MATRIX SERVICE CO 10-Q

Item 1. Financial Statements Matrix Service Company Condensed Consolidated Statements of Income (In thousands, except per share data) (unaudited) Three Months Ended Six Months Ended December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Revenue $ 161,965 $ 167,468 $ 330,058 $ 350,239 Cost of revenue 158,758 152,155 330,359 320,576 Gross profit (loss) 3,207 15,313 ( 301 ) 29,663 Selling, general and administrative expenses 15,922 16,724 32,551 34,852 Restructuring costs 695 5,045 1,300 4,725 Operating loss ( 13,410 ) ( 6,456 ) ( 34,152 ) ( 9,914 ) Other income (expense): Interest expense (Note 5) ( 502 ) ( 358 ) ( 2,501 ) ( 733 ) Interest income 29 38 50 71 Other ( 60 ) 973 ( 143 ) 2,006 Loss before income tax expense (benefit) ( 13,943 ) ( 5,803 ) ( 36,746 ) ( 8,570 ) Provision (benefit) for federal, state and foreign income taxes 10,976 ( 1,212 ) 5,711 ( 942 ) Net loss $ ( 24,919 ) $ ( 4,591 ) $ ( 42,457 ) $ ( 7,628 ) Basic loss per common share $ ( 0.93 ) $ ( 0.17 ) $ ( 1.59 ) $ ( 0.29 ) Diluted loss per common share $ ( 0.93 ) $ ( 0.17 ) $ ( 1.59 ) $ ( 0.29 ) Weighted average common shares outstanding: Basic 26,749 26,489 26,680 26,377 Diluted 26,749 26,489 26,680 26,377 See accompanying notes. -1- Table of Contents Matrix Service Company Condensed Consolidated Statements of Comprehensive Income (In thousands) (unaudited) Three Months Ended Six Months Ended December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Net loss $ ( 24,919 ) $ ( 4,591 ) $ ( 42,457 ) $ ( 7,628 ) Other comprehensive income (loss), net of tax: Foreign currency translation gain (loss) (net of tax expense (benefit) of $(8) and $46 for the three and six months ended December 31, 2021, respectively, and $41 and $53 for the three and six months ended December 31, 2020, respectively) 99 819 ( 696 ) 1,223 Comprehensive loss $ ( 24,820 ) $ ( 3,772 ) $ ( 43,153 ) $ ( 6,405 ) See accompanying notes. -2- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands) (unaudited) December 31, 2021 June 30, 2021 Assets Current assets: Cash and cash equivalents (Note 1) $ 65,040 $ 83,878 Restricted cash (Note 1) 2,600 — Accounts receivable, less allowances (December 31, 2021—$547 and June 30, 2021—$898) 121,601 148,030 Costs and estimated earnings in excess of billings on uncompleted contracts 34,503 30,774 Inventories 6,297 7,342 Income taxes receivable 16,236 16,965 Other current assets 8,460 4,230 Total current assets 254,737 291,219 Property, plant and equipment at cost: Land and buildings 41,545 41,633 Construction equipment 94,091 94,453 Transportation equipment 50,051 50,510 Office equipment and software 43,062 42,706 Construction in progress 282 493 Total property, plant and equipment - at cost 229,031 229,795 Accumulated depreciation ( 166,296 ) ( 160,388 ) Property, plant and equipment - net 62,735 69,407 Restricted cash, non-current (Note 1) 25,000 — Operating lease right-of-use assets 20,414 22,412 Goodwill 60,546 60,636 Other intangible assets, net of accumulated amortization 5,660 6,614 Deferred income taxes — 5,295 Other assets, non-current 11,472 11,973 Total assets $ 440,564 $ 467,556 See accompanying notes. -3- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands, except share data) (unaudited) December 31, 2021 June 30, 2021 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 55,953 $ 60,920 Billings on uncompleted contracts in excess of costs and estimated earnings 84,859 53,832 Accrued wages and benefits 15,968 21,008 Accrued insurance 6,175 6,568 Operating lease liabilities 5,364 5,747 Other accrued expenses 5,610 5,327 Total current liabilities 173,929 153,402 Deferred income taxes 33 34 Operating lease liabilities 18,925 20,771 Other liabilities, non-current 2,067 7,810 Total liabilities 194,954 182,017 Commitments and contingencies Stockholders’ equity: Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of December 31, 2021 and June 30, 2021; 26,773,975 and 26,549,438 shares outstanding as of December 31, 2021 and June 30, 2021 279 279 Additional paid-in capital 135,913 137,575 Retained earnings 132,721 175,178 Accumulated other comprehensive loss ( 7,445 ) ( 6,749 ) 261,468 306,283 Less: Treasury stock, at cost — 1,114,242 shares as of December 31, 2021, and 1,338,779 shares as of June 30, 2021 ( 15,858 ) ( 20,744 ) Total stockholders' equity 245,610 285,539 Total liabilities and stockholders’ equity $ 440,564 $ 467,556 See accompanying notes. -4- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Six Months Ended December 31, 2021 December 31, 2020 Operating activities: Net loss $ ( 42,457 ) $ ( 7,628 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 7,841 9,287 Stock-based compensation expense 3,735 4,199 Operating lease impairment due to restructuring — 242 Deferred income tax 5,340 ( 760 ) Gain on sale of property, plant and equipment ( 102 ) ( 1,186 ) Provision for uncollectible accounts ( 35 ) ( 41 ) Accelerated amortization of deferred debt amendment fees (Note 5) 1,518 — Other 45 200 Changes in operating assets and liabilities increasing (decreasing) cash: Accounts receivable 26,464 9,644 Costs and estimated earnings in excess of billings on uncompleted contracts ( 3,729 ) 18,150 Inventories 1,045 ( 304 ) Other assets and liabilities ( 3,784 ) ( 6,095 ) Accounts payable ( 4,866 ) ( 21,788 ) Billings on uncompleted contracts in excess of costs and estimated earnings 31,027 ( 1,645 ) Accrued expenses ( 10,657 ) 3,549 Net cash provided by operating activities 11,385 5,824 Investing activities: Capital expenditures ( 569 ) ( 3,068 ) Proceeds from asset sales 108 1,634 Net cash used by investing activities $ ( 461 ) $ ( 1,434 ) See accompanying notes. -5- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Six Months Ended December 31, 2021 December 31, 2020 Financing activities: Advances under senior secured revolving credit facility $ — $ 1,125 Repayments of advances under senior secured revolving credit facility — ( 10,913 ) Payment of debt amendment fees ( 1,010 ) ( 663 ) Issuances of common stock 199 — Proceeds from issuance of common stock under employee stock purchase plan 143 155 Repurchase of common stock for payment of statutory taxes due on equity-based compensation ( 853 ) ( 1,549 ) Other ( 236 ) — Net cash used by financing activities ( 1,757 ) ( 11,845 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 405 ) 900 Increase (decrease) in cash, cash equivalents and restricted cash 8,762 ( 6,555 ) 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) $ 92,640 $ 93,481 Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Income taxes $ ( 341 ) $ 197 Interest, including payment of debt amendment fees $ 1,798 $ 1,039 Non-cash investing and financing activities: Purchases of property, plant and equipment on account $ 5 $ 11 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, September 30, 2021 $ 279 $ 135,308 $ 157,640 $ ( 17,385 ) $ ( 7,544 ) $ 268,298 Net loss — — ( 24,919 ) — — ( 24,919 ) Other comprehensive income — — — — 99 99 Exercise of stock options (19,550 shares) — ( 189 ) — 388 — 199 Issuance of deferred shares (51,319 shares) — ( 1,018 ) — 1,018 — — Treasury shares sold to Employee Stock Purchase Plan (6,078 shares) — ( 54 ) — 121 — 67 Stock-based compensation expense — 1,866 — — — 1,866 Balances, December 31, 2021 $ 279 $ 135,913 $ 132,721 $ ( 15,858 ) $ ( 7,445 ) $ 245,610 Balances, September 30, 2020 $ 279 $ 132,687 $ 203,365 $ ( 22,342 ) $ ( 7,969 ) $ 306,020 Net loss — — ( 4,591 ) — — ( 4,591 ) Other comprehensive income — — — — 819 819 Issuance of deferred shares (35,615 shares) — ( 632 ) — 632 — — Treasury shares sold to Employee Stock Purchase Plan (8,585 shares) — ( 79 ) — 152 — 73 Treasury shares purchased to satisfy tax withholding obligations (1,436 shares) — — — ( 13 ) — ( 13 ) Stock-based compensation expense — 1,981 — — — 1,981 Balances, December 31, 2020 $ 279 $ 133,957 $ 198,774 $ ( 21,571 ) $ ( 7,150 ) $ 304,289 -7- Table of Contents Matrix Service Company Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share data) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balances, June 30, 2021 $ 279 $ 137,575 $ 175,178 $ ( 20,744 ) $ ( 6,749 ) $ 285,539 Net loss — — ( 42,457 ) — — ( 42,457 ) Other comprehensive loss — — — — ( 696 ) ( 696 ) Exercise of stock options (19,550 shares) — ( 189 ) — 388 — 199 Issuance of deferred shares (268,403 shares) — ( 5,102 ) — 5,102 — — Treasury shares sold to Employee Stock Purchase Plan (13,287 shares) — ( 106 ) — 249 — 143 Treasury shares purchased to satisfy tax withholding obligations (76,703 shares) — — — ( 853 ) — ( 853 ) Stock-based compensation expense — 3,735 — — — 3,735 Balances, December 31, 2021 $ 279 $ 135,913 $ 132,721 $ ( 15,858 ) $ ( 7,445 ) $ 245,610 Balances, June 30, 2020 $ 279 $ 138,966 $ 206,402 $ ( 29,385 ) $ ( 8,373 ) $ 307,889 Net loss — — ( 7,628 ) — — ( 7,628 ) Other comprehensive income — — — — 1,223 1,223 Issuance of deferred shares (514,318 shares) — ( 9,067 ) — 9,067 — — Treasury shares sold to Employee Stock Purchase Plan (17,315 shares) — ( 141 ) — 296 — 155 Treasury shares purchased to satisfy tax withholding obligations (170,201 shares) — — — ( 1,549 ) — ( 1,549 ) Stock-based compensation expense — 4,199 — — — 4,199 Balances, December 31, 2020 $ 279 $ 133,957 $ 198,774 $ ( 21,571 ) $ ( 7,150 ) $ 304,289 -8- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 – Basis of Presentation and Significant Accounting Policies Basis of Presentation The condensed consolidated financial statements include the accounts of Matrix Service Company and its subsidiaries (“Matrix”, “we”, “our”, “us”, “its” or the “Company”), unless otherwise indicated. Intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. The information furnished reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations, cash flows and financial position for the interim periods presented. The accompanying condensed 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 and six month periods ended December 31, 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 while we transition to our new card administrator. We have included this restricted cash in current assets in our Condensed Consolidated Balance Sheets since we expect to terminate 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): December 31, 2021 June 30, 2021 Cash and cash equivalents $ 65,040 $ 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 $ 92,640 $ 83,878 Note 2 – Revenue Remaining Performance Obligations We had $ 396.8 million of remaining performance obligations yet to be satisfied as of December 31, 2021 . We expect to recognize $ 326.6 million of our remaining performance obligations as revenue within the next twelve months. -9- 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 payments, which usually differs from the timing of revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets and liabilities are calculated on a contract-by-contract basis and reported on a net basis at the end of each period and are classified as current. We present our contract assets in the balance sheet as Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts ("CIE"). CIE consists of revenue recognized in excess of billings. We present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and Estimated Earnings ("BIE"). BIE consists of billings in excess of revenue recognized. The following table provides information about CIE and BIE: December 31, 2021 June 30, 2021 Change (in thousands) Costs and estimated earnings in excess of billings on uncompleted contracts $ 34,503 $ 30,774 $ 3,729 Billings on uncompleted contracts in excess of costs and estimated earnings ( 84,859 ) ( 53,832 ) ( 31,027 ) Net contract liabilities $ ( 50,356 ) $ ( 23,058 ) $ ( 27,298 ) 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 six months ended December 31, 2021 that was included in the June 30, 2021 BIE balance was $ 48.4 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 December 31, 2021 and June 30, 2021 included retentions to be collected within one year of $ 13.6 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 $ 2.1 million as of December 31, 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 Six Months Ended December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 (In thousands) United States $ 145,917 $ 146,200 $ 299,201 $ 307,577 Canada 15,260 19,132 28,770 38,743 Other international 788 2,136 2,087 3,919 Total Revenue $ 161,965 $ 167,468 $ 330,058 $ 350,239 Contract Type Disaggregation: Three Months Ended Six Months Ended December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 (In thousands) Fixed-price contracts $ 100,841 $ 113,871 $ 202,906 $ 247,227 Time and materials and other cost reimbursable contracts 61,124 53,597 127,152 103,012 Total Revenue $ 161,965 $ 167,468 $ 330,058 $ 350,239 -10- 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 for the first quarter of fiscal 2022 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. The change in forecasted costs 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 and resulted in no change to the expected outcome of the project. Our results of operations were materially impacted by an increase in the costs required to complete a thermal energy storage tank repair and maintenance project in the Storage and Terminal Solutions segment, which resulted in a decrease in gross profit of $ 2.8 million and $ 5.5 million in the three and six months ended December 31, 2021, respectively. The increase in costs was primarily due to changes in repair scope, expanded client weld testing and associated schedule delays. We expect to complete these repairs in the second half of fiscal 2022. 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 94 % of all right-of-use assets as of December 31, 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 Six Months Ended December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Lease expense Location of Expense (in thousands) Operating lease expense Cost of revenue and Selling, general and administrative expenses $ 1,878 $ 2,310 $ 3,970 $ 4,798 Short-term lease expense (1) Cost of revenue 5,292 6,274 10,863 12,248 Total lease expense $ 7,170 $ 8,584 $ 14,833 $ 17,046 (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. -11- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in our Condensed Consolidated Balance Sheets, were as follows: December 31, 2021 Maturity Analysis: (in thousands) Remainder of Fiscal 2022 $ 3,499 Fiscal 2023 4,881 Fiscal 2024 3,667 Fiscal 2025 3,160 Fiscal 2026 2,882 Thereafter 11,220 Total future operating lease payments 29,309 Imputed interest ( 5,020 ) Net present value of future lease payments 24,289 Less: current portion of operating lease liabilities 5,364 Non-current operating lease liabilities $ 18,925 The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of December 31, 2021 : Weighted-average remaining lease term (in years) 7.3 years Weighted-average discount rate 5.2 % Supplemental cash flow information related to leases is as follows: Six Months Ended December 31, 2021 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating lease payments $ 4,197 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 1,344 Note 4 – Goodwill and Other Intangible Assets 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) ( 28 ) ( 7 ) ( 55 ) ( 90 ) Net balance at December 31, 2021 $ 6,956 $ 26,871 $ 26,719 $ 60,546 (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. -12- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) 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 December 31, 2021. However, based on future operating performance and economic factors, including our future share price, 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 December 31, 2021 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,483 $ ( 2,116 ) $ 367 Customer-based 6 to 15 17,274 ( 11,981 ) 5,293 Total amortizing intangible assets $ 19,757 $ ( 14,097 ) $ 5,660 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 $ 0.4 million and $ 1.0 million during the three and six months ended December 31, 2021 and $ 0.5 million and $ 1.1 million during the three and six months ended December 31, 2020, respectively. We estimate that the remaining amortization expense related to December 31, 2021 amortizing intangible assets will be as follows (in thousands): Period ending: Remainder of Fiscal 2022 $ 864 Fiscal 2023 1,729 Fiscal 2024 1,416 Fiscal 2025 1,096 Fiscal 2026 555 Total estimated remaining amortization expense at December 31, 2021 $ 5,660 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. -13- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) 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. The ABL Facility matures and any outstanding amounts become due and payable on September 9, 2026 . At December 31, 2021 , our borrowing base was $ 70.1 million and we had $ 33.4 million in letters of credit outstanding issued by Bank of Montreal, which resulted in availability of $ 36.7 million under the ABL Facility. In addition, there were $ 9.5 million in letters of credit outstanding issued by JPMorgan Chase Bank, N.A. ("JPMorgan"). JPMorgan was the administrative agent of our former senior secured revolving credit facility, which was terminated and replaced with the ABL Facility. The JPMorgan letters of credit outstanding as of December 31, 2021 were in the process of being replaced by Bank of Montreal letters of credit, and that process was substantially complete at the end of January. The letters of credit outstanding from Bank of Montreal had reduced from $ 33.4 million as of December 31, 2021 to $ 23.6 million as of January 31, 2022. In addition, the letters of credit outstanding from JPMorgan had reduced from $ 9.5 million as of December 31, 2021 to $ 0.2 million as of January 31, 2022. 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. 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 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. We are in compliance with all covenants of the ABL Facility as of December 31, 2021. 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, 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 was set to expire 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. As of December 31, 2021 there were $ 9.5 million in letters of credit outstanding under the Prior Credit Agreement, which decreased to $ 0.2 million outstanding as of January 31, 2022. Interest expense during the six months ended December 31, 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 ( 78.7 )% and ( 15.5 )% for the three and six months ended December 31, 2021 , compared to 20.9 % and 11.0 % during the three and six months ended December 31, 2020, respectively. The effective tax rates in fiscal 2022 were negatively impacted by a $ 14.2 million valuation allowance placed on our deferred tax assets during the second quarter. The effective tax rates in fiscal 2021 were negatively impacted by deferred tax asset adjustments of $ 0.2 million and $ 1.2 million during the three and six months ended December 31, 2020, respectively. -14- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) In determining the need for a valuation allowance on deferred tax assets, the accounting standards provide that the existence of a cumulative loss over a three-year period generally precludes the use of management’s projections of future taxable income. Consequently, we have recorded a full valuation allowance against the deferred tax assets in the U.S. taxable jurisdiction in the amount of $14.2 million. These assets are primarily comprised of federal net operating losses, which have an indefinite carryforward, federal tax credits and those state net operating losses for which a valuation allowance did not previously exist. To the extent the Company generates taxable income in the future, or cumulative losses are no longer present and our future projections for growth or tax planning strategies are demonstrated, we will realize the benefit associated with the net operating losses for which the valuation allowance has been provided. Net Operating Loss Carryback Refund Through provisions in the CARES Act, we had an income tax benefit 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 $ 12.6 million tax refund in connection with this carryback, which is included in income taxes receivable in the Condensed Consolidated Balance Sheets. Refund of Overpayment of Estimated Taxes In January 2022, we received a $ 2.4 million tax refund in connection with overpayments of estimated taxes from prior years, which was included in income taxes receivable in the Condensed Consolidated Balance Sheets as of December 31, 2021. Deferred Payroll Taxes As of September 30, 2021, we deferred a total of $ 11.1 million of U.S. payroll tax through provisions of CARES Act. We repaid half of the deferred payroll tax outstanding during the three months ended December 31, 2021 and must repay the remaining balance by December 31, 2022. The remaining balance of deferred payroll taxes is included within accrued wages and benefits in the Condensed Consolidated Balance Sheets. Note 7 – Commitments and Contingencies Insurance Reserves We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses through the use of deductibles, self-insured retentions and coverage limits. Typically, our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of our services and provide warranties for materials and workmanship. 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 $ 10.1 million at December 31, 2021 and $ 14.6 million at June 30, 2021. 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, since customers may not pay these amounts until final resolution of related claims, collection of these amounts may extend beyond one year. -15- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) 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 December 31, 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 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 Six Months Ended December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 (In thousands, except per share data) Basic EPS: Net loss $ ( 24,919 ) $ ( 4,591 ) $ ( 42,457 ) $ ( 7,628 ) Weighted average shares outstanding 26,749 26,489 26,680 26,377 Basic loss per share $ ( 0.93 ) $ ( 0.17 ) $ ( 1.59 ) $ ( 0.29 ) Diluted EPS: Diluted weighted average shares 26,749 26,489 26,680 26,377 Diluted loss per share $ ( 0.93 ) $ ( 0.17 ) $ ( 1.59 ) $ ( 0.29 ) 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 engineering, fabrication, and construction services for LNG utility peak shaving facilities, and provide construction and maintenance services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configuration. • 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. -16- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) • Storage and Terminal Solutions : consists of work related to aboveground crude oil and refined product 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. -17- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Results of Operations (In thousands) Three Months Ended Six Months Ended December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Gross revenue Utility and Power Infrastructure $ 54,752 $ 52,023 $ 111,956 $ 112,694 Process and Industrial Facilities 52,037 51,747 97,247 98,475 Storage and Terminal Solutions 57,607 65,434 125,919 143,030 Total gross revenue $ 164,396 $ 169,204 $ 335,122 $ 354,199 Less: Inter-segment revenue Process and Industrial Facilities $ 1,721 $ 485 $ 3,026 $ 1,282 Storage and Terminal Solutions 710 1,251 2,038 2,678 Total inter-segment revenue $ 2,431 $ 1,736 $ 5,064 $ 3,960 Consolidated revenue Utility and Power Infrastructure $ 54,752 $ 52,023 $ 111,956 $ 112,694 Process and Industrial Facilities 50,316 51,262 94,221 97,193 Storage and Terminal Solutions 56,897 64,183 123,881 140,352 Total consolidated revenue $ 161,965 $ 167,468 $ 330,058 $ 350,239 Gross profit (loss) Utility and Power Infrastructure $ ( 491 ) $ 5,597 $ ( 6,598 ) $ 12,510 Process and Industrial Facilities 4,235 7,864 7,106 11,523 Storage and Terminal Solutions ( 172 ) 1,852 241 5,630 Corporate ( 365 ) — ( 1,050 ) — Total gross profit (loss) $ 3,207 $ 15,313 $ ( 301 ) $ 29,663 Selling, general and administrative expenses Utility and Power Infrastructure $ 3,150 $ 2,576 $ 6,200 $ 4,798 Process and Industrial Facilities 2,792 3,387 5,554 7,437 Storage and Terminal Solutions 4,280 3,919 8,786 9,062 Corporate 5,700 6,842 12,011 13,555 Total selling, general and administrative expenses $ 15,922 $ 16,724 $ 32,551 $ 34,852 Restructuring costs Utility and Power Infrastructure $ 37 $ 812 $ 46 $ 823 Process and Industrial Facilities ( 24 ) 3,364 ( 17 ) 2,864 Storage and Terminal Solutions 107 641 74 654 Corporate 575 228 1,197 384 Total restructuring costs $ 695 $ 5,045 $ 1,300 $ 4,725 Operating income (loss) Utility and Power Infrastructure $ ( 3,678 ) $ 2,209 $ ( 12,844 ) $ 6,889 Process and Industrial Facilities 1,467 1,113 1,569 1,222 Storage and Terminal Solutions ( 4,559 ) ( 2,708 ) ( 8,619 ) ( 4,086 ) Corporate ( 6,640 ) ( 7,070 ) ( 14,258 ) ( 13,939 ) Total operating loss $ ( 13,410 ) $ ( 6,456 ) $ ( 34,152 ) $ ( 9,914 ) -18- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Total assets by segment were as follows: December 31, 2021 June 30, 2021 Utility and Power Infrastructure $ 92,072 $ 81,717 Process and Industrial Facilities 78,757 106,619 Storage and Terminal Solutions 149,523 160,782 Corporate 120,212 118,438 Total segment assets $ 440,564 $ 467,556 Note 10 – Restructuring Costs In fiscal 2020, we initiated a business improvement plan to increase profitability and reduce our cost structure in order to help us become more competitive and deliver higher quality service. As a result of specific events, including the effects of the COVID-19 pandemic and related market disruptions, the Company expanded its business improvement plan. The business improvement plan consisted of an initial phase 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. In fiscal 2022, we commenced a second phase of our plan to focus on centralization of support functions, including business development, accounting, human resources, procurement and project services into shared service centers. We incurred $0.7 million and $1.3 million of restructuring costs during the three and six months ended December 31, 2021 and $22.1 million of restructuring costs since inception of the plan. The restructuring costs consist primarily of severance costs, facility closure costs, consulting fees and other liabilities. -19- 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 Six Months Ended Since Inception of Business Improvement Plan December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 (In thousands) Utility and Power Infrastructure Severance and other personnel-related costs $ 36 $ 811 $ 45 $ 818 $ 2,584 Facility costs — 1 — 5 348 Other intangible asset impairments — — — — 1,150 Other costs 1 — 1 — 1 Total Utility and Power Infrastructure $ 37 $ 812 $ 46 $ 823 $ 4,083 Process and Industrial Facilities Severance and other personnel-related costs $ ( 27 ) $ 3,082 $ ( 22 ) $ 2,590 $ 9,096 Facility costs 1 134 1 15 3,189 Other intangible asset impairments — — — — 375 Other costs 2 148 4 259 430 Total Process and Industrial Facilities $ ( 24 ) $ 3,364 $ ( 17 ) $ 2,864 $ 13,090 Storage and Terminal Solutions Severance and other personnel-related costs $ 102 $ 640 $ 69 $ 653 $ 1,647 Facility costs — 1 — 1 879 Other costs 5 — 5 — 5 Total Storage and Terminal Solutions $ 107 $ 641 $ 74 $ 654 $ 2,531 Corporate Severance and other personnel-related costs $ — $ 155 $ 44 $ 161 $ 1,127 Facility costs — 73 16 223 98 Other costs 575 — 1,137 — 1,137 Total Corporate $ 575 $ 228 $ 1,197 $ 384 $ 2,362 Restructuring Costs by Type: Severance and other personnel-related costs $ 111 $ 4,688 $ 136 $ 4,222 $ 14,454 Facility costs 1 209 17 244 4,514 Other intangible asset impairments — — — — 1,525 Other costs 583 148 1,147 259 1,573 Total restructuring costs $ 695 $ 5,045 $ 1,300 $ 4,725 $ 22,066 -20- Table of Contents