subcontractors’ work or as required by the subcontract. There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against a valid claim or loss under the contracts with our customers. Unpriced Change Orders and Claims Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $ 15.3 million at September 30, 2021 and $ 14.6 million at June 30, 2021. Generally, collection of amounts related to unpriced change orders and claims is expected within twelve months. However, since customers may not pay these amounts until final resolution of related claims, collection of these amounts may extend beyond one year. Other During the third quarter of fiscal 2020, we commenced litigation in an effort to collect accounts receivable from an iron and steel customer following the deterioration of the relationship in the second quarter of fiscal 2020. The unpaid receivable balance at September 30, 2021 was $ 17.0 million. Litigation is unpredictable, however, based on the terms of the contract with this customer, we believe we are entitled to collect the full amount owed under the contract. We and our subsidiaries are participants in various legal actions. It is the opinion of management that none of the other known legal actions, including a contract dispute with a customer involving the construction of a crude terminal, will have a material impact on our financial position, results of operations or liquidity. Note 8 – Earnings per Common Share Basic earnings per share (“Basic EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share (“Diluted EPS”) includes the dilutive effect of stock options and nonvested deferred shares. In the event we report a loss, stock options and nonvested deferred shares are not included since they are anti-dilutive. The computation of basic and diluted earnings per share is as follows: Three Months Ended September 30, 2021 September 30, 2020 (In thousands, except per share data) Basic EPS: Net loss $ ( 17,538 ) $ ( 3,037 ) Weighted average shares outstanding 26,611 26,265 Basic loss per share $ ( 0.66 ) $ ( 0.12 ) Diluted EPS: Diluted weighted average shares 26,611 26,265 Diluted loss per share $ ( 0.66 ) $ ( 0.12 ) -14- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 9 – Segment Information We report our results of operations through three reportable segments: Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions. • 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 as 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. We evaluate performance and allocate resources based on operating income. We record intersegment sales and transfers at cost; therefore, no intercompany profit or loss is recognized. In addition, corporate selling, general and administrative expenses are reported separately from the three reportable segments. Segment assets consist primarily of accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, property, plant and equipment, right-of-use lease assets, goodwill and other intangible assets. -15- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Results of Operations (In thousands) Three Months Ended September 30, 2021 September 30, 2020 Gross revenue Utility and Power Infrastructure $ 57,204 $ 60,671 Process and Industrial Facilities 45,210 46,728 Storage and Terminal Solutions 68,312 77,596 Total gross revenue $ 170,726 $ 184,995 Less: Inter-segment revenue Process and Industrial Facilities $ 1,305 $ 797 Storage and Terminal Solutions 1,328 1,427 Total inter-segment revenue $ 2,633 $ 2,224 Consolidated revenue Utility and Power Infrastructure $ 57,204 $ 60,671 Process and Industrial Facilities 43,905 45,931 Storage and Terminal Solutions 66,984 76,169 Total consolidated revenue $ 168,093 $ 182,771 Gross profit (loss) Utility and Power Infrastructure $ ( 6,107 ) $ 6,913 Process and Industrial Facilities 2,871 3,659 Storage and Terminal Solutions 413 3,778 Corporate ( 685 ) — Total gross profit (loss) $ ( 3,508 ) $ 14,350 Selling, general and administrative expenses Utility and Power Infrastructure $ 3,050 $ 2,222 Process and Industrial Facilities 2,762 4,050 Storage and Terminal Solutions 4,506 5,143 Corporate 6,311 6,713 Total selling, general and administrative expenses $ 16,629 $ 18,128 Restructuring costs Utility and Power Infrastructure $ 9 $ 11 Process and Industrial Facilities 7 ( 500 ) Storage and Terminal Solutions ( 33 ) 13 Corporate 622 156 Total restructuring costs $ 605 $ ( 320 ) Operating income (loss) Utility and Power Infrastructure $ ( 9,166 ) $ 4,680 Process and Industrial Facilities 102 109 Storage and Terminal Solutions ( 4,060 ) ( 1,378 ) Corporate ( 7,618 ) ( 6,869 ) Total operating loss $ ( 20,742 ) $ ( 3,458 ) -16- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Total assets by segment were as follows: September 30, 2021 June 30, 2021 Utility and Power Infrastructure $ 107,077 $ 81,717 Process and Industrial Facilities 80,315 106,619 Storage and Terminal Solutions 155,730 160,782 Corporate 107,155 118,438 Total segment assets $ 450,277 $ 467,556 Note 10 – Restructuring Costs In fiscal 2020, we initiated a business improvement plan to increase profitability and reduce our cost structure due to our strategic initiative to exit the domestic iron and steel industry and the decline in revenue caused by the ongoing effects of the COVID-19 pandemic and related market disruptions. The business improvement plan consists of discretionary cost reductions, workforce reductions, reduction of capital expenditures and the reduction in size or closure of certain offices in order to increase the utilization of our staff and bring the cost structure of the business in line with revenue volumes. We incurred $0.6 million of restructuring costs during the three months ended September 30, 2021 and $21.4 million of restructuring costs since inception of the plan. The restructuring costs consist primarily of severance costs, facility closure costs, and other liabilities as a result of exiting certain operations. We expect to substantially complete this initiative in fiscal 2022. -17- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Restructuring costs under our business improvement plan are classified as follows: Three Months Ended Since Inception of Business Improvement Plan September 30, 2021 September 30, 2020 (In thousands) Utility and Power Infrastructure Severance and other personnel-related costs $ 9 $ 7 $ 2,548 Facility costs — 4 349 Other intangible asset impairments — — 1,150 Total Utility and Power Infrastructure $ 9 $ 11 $ 4,047 Process and Industrial Facilities Severance and other personnel-related costs $ 5 $ ( 492 ) $ 9,123 Facility costs — ( 119 ) 3,187 Other intangible asset impairments — — 375 Other costs 2 111 428 Total Process and Industrial Facilities $ 7 $ ( 500 ) $ 13,113 Storage and Terminal Solutions Severance and other personnel-related costs $ ( 33 ) $ 13 $ 1,544 Facility costs — — 879 Total Storage and Terminal Solutions $ ( 33 ) $ 13 $ 2,423 Corporate Severance and other personnel-related costs $ 44 $ 6 $ 1,128 Facility costs 16 150 98 Other costs 562 — 562 Total Corporate $ 622 $ 156 $ 1,788 Restructuring Costs by Type: Severance and other personnel-related costs $ 25 $ ( 466 ) $ 14,343 Facility costs 16 35 4,513 Other intangible asset impairments — — 1,525 Other costs 564 111 990 Total restructuring costs $ 605 $ ( 320 ) $ 21,371 The restructuring reserve is included in other accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets. The table below is a reconciliation of the beginning and ending restructuring reserve balance under the business improvement plan (in thousands): Balance as of June 30, 2021 $ 2,435 Cash payments ( 272 ) Other 29 Balance as of September 30, 2021 $ 2,192 -18- Table of Contents