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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2022-02-08 · 162 added, 156 removed, 336 unchanged (49% of the section changed)

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These forward-looking statements include, among others, such things as:

• the impact to our business of the COVID-19 pandemic;

• amounts and nature of future project awards, revenue and margins from each of our segments;

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• the impact to our business of changes in crude oil, natural gas and other commodity prices;

• the impact of inflation on our operating expenses and our business operations;

• the likely impact of new or existing regulations or market forces on the demand for our services;

• the impact to our business of the COVID-19 pandemic;

• our expectations with respect to the likelihood of a future impairment;

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• any risk factors discussed in this Form 10-Q, Form 10-K for the fiscal year ended June 30, 2021, and in our other filings with the Securities and Exchange Commission;

• economic, market or business conditions in general (including the length and severity of the COVID-19 pandemic) and in the oil, natural gas, power, petrochemical, agricultural and mining industries in particular;

• economic, market or business conditions in general and in the oil, natural gas, power, petrochemical, agricultural and mining industries in particular;

• the transition to renewable energy sources and its impact on our current customer base;

• the under- or over-utilization of our work force;

• delays in the commencement or progression of major projects, whether due to COVID-19 concerns, permitting issues or other factors;

• delays in the commencement or progression of major projects, whether due to permitting issues or other factors;

• reduced creditworthiness of our customer base and the higher risk of non-payment of receivables due to volatility of crude oil, natural gas, and other commodity prices which affect our customers' businesses;

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We evaluate performance and allocate resources based on operating income.

We record intersegment sales and transfers at cost;

We eliminate intersegment sales;

therefore, no intercompany profit or loss is recognized.

In addition, corporate selling, general and administrative expenses are reported separately from the three reportable segments.

Corporate selling, general and administrative expenses are excluded from our three reportable segments in order to better align controllable costs with the responsibility of segment management, and to be consistent with how our chief operating decision-maker assesses segment performance and allocates resources.

Operational Update

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

Our project teams, in coordination with our clients, are monitoring the impact of the omicron and other 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.

The emergence of the omicron variant in the second quarter of fiscal 2022 did not have a significant impact on our existing COVID-19 safety protocols designed to maintain our safe working environment.

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.

To date, we estimate that we have reduced our cost structure by approximately $80 million, or approximately 29%, with approximately one-third of those reductions related to SG&A and the rest related to construction overhead, which is included in cost of revenue in the Condensed Consolidated Statements of Income.

Bidding activity and the volume of project awards have both improved as the economy emerges from the pandemic.

However, we have not been able to generate enough revenue to fully recover construction overhead and SG&A costs despite the significant reductions in our cost structure.

In addition, increased forecasted costs to complete certain projects have further pressured profitability during the fiscal year (see the discussion of our three and nine months results for more details).

In fiscal 2022, we commenced the second phase of our ongoing business improvement plan to focus on centralization of support functions, including business development, accounting, human resources, procurement and project services into shared service centers.

Since the beginning of fiscal 2020, we estimate that we have reduced our cost structure by approximately $82 million, or approximately 30%, with approximately one-third of those reductions related to SG&A and the rest related to construction overhead, which is included in cost of revenue in the Condensed Consolidated Statements of Income.

Financial Statements, Note 10 - Restructuring Costs, for more information about our business improvement plan.

Despite the significant reductions in our cost structure, our low revenue volume still has not allowed for the complete recovery of construction overhead or leveraging of SG&A costs.

Based on improving market conditions and strong award activity in the first half of fiscal 2022, we expect cost savings from the business improvement plan along with improving revenue volumes to positively impact earnings in the second half of fiscal 2022.

Three Months Ended December 31, 2021 Compared to the Three Months Ended December 31, 2020

Consolidated revenue was $162.0 million for the three months ended December 31, 2021, compared to $167.5 million in the same period last year.

On a segment basis, revenue decreased in the Storage and Terminal Solutions and Process and Industrial Facilities segments by $7.3 million and $1.0 million, respectively.

The decreases were partially offset by an increase in revenue of $2.8 million in the Utility and Power Infrastructure segment.

Consolidated gross profit decreased to $3.2 million in the three months ended December 31, 2021 compared to $15.3 million in the same period last year.

Gross margin decreased to 2.0% in the three months ended December 31, 2021 compared to 9.1% in the same period last year.

Gross margins in the second quarter of fiscal 2022 were negatively impacted by lower volumes, which led to the under recovery of construction overhead costs, and by a lower than previously forecasted margin on a tank repair and maintenance project in the Storage and Terminal Solutions segment.

Gross margins in fiscal 2021 were positively impacted by strong project execution, partially offset by lower than forecasted volumes, which led to under recovery of construction overhead costs.

Consolidated SG&A expenses were $15.9 million in the three months ended December 31, 2021 compared to $16.7 million in the same period a year earlier.

The decrease is primarily attributable to implemented cost reductions.

As a result of restructuring activities, we recorded $0.7 million of restructuring costs in the three months ended December 31, 2021.

Based on improving market conditions and strong bidding activity, we are expecting project awards to pick up in the fourth quarter and continue the momentum into fiscal 2023.

We expect this to result in higher revenue volume, increased cost leverage and improved earnings in the future.

Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

Consolidated revenue was $177.0 million for the three months ended March 31, 2022, compared to $148.3 million in the same period last year.

On a segment basis, revenue increased in the Process and Industrial Facilities and Utility and Power Infrastructure segments by $26.1 million and $14.6 million, respectively.

The increases were partially offset by a decrease in revenue of $12.0 million in the Storage and Terminal Solutions segment.

Consolidated gross profit (loss) decreased to ($1.8) million in the three months ended March 31, 2022 compared to $1.6 million in the same period last year.

Gross margin (loss) decreased to (1.0%) in the three months ended March 31, 2022 compared to 1.1% in the same period last year.

Gross margins in the third quarter of fiscal 2022 were negatively impacted by low revenue volume, which led to the under recovery of construction overhead costs and an increase in forecasted costs on a midstream gas processing project in the Process and Industrial Facilities segment.

Gross margins in fiscal 2021 were largely impacted negatively by a lower than previously forecasted margin on a large capital project in the Utility and Power Infrastructure segment.

These negative impacts were partially offset by increases in estimated recoveries on other completed capital projects.

Consolidated SG&A expenses were $17.0 million in the three months ended March 31, 2022 compared to $17.2 million in the same period a year earlier.

In the third quarter, we recorded $18.3 million of goodwill impairment.

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

As a result of restructuring activities, we recorded a credit of $1.6 million to restructuring costs in the three months ended March 31, 2022.

The credit was due to a favorable settlement of a restructuring obligation related to our exit from the domestic iron and steel industry in fiscal 2020.

Financial Statements, Note 10 - Restructuring Costs, for more information.

Interest expense was $0.5 million in the three months ended December 31, 2021 compared to $0.4 million in the three months ended December 31, 2020.

Interest expense in the three months ended December 31, 2021 consisted primarily of letter of credit fees, unused capacity fees and amortization of deferred debt issuance costs.

Our effective tax rates for the three months ended December 31, 2021 and December 31, 2020 were (78.7)% and 20.9%, respectively.

The effective tax rate in fiscal 2022 was negatively impacted by a $14.2 million valuation allowance placed on our deferred tax assets during the second quarter, see Item 1.

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

The effective tax rate for the three months ended December 31, 2020 was negatively impacted by deferred tax asset adjustments of $0.2 million.

For the three months ended December 31, 2021, we had a net loss of $24.9 million, or $0.93 per fully diluted share, compared to a net loss of $4.6 million, or $0.17 per fully diluted share, in the three months ended December 31, 2020.

Interest expense was $0.2 million in the three months ended March 31, 2022 compared to $0.3 million in the three months ended March 31, 2021.

Interest expense in the three months ended March 31, 2022 consisted primarily of letter of credit fees, unused capacity fees and amortization of deferred debt issuance costs.

Our effective tax rates for the three months ended March 31, 2022 and March 31, 2021 were 0.4% and 28.2%, respectively.

The effective tax rate during fiscal 2022 was impacted by valuation allowances of $7.7 million.

The income tax benefit recorded for the three months ended March 31, 2022 was the result of a change in estimate of our uncertain tax positions.

Financial Statements, Note 6 - Income Taxes, for more information about the valuation allowances.

The effective tax rates were negatively impacted by $1.9 million of valuation allowances on certain deferred tax assets in the third quarter of fiscal 2021.

For the three months ended March 31, 2022, we had a net loss of $34.9 million, or $1.30 per fully diluted share, compared to a net loss of $12.9 million, or $0.49 per fully diluted share, in the three months ended March 31, 2021.

Utility and Power Infrastructure

Revenue for the Utility and Power Infrastructure segment was $54.8 million in the three months ended December 31, 2021 compared to $52.0 million in the same period last year.

The increase is primarily due to higher volumes of power generation work.

Revenue for the Utility and Power Infrastructure segment was $59.3 million in the three months ended March 31, 2022 compared to $44.7 million in the same period last year.

The increase is primarily due to higher volumes of power delivery and power generation work.

The segment gross margin (loss) was (0.8%) in fiscal 2022 compared to (10.5%) in fiscal 2021.

The segment gross margin (loss) for the second quarter of fiscal 2022 was negatively impacted by lower margins on power delivery work bid competitively and revenue recognized on a large capital project at a margin reduced in prior periods.

In addition, segment gross margin in the second quarter of fiscal 2022 was also negatively impacted by low volumes, which led to the under recovery of construction overhead costs.

The fiscal 2021 segment gross margin was positively impacted by strong project execution, partially offset by under recovery of construction overhead costs.

The segment gross margin for the third quarter of fiscal 2022 was negatively impacted by low revenue volume, which led to the under recovery of construction overhead costs, an increase in forecasted cost on a capital project, and lower margins on capital work bid competitively.

The fiscal 2021 segment gross margin was negatively impacted by an increase in the forecasted costs to complete a large capital project.

Process and Industrial Facilities

Revenue for the Process and Industrial Facilities segment was $50.3 million in the three months ended December 31, 2021 compared to $51.3 million in the same period last year.

While segment revenue was nearly flat compared to last year, we booked $210.4 million of project awards in the first half of fiscal 2022, which includes some large capital projects that are still in the preliminary stages of engineering and construction.

As such, we expect strong revenue growth in this segment during the second half of fiscal 2022.

The segment gross margin was 8.4% for the three months ended December 31, 2021 compared to 15.3% in the same period last year.

Despite generally strong project execution, the lower segment gross margin in fiscal 2022 was the result of low volumes, which lead to under recovery of construction overhead costs.

Segment gross margin in the second quarter of fiscal 2021 was positively impacted by strong project execution and a one-time workers compensation claim, partially offset by the under recovery of construction overhead costs.

Revenue for the Process and Industrial Facilities segment was $69.0 million in the three months ended March 31, 2022 compared to $42.8 million in the same period last year.

The increase was primarily due to higher volumes of refinery maintenance and turnaround work.

The segment gross loss was (0.6%) for the three months ended March 31, 2022 compared to (0.4%) in the same period last year.

The segment gross loss in the third quarter of fiscal 2022 was negatively impacted by an increase in forecasted costs to complete a midstream gas processing project, which resulted in a $4.8 million reduction to gross profit.

The increase in forecasted costs was primarily due to performance of a, now terminated, subcontractor, which will require rework in order to meet our client's expectations.

In addition, the mix of work, which was impacted by increased reimbursable maintenance activity also contributed to lower margins.

The higher revenue led to improvement in the recovery of construction overhead costs, but the segment still had some under recovery that impacted the segment gross margin.

Project execution generally met our expectations in the third quarter of fiscal 2021.

However, segment gross margin in the same period was negatively impacted by low volumes, which led to the under recovery of construction overhead costs, and an adjustment related to the Company's assessment of the amount due on a completed project.

Storage and Terminal Solutions

Revenue for the Storage and Terminal Solutions segment was $56.9 million in the three months ended December 31, 2021 compared to $64.2 million in the same period last year.

The decrease in segment revenue is primarily a result of lower volumes of crude oil tank and terminal capital work, partially offset by an increase in tank repair and maintenance work.

The segment gross margin (loss) was (0.3)% for the three months ended December 31, 2021 compared to 2.9% in the same period last year.

The fiscal 2022 segment gross margin was negatively impacted by a lower than previously forecasted margin on a thermal energy storage tank repair and maintenance project due to changes in repair scope, expanded client weld testing and associated schedule delays, which reduced segment gross profit by $2.8 million.

The segment gross margin in the second quarter of fiscal 2022 was also negatively impacted by low volumes, which led to under recovery of construction overhead costs.

The segment gross margin in fiscal 2021 was negatively impacted by a lower than previously forecasted margin on a large crude oil storage terminal capital project and the under recovery of construction overhead costs.

Unallocated corporate expenses were $6.6 million during the three months ended December 31, 2021 compared to $7.1 million in the same period last year.

The decrease is primarily attributable to implemented cost reductions under the business improvement plan (see Item 1.

Revenue for the Storage and Terminal Solutions segment was $48.7 million in the three months ended March 31, 2022 compared to $60.7 million in the same period last year.

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

The segment gross margin (loss) was (0.9%) for the three months ended March 31, 2022 compared to 10.6% in the same period last year.

The fiscal 2022 segment gross margin was negatively impacted by low revenue volume, which led to under recovery of construction overhead costs, and smaller competitively priced capital projects.

The fiscal 2021 segment gross margin was positively impacted by additional estimated recoveries of unpriced change orders on a large crude oil terminal project following the achievement of mechanical completion and demobilization from the project site.

Unallocated corporate expenses were $7.2 million during the three months ended March 31, 2022 compared to $6.2 million in the same period last year.

The increase is primarily attributable to centralizing support costs under the second phase of our business improvement plan (see Item 1.

Financial Statements, Note 10 - Restructuring Costs, and "Operational Update" in this Results of Operations section for more information).

Six Months Ended December 31, 2021 Compared to the Six Months Ended December 31, 2020

Consolidated revenue was $330.1 million for the six months ended December 31, 2021, compared to $350.2 million in the same period last year.

On a segment basis, revenue decreased in the Storage and Terminal Solutions, Process and Industrial Facilities, and Utility and Power Infrastructure segments by $16.5 million, $3.0 million and $0.7 million, respectively.

Consolidated gross profit (loss) decreased to $(0.3) million in the six months ended December 31, 2021 compared to $29.7 million in the same period last year.

Gross margin (loss) decreased to (0.1)% in the six months ended December 31, 2021 compared to 8.5% in the same period last year.

Gross margins in fiscal 2022 were negatively impacted by a lower than previously forecasted margin on a large capital project and an unfavorable settlement of a claim with a customer, both in the Utility and Power Infrastructure segment, and a lower than previously forecasted margin on a tank repair and maintenance project in the Storage and Terminal Solutions segment.

In addition, gross margins were also negatively impacted by lower than forecasted volumes, which led to the under recovery of construction overhead costs.

Despite generally strong project execution, gross margins in the first half of fiscal 2021 were negatively impacted by lower than forecasted volumes, which led to under recovery of construction overhead costs.

Consolidated SG&A expenses were $32.6 million in the six months ended December 31, 2021 compared to $34.9 million in the same period a year earlier.

Nine Months Ended March 31, 2022 Compared to the Nine Months Ended March 31, 2021

Consolidated revenue was $507.1 million for the nine months ended March 31, 2022, compared to $498.5 million in the same period last year.

On a segment basis, revenue increased in the Process and Industrial Facilities and Utility and Power Infrastructure segments by $23.2 million and $13.9 million, respectively.

The increases were partially offset by a decrease in revenue of $28.5 million in the Storage and Terminal Solutions segment.

Consolidated gross profit (loss) decreased to ($2.1) million in the nine months ended March 31, 2022 compared to $31.2 million in the same period last year.

Gross margin (loss) decreased to (0.4%) in the nine months ended March 31, 2022 compared to 6.3% in the same period last year.

Gross margins in fiscal 2022 were negatively impacted by low revenue volume, which led to the under recovery of construction overhead costs.

In addition, the competitive environment and project adjustments negatively impacted gross margins.

Gross margins in fiscal 2021 were negatively impacted by lower than forecasted volumes, which led to under recovery of construction overhead costs as well as a lower than previously forecasted margin on a large capital project in the Utility and Power Infrastructure segment.

Consolidated SG&A expenses were $49.6 million in the nine months ended March 31, 2022 compared to $52.0 million in the same period a year earlier.

The decrease is primarily attributable to implemented cost reductions.

As a result of restructuring activities, we recorded $1.3 million of restructuring costs in the six months ended December 31, 2021.

In the third quarter, we recorded $18.3 million of goodwill impairment.

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

As a result of restructuring activities, we recorded ($0.3) million of restructuring costs in the nine months ended March 31, 2022.

The credit included a $1.6 million favorable settlement of a restructuring obligation related to our exit from the domestic iron and steel industry in fiscal 2020.

Financial Statements, Note 10 - Restructuring Costs, for more information.

Interest expense was $2.5 million in the six months ended December 31, 2021 compared to $0.7 million in the six months ended December 31, 2020.

Interest expense was $2.7 million in the nine months ended March 31, 2022 compared to $1.1 million in the nine months ended March 31, 2021.

Interest expense in fiscal 2022 included $1.5 million of accelerated amortization of deferred debt amendment fees (see Item 1.

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The remaining interest expense in fiscal 2022 was comprised of letter of credit fees, unused capacity fees and amortization of deferred debt issuance costs.

Our effective tax rates for the six months ended December 31, 2021 and December 31, 2020 were (15.5)% and 11.0%, respectively.

The effective tax rate in fiscal 2022 was negatively impacted by a $14.2 million valuation allowance placed on our deferred tax assets during the second quarter, see Item 1.

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

The effective tax rate for the six months ended December 31, 2020 was negatively impacted by deferred tax asset adjustments of $1.2 million.

For the six months ended December 31, 2021, we had a net loss of $42.5 million, or $1.59 per fully diluted share, compared to a net loss of $7.6 million, or $0.29 per fully diluted share, in the six months ended December 31, 2020.

Our effective tax rates for the nine months ended March 31, 2022 and March 31, 2021 were (7.8%) and 22.6%, respectively.

The effective tax rate during fiscal 2022 was impacted by a $21.9 million valuation allowance placed on our deferred tax assets.

Financial Statements, Note 6 - Income Taxes, for more information about the valuation allowances.

The effective tax rates were negatively impacted by $1.9 million of valuation allowances on certain deferred tax assets in the third quarter of fiscal 2021, and $1.2 million of other deferred tax adjustments in the first half of fiscal 2021.

For the nine months ended March 31, 2022, we had a net loss of $77.4 million, or $2.90 per fully diluted share, compared to a net loss of $20.5 million, or $0.78 per fully diluted share, in the nine months ended March 31, 2021.

Utility and Power Infrastructure

Revenue for the Utility and Power Infrastructure segment was $112.0 million in the six months ended December 31, 2021 compared to $112.7 million in the same period last year.

The decrease is primarily due to lower volumes of power delivery and natural gas utility peak shaving work, partially offset by higher volumes of power generation and storm response service work.

Revenue for the Utility and Power Infrastructure segment was $171.3 million in the nine months ended March 31, 2022 compared to $157.4 million in the same period last year.

The increase is primarily due to higher volumes of power generation and power delivery work, partially offset by lower volumes of natural gas utility peak shaving and storm response service work.

The segment gross margin (loss) was (4.1%) in fiscal 2022 compared to 5.0% in fiscal 2021.

The fiscal 2022 segment gross margin was negatively impacted by an increase in the forecasted costs to complete a large capital project in the first quarter, 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.

In addition, segment gross margin was negatively impacted by an unfavorable settlement of a claim with a customer, and low volumes, which led to the under recovery of construction overhead costs.

The fiscal 2021 segment gross margin was positively impacted by strong project execution, partially offset by under recovery of construction overhead costs.

The segment gross margin in fiscal 2022 was negatively impacted by low revenue volume, which led to the under recovery of construction overhead costs.

In addition, the fiscal 2022 segment gross margin was materially impacted by changes in the forecasted costs to complete a large capital project.

Improved execution during the third quarter of fiscal 2022 resulted in an increase in gross profit of $0.8 million on this project during the three months ended March 31, 2022.

However, increases in the forecasted costs to complete the project during the first half of fiscal 2022 resulted in the project reducing gross profit by $5.1 million during the nine months ended March 31, 2022.

The increase in forecasted costs during the first half of the fiscal year 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 during the second quarter of fiscal 2022, which significantly reduced our financial exposure on the project.

We expect to complete the project during the fourth quarter of fiscal 2022.

In addition, segment gross margin was negatively impacted by an unfavorable settlement of a claim with a customer.

The fiscal 2021 segment gross margin was negatively impacted by an increase in the forecasted costs to complete a large capital project.

In addition, segment gross margin was negatively impacted by low volumes, 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.

Process and Industrial Facilities

Revenue for the Process and Industrial Facilities segment was $94.2 million in the six months ended December 31, 2021 compared to $97.2 million in the same period last year.

While segment revenue was slightly down compared to last year, we booked $210.4 million of project awards in the first half of fiscal 2022, which includes some large capital projects that are still in the preliminary stages of engineering and construction.

As such, we expect strong revenue growth in this segment during the second half of fiscal 2022.

The segment gross margin was 7.5% for the six months ended December 31, 2021 compared to 11.9% in the same period last year.

Despite generally strong project execution, the low segment gross margin in fiscal 2022 was the result of low volumes, which led to the under recovery of construction overhead costs.

Segment gross margin in fiscal 2021 was positively impacted by strong project execution and the positive impact of a one-time workers' compensation item.

Revenue for the Process and Industrial Facilities segment was $163.2 million in the nine months ended March 31, 2022 compared to $140.0 million in the same period last year.

The increase was primarily due to higher levels of refinery maintenance and turnaround work.

The segment gross margin was 4.1% for the nine months ended March 31, 2022 compared to 8.1% in the same period last year.

Despite generally strong project execution and higher volumes, the segment gross margin in fiscal 2022 was negatively impacted by under recovered construction overhead costs and a $4.8 million increase in forecasted costs to complete a midstream gas processing project.

The increase in forecasted costs was primarily due to performance of a, now terminated, subcontractor, which will require rework in order to meet our client's expectations.

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 volumes, which led to the under recovery of construction overhead costs.

Storage and Terminal Solutions

Revenue for the Storage and Terminal Solutions segment was $123.9 million in the six months ended December 31, 2021 compared to $140.4 million in the same period last year.

The decrease in segment revenue is primarily a result of lower volumes of crude oil tank and terminal capital work, partially offset by an increase in tank repair and maintenance work.

The segment gross margin was 0.2% for the six months ended December 31, 2021 compared to 4.0% in the same period last year.

In addition, the fiscal 2022 segment gross margin was also negatively impacted by low volumes, which led to under recovery of construction overhead costs.

Unallocated corporate expenses were $14.3 million during the six months ended December 31, 2021 compared to $13.9 million in the same period last year.

Revenue for the Storage and Terminal Solutions segment was $172.6 million in the nine months ended March 31, 2022 compared to $201.1 million in the same period last year.

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

The segment gross margin (loss) was (0.1%) for the nine months ended March 31, 2022 compared to 6.0% in the same period last year.

The fiscal 2022 segment gross margin was negatively impacted by low revenue volume, which led to under recovery of construction overhead costs and a lower than previously forecasted margin on a thermal energy storage tank repair and maintenance project due to changes in repair scope, expanded client weld testing and associated schedule delays, which reduced segment gross profit by $5.5 million.

In addition, segment gross margin was negatively impacted by smaller competitively priced capital projects.

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.

Unallocated corporate expenses were $21.5 million during the nine months ended March 31, 2022 compared to $20.2 million in the same period last year.

The increase is primarily attributable to an increase in legal costs for outstanding litigation (see Item 1.

Financial Statements, Note 7 - Commitment and Contingencies, for more information) and third party consulting services related to restructuring activities (see "Operational Update" in this Results of Operations section), partially offset by cost reductions we implemented.

Financial Statements, Note 7 - Commitment and Contingencies, for more information), third party consulting services and centralization of support costs related to restructuring activities (see "Operational Update" in this Results of Operations section), partially offset by cost reductions we implemented.

We define backlog as the total dollar amount of revenue that we expect to recognize as a result of performing work that has been awarded to us through a signed contract, limited notice to proceed or other type of assurance that we consider firm.

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For all other arrangements, we calculate backlog as the estimated contract amount less revenue recognized as of the reporting date.

The following table provides a summary of changes in our backlog for the three months ended December 31, 2021:

The following table provides a summary of changes in our backlog for the three months ended March 31, 2022:

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

(In thousands)

Backlog as of September 30, 2021 $ 176,876 $ 185,434 $ 199,045 $ 561,355

Backlog as of December 31, 2021 $ 150,368 $ 250,970 $ 190,222 $ 591,560

Project awards 23,366 104,729 51,575 179,670

Revenue recognized (59,341) (68,971) (48,691) (177,003)

Backlog as of December 31, 2021 $ 150,368 $ 250,970 $ 190,222 $ 591,560

Backlog as of March 31, 2022 $ 114,393 $ 286,728 $ 193,106 $ 594,227

Book-to-bill ratio (1)

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(1) Calculated by dividing project awards by revenue recognized during the period.

The following table provides a summary of changes in our backlog for the six months ended December 31, 2021:

The following table provides a summary of changes in our backlog for the nine months ended March 31, 2022:

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

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Revenue recognized (171,298) (163,192) (172,571) (507,061)

Backlog as of December 31, 2021 $ 150,368 $ 250,970 $ 190,222 $ 591,560

Backlog as of March 31, 2022 $ 114,393 $ 286,728 $ 193,106 $ 594,227

Book-to-bill ratio (1)

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(1) Calculated by dividing project awards by revenue recognized during the period.

Strong bidding activity has led to project awards of $192.2 million and $459.1 million during the three and six months ended December 31, 2021, respectively, leading to a book-to-bill ratios of 1.2 and 1.4 for the three and six month periods.

Project awards through the first half of fiscal 2022 have surpassed project awards for the full year of fiscal 2021.

Total backlog increased by 5.4% and 27.9% during the three and six months ended December 31, 2021, respectively.

In the Utility and Power Infrastructure segment, backlog decreased by 15.0% as we booked $28.2 million of project awards during the three months ended December 31, 2021.

Backlog decreased by 11.6% as we booked $92.3 million of project awards during the six months ended December 31, 2021.

Strong bidding activity has led to project awards of $179.7 million and $638.7 million during the three and nine months ended March 31, 2022, respectively, leading to a book-to-bill ratios of 1.0 and 1.3 for the three and nine months ended March 31, 2022, respectively.

Project awards through the first half of fiscal 2022 surpassed project awards for the full year of fiscal 2021.

Total backlog increased by 0.5% and 28.5% during the three and nine months ended March 31, 2022, respectively.

In the Utility and Power Infrastructure segment, backlog decreased by 23.9% as we booked $23.4 million of project awards during the three months ended March 31, 2022.

Backlog decreased by 32.7% as we booked $115.6 million of project awards during the nine months ended March 31, 2022.

Bidding activity is strong in the power delivery portion of the business.

During the first half of fiscal 2022, we received several key contracts for electrical infrastructure services including substation and transmission line rebuilds, relay upgrades, and fiber installation.

During fiscal 2022, we received several key contracts for electrical infrastructure services including substation and transmission line rebuilds, relay upgrades, and fiber installation.

Our opportunity pipeline for LNG peak shaving projects is also building, however those awards, while significant, can be less frequent.

In addition, we expect the $1.2 trillion Infrastructure Investment and Jobs Act recently passed by congress will lead to increased opportunities in this segment.

In the Process and Industrial Facilities segment, backlog increased by 35.3% as we booked $115.9 million of project awards during the three months ended December 31, 2021.

Backlog increased by 86.2% as we booked $210.4 million of project awards during the six months ended December 31, 2021.

In addition, we expect the $1.2 trillion Infrastructure Investment and Jobs Act passed by congress will lead to increased opportunities in this segment.

In the Process and Industrial Facilities segment, backlog increased by 14.2% as we booked $104.7 million of project awards during the three months ended March 31, 2022.

Backlog increased by 112.7% as we booked $315.1 million of project awards during the nine months ended March 31, 2022.

Client spending related to refinery maintenance operations has returned to near-normal levels.

During the first half of fiscal 2022, we received key awards for a thermal vacuum chamber, a midstream gas processing plant and other renewable energy capital projects.

During fiscal 2022, we received key awards for two thermal vacuum chamber projects, a midstream gas processing plant, a borate mining facility, and other renewable energy capital projects.

We continue to see strong demand for thermal vacuum chambers in the coming quarters, as well as increasing opportunities in mining and minerals and chemicals.

In addition, we are seeing more opportunities for midstream gas work, including some larger scale projects.

In the Storage and Terminal Solutions segment, backlog decreased by 4.4% as we booked $48.1 million of project awards during the three months ended December 31, 2021.

Backlog increased by 20.6% as we booked $156.4 million of project awards during the six months ended December 31, 2021.

In the Storage and Terminal Solutions segment, backlog increased by 1.5% as we booked $51.6 million of project awards during the three months ended March 31, 2022.

Backlog increased by 22.4% as we booked $207.9 million of project awards during the nine months ended March 31, 2022.

Oil and natural gas producers have remained cautious with capital spending, which has limited new production volumes and opportunities in crude oil tanks and terminals.

However, we received key capital construction contracts for an LNG tank and a storage tank package consisting of seven biodiesel tanks, in the first half of fiscal 2022.

However, the price of crude oil increased significantly during the third quarter of fiscal 2022 primarily due to increased foreign supply pressures from the sanctions against Russia.

While the impact of the price increase remains uncertain, if sustained, we expect it could strengthen our existing opportunities for crude oil tanks and terminals, and export facilities in the coming quarters.

This segment also includes significant opportunities for storage infrastructure projects related to natural gas, LNG, ammonia, hydrogen, NGLs and other forms of renewable energy.

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Therefore, revenue volume in the summer months is typically lower than in other periods throughout the year.

Our operations are also impacted by the COVID-19 pandemic, which has led to the loss of productivity, among other issues.

Our business can also be affected, both positively and negatively, by seasonal factors such as energy demand or weather conditions including hurricanes, snowstorms, wildfires and abnormally low or high temperatures.

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(In thousands, except per share data)

Three Months Ended Six Months Ended

December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020

Three Months Ended Nine Months Ended

March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021

Net loss, as reported $ (34,899) $ (12,873) $ (77,356) $ (20,501)

Restructuring costs incurred (1,578) 1,860 (278) 6,585

Goodwill impairment 18,312 — 18,312 —

Accelerated amortization of deferred debt amendment fees (2)

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7,671 — 21,869 —

Tax impact of restructuring costs and accelerated amortization of debt amendment fees (179) (1,299) (725) (1,217)

Tax impact of adjustments (2,911) (479) (3,636) (1,695)

Adjusted net loss $ (13,405) $ (11,492) $ (39,571) $ (15,611)

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Adjusted loss per fully diluted share $ (0.50) $ (0.43) $ (1.48) $ (0.59)

(1) This table presents non-GAAP financial measures of our adjusted net loss and adjusted diluted loss per common share for the three and six months ended December 31, 2021 and 2020.

(1) This table presents non-GAAP financial measures of our adjusted net loss and adjusted diluted loss per common share for the three and nine months ended March 31, 2022 and 2021.

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

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

• It does not include impairment to goodwill.

While impairment to goodwill is a non-cash expense in the period recognized, cash or other consideration was still transferred in exchange for goodwill in the period of the acquisition.

Any measure that excludes impairment to goodwill has material limitations since this expense represents the loss of an asset that was acquired in exchange for cash or other assets.

• It does not include restructuring costs.

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A reconciliation of Adjusted EBITDA to net loss follows:

Three Months Ended Six Months Ended

2021 December 31,

2020 December 31,

2021 December 31,

Three Months Ended Nine Months Ended

2022 March 31,

2021 March 31,

2022 March 31,

(In thousands)

Net loss $ (34,899) $ (12,873) $ (77,356) $ (20,501)

Goodwill impairment 18,312 — 18,312 —

Restructuring costs (1,578) 1,860 (278) 6,585

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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 at December 31, 2021 were unrestricted cash and cash equivalents on hand, capacity under our ABL Facility, and cash generated from operations.

Unrestricted cash and cash equivalents at December 31, 2021 totaled $65.0 million and availability under the ABL Facility totaled $36.7 million, resulting in total liquidity of $101.7 million.

Our primary sources of liquidity at March 31, 2022 were unrestricted cash and cash equivalents on hand, capacity under our ABL Facility, and cash generated from operations.

Unrestricted cash and cash equivalents at March 31, 2022 totaled $34.1 million and availability under the ABL Facility totaled $52.7 million, resulting in total liquidity of $86.8 million.

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):

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Cash and cash equivalents $ 34,092 $ 83,878

Restricted cash, current 2,600 —

Restricted cash, non-current 25,000 —

Restricted cash 25,000 —

Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows $ 59,092 $ 83,878

While we saw improvement in our project awards and business environment during the first half of fiscal 2022, the near- and intermediate-term business impacts from the COVID-19 pandemic and its disruption of our markets are still uncertain.

While bidding activity and the volume of project awards have both improved as the economy emerges from the pandemic, the market environment is still uncertain.

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

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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.

At March 31, 2022, our borrowing base was $76.4 million and we had $23.7 million in letters of credit outstanding issued by Bank of Montreal, which resulted in availability of $52.7 million under the ABL Facility.

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.

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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.

We are in compliance with all covenants of the ABL Facility as of March 31, 2022.

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 was set to expire November 2, 2023.

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.

Cash Flow for the Six Months Ended December 31, 2021

Cash Flows Provided by Operating Activities

Cash provided by operating activities for the six months ended December 31, 2021 totaled $11.4 million.

Interest expense during the nine months ended March 31, 2022 included $1.5 million of accelerated amortization of deferred debt amendment fees associated with the Prior Credit Agreement.

Cash Flow for the Nine Months Ended March 31, 2022

Cash Flows Used by Operating Activities

Cash used by operating activities for the nine months ended March 31, 2022 totaled $22.5 million.

The various components are as follows:

Net Cash Provided by Operating Activities

Net Cash Used by Operating Activities

(In thousands)

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Non-cash expenses 18,276

Goodwill impairment 18,312

Deferred income tax 5,323

Cash effect of changes in operating assets and liabilities 12,825

Net cash provided by operating activities $ 11,385

Cash effect of changes in operating assets and liabilities at December 31, 2021 in comparison to June 30, 2021 include the following:

• Accounts receivable decreased $26.5 million during the six months ended December 31, 2021, which increased cash flows from operating activities.

Net cash used by operating activities $ (22,517)

Cash effect of changes in operating assets and liabilities at March 31, 2022 in comparison to June 30, 2021 include the following:

• Accounts receivable decreased $10.3 million during the nine months ended March 31, 2022, which increased cash flows from operating activities.

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

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CIE and BIE balances can experience significant fluctuations based on business volumes 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, non-current, were flat during the six months ended December 31, 2021, which did not affect cash flows from operating activities.

• Inventories, income taxes receivable, other current assets, operating right-of-use lease assets and other assets, non-current, decreased $1.0 million during the nine months ended March 31, 2022, which increased 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;

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and other timing differences.

• Accounts payable, accrued wages and benefits, accrued insurance, operating lease liabilities, other accrued expenses, and other liabilities, non-current decreased by $18.1 million during the six months ended December 31, 2021, which decreased cash flows from operating activities.

• Accounts payable, accrued wages and benefits, accrued insurance, operating lease liabilities, other accrued expenses, and other liabilities, non-current decreased by $1.8 million during the nine months ended March 31, 2022, which decreased cash flows from operating activities.

These operating liabilities can fluctuate based on the timing of vendor payments;

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Cash Flows Used by Investing Activities

Investing activities used $0.5 million of cash in the six months ended December 31, 2021 primarily due to $0.6 million of capital expenditures, partially offset by $0.1 million of proceeds from other asset sales.

Investing activities used $0.1 million of cash in the nine months ended March 31, 2022 primarily due to $1.4 million of capital expenditures, partially offset by $1.3 million of proceeds from other asset sales.

Cash Flows Used by Financing Activities

Financing activities used $1.8 million of cash in the six months ended December 31, 2021 primarily due to $1.0 million paid in fees to enter into our ABL Facility and $0.9 million paid to repurchase our stock for payment of withholding taxes due on equity-based compensation.

Financing activities used $1.9 million of cash in the nine months ended March 31, 2022 primarily due to $1.1 million paid in fees to enter into our ABL Facility and $0.9 million paid to repurchase our stock for payment of withholding taxes due on equity-based compensation.

Dividend Policy

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

Stock Repurchase Program and Treasury Shares

Treasury Shares

The terms of our ABL Facility limit share repurchases to $2.5 million per fiscal year provided that we meet certain availability thresholds and do not violate our Fixed Charge Coverage Ratio financial covenant.

Stock Repurchase Program

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

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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 first half of fiscal 2022 and have no current plans to repurchase stock.

As of December 31, 2021, there were 1,349,037 shares available for repurchase under the Stock Buyback Program.

We had 1,114,242 treasury shares as of December 31, 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.

We made no repurchases under the program in the nine months ended March 31, 2022 and have no current plans to repurchase stock.

As of March 31, 2022, there were 1,349,037 shares available for repurchase under the Stock Buyback Program.

Treasury Shares

We had 1,104,952 treasury shares as of March 31, 2022 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.

CRITICAL ACCOUNTING POLICIES

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

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.

Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $9.3 million at March 31, 2022 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.

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In accordance with current accounting guidance, goodwill is not amortized, but is tested at least annually for impairment at the reporting unit level, which is a level below our reportable segments.

We perform our annual impairment test as of May 31st of each fiscal year to determine whether an impairment exists and to determine the amount of headroom.

We perform our annual impairment test as of May 31st of each fiscal year, or in between annual tests if impairment indicators are present, to determine whether an impairment exists and to determine the amount of headroom.

We define "headroom" as the percentage difference between the fair value of a reporting unit and its carrying value.

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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.

Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in market risk faced by us from those reported in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed with the Securities and Exchange Commission.

For more information on market risk, see Part II, Item 7A in our fiscal 2021 Annual Report on Form 10-K.

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-Q

Item 2. Management’s Discussion and Analysis