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 Nine Months Ended March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021 Revenue $ 177,003 $ 148,260 $ 507,061 $ 498,499 Cost of revenue 178,766 146,700 509,125 467,276 Gross profit (loss) ( 1,763 ) 1,560 ( 2,064 ) 31,223 Selling, general and administrative expenses 17,041 17,179 49,592 52,031 Goodwill impairment (Note 4) 18,312 — 18,312 — Restructuring costs (Note 10) ( 1,578 ) 1,860 ( 278 ) 6,585 Operating loss ( 35,538 ) ( 17,479 ) ( 69,690 ) ( 27,393 ) Other income (expense): Interest expense (Note 5) ( 204 ) ( 322 ) ( 2,705 ) ( 1,055 ) Interest income 19 25 69 96 Other 677 ( 157 ) 534 1,849 Loss before income tax expense (benefit) ( 35,046 ) ( 17,933 ) ( 71,792 ) ( 26,503 ) Provision (benefit) for federal, state and foreign income taxes ( 147 ) ( 5,060 ) 5,564 ( 6,002 ) Net loss $ ( 34,899 ) $ ( 12,873 ) $ ( 77,356 ) $ ( 20,501 ) Basic loss per common share $ ( 1.30 ) $ ( 0.49 ) $ ( 2.90 ) $ ( 0.78 ) Diluted loss per common share $ ( 1.30 ) $ ( 0.49 ) $ ( 2.90 ) $ ( 0.78 ) Weighted average common shares outstanding: Basic 26,783 26,515 26,714 26,422 Diluted 26,783 26,515 26,714 26,422 See accompanying notes. -1- Table of Contents Matrix Service Company Condensed Consolidated Statements of Comprehensive Income (In thousands) (unaudited) Three Months Ended Nine Months Ended March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021 Net loss $ ( 34,899 ) $ ( 12,873 ) $ ( 77,356 ) $ ( 20,501 ) Other comprehensive income (loss), net of tax: Foreign currency translation gain (loss) (net of tax expense (benefit) of $(16) and $30 for the three and nine months ended March 31, 2022, respectively, and $(33) and $20 for the three and nine months ended March 31, 2021, respectively) ( 32 ) 68 ( 728 ) 1,291 Comprehensive loss $ ( 34,931 ) $ ( 12,805 ) $ ( 78,084 ) $ ( 19,210 ) See accompanying notes. -2- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands) (unaudited) March 31, 2022 June 30, 2021 Assets Current assets: Cash and cash equivalents (Note 1) $ 34,092 $ 83,878 Accounts receivable, less allowances (March 31, 2022—$634 and June 30, 2021—$898) 137,690 148,030 Costs and estimated earnings in excess of billings on uncompleted contracts 46,393 30,774 Inventories 6,907 7,342 Income taxes receivable 13,734 16,965 Other current assets 7,322 4,230 Total current assets 246,138 291,219 Property, plant and equipment at cost: Land and buildings 41,745 41,633 Construction equipment 93,862 94,453 Transportation equipment 49,532 50,510 Office equipment and software 43,447 42,706 Construction in progress 564 493 Total property, plant and equipment - at cost 229,150 229,795 Accumulated depreciation ( 168,672 ) ( 160,388 ) Property, plant and equipment - net 60,478 69,407 Restricted cash (Note 1) 25,000 — Operating lease right-of-use assets 20,811 22,412 Goodwill 42,240 60,636 Other intangible assets, net of accumulated amortization 5,228 6,614 Deferred income taxes — 5,295 Other assets, non-current 13,185 11,973 Total assets $ 413,080 $ 467,556 See accompanying notes. -3- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands, except share data) (unaudited) March 31, 2022 June 30, 2021 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 68,161 $ 60,920 Billings on uncompleted contracts in excess of costs and estimated earnings 73,868 53,832 Accrued wages and benefits 23,073 21,008 Accrued insurance 6,310 6,568 Operating lease liabilities 4,928 5,747 Other accrued expenses 3,841 5,327 Total current liabilities 180,181 153,402 Deferred income taxes 32 34 Operating lease liabilities 19,630 20,771 Other liabilities, non-current 401 7,810 Total liabilities 200,244 182,017 Commitments and contingencies Stockholders’ equity: Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of March 31, 2022 and June 30, 2021; 26,783,265 and 26,549,438 shares outstanding as of March 31, 2022 and June 30, 2021, respectively 279 279 Additional paid-in capital 137,886 137,575 Retained earnings 97,822 175,178 Accumulated other comprehensive loss ( 7,477 ) ( 6,749 ) 228,510 306,283 Less: Treasury stock, at cost — 1,104,952 shares as of March 31, 2022, and 1,338,779 shares as of June 30, 2021 ( 15,674 ) ( 20,744 ) Total stockholders' equity 212,836 285,539 Total liabilities and stockholders’ equity $ 413,080 $ 467,556 See accompanying notes. -4- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Nine Months Ended March 31, 2022 March 31, 2021 Operating activities: Net loss $ ( 77,356 ) $ ( 20,501 ) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 11,557 13,639 Goodwill impairment 18,312 — Stock-based compensation expense 5,823 6,413 Operating lease impairment due to restructuring — 454 Deferred income tax 5,323 1,468 Gain on sale of property, plant and equipment ( 674 ) ( 1,123 ) Provision for uncollectible accounts 52 ( 38 ) Accelerated amortization of deferred debt amendment fees (Note 5) 1,518 — Other 103 317 Changes in operating assets and liabilities increasing (decreasing) cash: Accounts receivable 10,288 2,610 Costs and estimated earnings in excess of billings on uncompleted contracts ( 15,619 ) 21,584 Inventories 435 243 Other assets and liabilities ( 2,769 ) ( 17,825 ) Accounts payable 7,188 ( 22,966 ) Billings on uncompleted contracts in excess of costs and estimated earnings 20,036 ( 4,394 ) Accrued expenses ( 6,734 ) 6,907 Net cash used by operating activities ( 22,517 ) ( 13,212 ) Investing activities: Capital expenditures ( 1,335 ) ( 3,897 ) Proceeds from asset sales 1,250 1,784 Net cash used by investing activities $ ( 85 ) $ ( 2,113 ) See accompanying notes. -5- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Nine Months Ended March 31, 2022 March 31, 2021 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 ( 1,054 ) ( 924 ) Issuances of common stock 199 92 Proceeds from issuance of common stock under employee stock purchase plan 212 230 Repurchase of common stock for payment of statutory taxes due on equity-based compensation ( 853 ) ( 1,554 ) Other ( 354 ) ( 236 ) Net cash used by financing activities ( 1,850 ) ( 12,180 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 334 ) 1,220 Decrease in cash, cash equivalents and restricted cash ( 24,786 ) ( 26,285 ) 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) $ 59,092 $ 73,751 Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Income taxes $ ( 2,841 ) $ 200 Interest, including payment of debt amendment fees $ 2,509 $ 1,404 Non-cash investing and financing activities: Purchases of property, plant and equipment on account $ 99 $ 33 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, December 31, 2021 $ 279 $ 135,913 $ 132,721 $ ( 15,858 ) $ ( 7,445 ) $ 245,610 Net loss — — ( 34,899 ) — — ( 34,899 ) Other comprehensive loss — — — — ( 32 ) ( 32 ) Treasury shares sold to Employee Stock Purchase Plan (9,290 shares) — ( 115 ) — 184 — 69 Stock-based compensation expense — 2,088 — — — 2,088 Balances, March 31, 2022 $ 279 $ 137,886 $ 97,822 $ ( 15,674 ) $ ( 7,477 ) $ 212,836 Balances, December 31, 2020 $ 279 $ 133,957 $ 198,774 $ ( 21,571 ) $ ( 7,150 ) $ 304,289 Net loss — — ( 12,873 ) — — ( 12,873 ) Other comprehensive income — — — — 68 68 Exercise of stock options (9,000 shares) — ( 68 ) — 160 — 92 Issuance of deferred shares (900 shares) — ( 16 ) — 16 — — Treasury shares sold to Employee Stock Purchase Plan (6,785 shares) — ( 45 ) — 120 — 75 Treasury shares purchased to satisfy tax withholding obligations (428 shares) — — — ( 5 ) — ( 5 ) Stock-based compensation expense — 2,214 — — — 2,214 Balances, March 31, 2021 $ 279 $ 136,042 $ 185,901 $ ( 21,280 ) $ ( 7,082 ) $ 293,860 -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 — — ( 77,356 ) — — ( 77,356 ) Other comprehensive loss — — — — ( 728 ) ( 728 ) 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 (22,577 shares) — ( 221 ) — 433 — 212 Treasury shares purchased to satisfy tax withholding obligations (76,703 shares) — — — ( 853 ) — ( 853 ) Stock-based compensation expense — 5,823 — — — 5,823 Balances, March 31, 2022 $ 279 $ 137,886 $ 97,822 $ ( 15,674 ) $ ( 7,477 ) $ 212,836 Balances, June 30, 2020 $ 279 $ 138,966 $ 206,402 $ ( 29,385 ) $ ( 8,373 ) $ 307,889 Net loss — — ( 20,501 ) — — ( 20,501 ) Other comprehensive income — — — — 1,291 1,291 Exercise of stock options (9,000 shares) — ( 68 ) — 160 — 92 Issuance of deferred shares (515,218 shares) — ( 9,083 ) — 9,083 — — Treasury shares sold to Employee Stock Purchase Plan (24,100 shares) — ( 186 ) — 416 — 230 Treasury shares purchased to satisfy tax withholding obligations (170,629 shares) — — — ( 1,554 ) — ( 1,554 ) Stock-based compensation expense — 6,413 — — — 6,413 Balances, March 31, 2021 $ 279 $ 136,042 $ 185,901 $ ( 21,280 ) $ ( 7,082 ) $ 293,860 -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 nine months ended March 31, 2022 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. During the third quarter, restrictions were released on $ 2.6 million of cash that supported a prior purchase card program. 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): March 31, 2022 June 30, 2021 Cash and cash equivalents $ 34,092 $ 83,878 Restricted cash 25,000 — Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows $ 59,092 $ 83,878 Note 2 – Revenue Remaining Performance Obligations We had $ 433.6 million of remaining performance obligations yet to be satisfied as of March 31, 2022 . We expect to recognize $ 368.9 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: March 31, 2022 June 30, 2021 Change (in thousands) Costs and estimated earnings in excess of billings on uncompleted contracts $ 46,393 $ 30,774 $ 15,619 Billings on uncompleted contracts in excess of costs and estimated earnings ( 73,868 ) ( 53,832 ) ( 20,036 ) Net contract liabilities $ ( 27,475 ) $ ( 23,058 ) $ ( 4,417 ) 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 nine months ended March 31, 2022 that was included in the June 30, 2021 BIE balance was $ 48.2 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 March 31, 2022 and June 30, 2021 included retentions to be collected within one year of $ 14.1 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 $ 2.8 million as of March 31, 2022 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 tables presents revenue disaggregated by geographic area where the work was performed and by contract type: Geographic Disaggregation: Three Months Ended Nine Months Ended March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021 (In thousands) United States $ 160,453 $ 138,001 $ 459,654 $ 445,578 Canada 16,268 8,930 45,038 47,673 Other international 282 1,329 2,369 5,248 Total Revenue $ 177,003 $ 148,260 $ 507,061 $ 498,499 Contract Type Disaggregation: Three Months Ended Nine Months Ended March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021 (In thousands) Fixed-price contracts $ 100,602 $ 96,412 $ 303,508 $ 343,639 Time and materials and other cost reimbursable contracts 76,401 51,848 203,553 154,860 Total Revenue $ 177,003 $ 148,260 $ 507,061 $ 498,499 -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. Revisions in Estimates Our results of operations were materially impacted by an increase in the forecasted costs to complete a midstream gas processing project in the Process and Industrial Facilities segment, which resulted in a decrease in gross profit of $ 4.8 million in the three and nine months ended March 31, 2022. 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. Our results of operations were materially impacted by changes in the forecasted costs to complete a large capital project in the Utility and Power Infrastructure segment. Improved project execution resulted in an increase in gross profit of $ 0.8 million 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. 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 $ 5.5 million in the first half of fiscal 2022. 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 fourth quarter 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 96 % of all right-of-use assets as of March 31, 2022 . 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 one 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 Nine Months Ended March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021 Lease expense Location of Expense (in thousands) Operating lease expense Cost of revenue and Selling, general and administrative expenses $ 1,867 $ 1,743 $ 5,837 $ 6,542 Short-term lease expense (1) Cost of revenue 6,216 6,772 17,079 19,020 Total lease expense $ 8,083 $ 8,515 $ 22,916 $ 25,562 (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: March 31, 2022 Maturity Analysis: (in thousands) Remainder of Fiscal 2022 $ 1,745 Fiscal 2023 5,211 Fiscal 2024 3,978 Fiscal 2025 3,483 Fiscal 2026 3,187 Thereafter 11,843 Total future operating lease payments 29,447 Imputed interest ( 4,889 ) Net present value of future lease payments 24,558 Less: current portion of operating lease liabilities 4,928 Non-current operating lease liabilities $ 19,630 The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of March 31, 2022 : Weighted-average remaining lease term (in years) 7.2 years Weighted-average discount rate 5.2 % Supplemental cash flow information related to leases is as follows: Nine Months Ended March 31, 2022 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating lease payments $ 6,197 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 3,065 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 Goodwill impairment ( 2,659 ) ( 8,445 ) ( 7,208 ) ( 18,312 ) Translation adjustment (1) ( 27 ) ( 6 ) ( 51 ) ( 84 ) Net balance at March 31, 2022 $ 4,298 $ 18,427 $ 19,515 $ 42,240 (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) In the third quarter, we concluded that goodwill impairment indicators existed based on the decline in the price of our stock and operating results that have underperformed our forecasts during the year. Accordingly, we performed an interim impairment test as of March 31, 2022 and concluded that there was $18.3 million of total impairment to goodwill, which was recorded as follows: • $8.4 million in the Process and Industrial Facilities segment; • $7.2 million in the Storage and Terminal Solutions segment; and • $2.7 million in the Utility and Power Infrastructure segment. The estimated fair value of each segment was derived by utilizing a discounted cash flow analysis. The key assumptions used are described in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies, Goodwill. Other Intangible Assets Information on the carrying value of other intangible assets is as follows: At March 31, 2022 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,483 $ ( 2,159 ) $ 324 Customer-based 6 to 15 17,274 ( 12,370 ) 4,904 Total amortizing intangible assets $ 19,757 $ ( 14,529 ) $ 5,228 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 $ 1.4 million during the three and nine months ended March 31, 2022 , respectively; and $ 0.6 million and $ 1.7 million during the three and nine months ended March 31, 2021, respectively. We estimate that the remaining amortization expense related to March 31, 2022 amortizing intangible assets will be as follows (in thousands): Period ending: Remainder of Fiscal 2022 $ 432 Fiscal 2023 1,729 Fiscal 2024 1,416 Fiscal 2025 1,096 Fiscal 2026 555 Total estimated remaining amortization expense at March 31, 2022 $ 5,228 -13- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 5 – Debt ABL Credit Facility On September 9, 2021 , we and our primary U.S. and Canada operating subsidiaries entered into an asset-backed credit agreement (the "ABL Facility") as borrowers with Bank of Montreal, as Administrative Agent, Swing-Line Lender, a Letter of Credit Issuer and a Lender. The ABL Facility is guaranteed by substantially all of our remaining U.S. and Canadian subsidiaries. The ABL Facility provides for available borrowings of up to $ 100.0 million, which may be increased further by an amount not to exceed $ 15.0 million, subject to certain conditions, including obtaining additional commitments. The ABL Facility is intended to be used for working capital, capital expenditures, issuances of letters of credit and other lawful purposes. Our obligations under the ABL Facility are secured by a first lien on all our assets and the assets of our co-borrowers and guarantors under the ABL Facility. The maximum amount that we may borrow under the ABL Facility is subject to a borrowing base, which is based on restricted cash plus a percentage of the value of certain accounts receivable, inventory and equipment, reduced for certain reserves. We are required to maintain a minimum of $25.0 million of restricted cash at all times, but such amounts are also included in the borrowing base. The ABL Facility matures and any outstanding amounts become due and payable on September 9, 2026 . 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. 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 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 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. 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. -14- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 6 – Income Taxes Effective Tax Rate Our effective tax rates were 0.4 % and ( 7.8 )% for the three and nine months ended March 31, 2022 , compared to 28.2 % and 22.6 % during the three and nine months ended March 31, 2021, respectively. The effective tax rates during fiscal 2022 were impacted by a $ 14.2 million valuation allowance placed on our deferred tax assets during the second quarter. The tax benefit resulting from additional losses during the three months ended March 31, 2022 was offset by additional 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. 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. 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 $ 21.9 million during fiscal 2022. These assets are primarily comprised of federal net operating losses, which have an indefinite carryforward, federal tax credits and state net operating losses. 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. Deferred Payroll Taxes As of March 31, 2022, we have a balance of $ 5.6 million remaining on U.S. payroll taxes we deferred through provisions of CARES Act. We paid half of the original deferred payroll tax balance during the second quarter of fiscal 2022 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. -15- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) 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 $ 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. Generally, collection of amounts related to unpriced change orders and claims is expected within twelve months. However, since customers may not pay these amounts until final resolution of related claims, collection of these amounts may extend beyond one year. Other During the third quarter of fiscal 2020, we commenced litigation in an effort to collect accounts receivable from an iron and steel customer following the deterioration of the relationship in the second quarter of fiscal 2020. The unpaid receivable balance at March 31, 2022 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 Nine Months Ended March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021 (In thousands, except per share data) Basic EPS: Net loss $ ( 34,899 ) $ ( 12,873 ) $ ( 77,356 ) $ ( 20,501 ) Weighted average shares outstanding 26,783 26,515 26,714 26,422 Basic loss per share $ ( 1.30 ) $ ( 0.49 ) $ ( 2.90 ) $ ( 0.78 ) Diluted EPS: Diluted weighted average shares 26,783 26,515 26,714 26,422 Diluted loss per share $ ( 1.30 ) $ ( 0.49 ) $ ( 2.90 ) $ ( 0.78 ) -16- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 9 – Segment Information We report our results of operations through three reportable segments: Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions. • Utility and Power Infrastructure : consists of power delivery services provided to investor-owned utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, upgrades and maintenance, as well as emergency and storm restoration services. We also provide 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. • 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 eliminate intersegment sales; therefore, no intercompany profit or loss is recognized. 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. 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 Nine Months Ended March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021 Gross revenue Utility and Power Infrastructure $ 59,341 $ 44,720 $ 171,298 $ 157,414 Process and Industrial Facilities 69,786 43,095 167,033 141,570 Storage and Terminal Solutions 49,254 61,542 175,174 204,572 Total gross revenue $ 178,381 $ 149,357 $ 513,505 $ 503,556 Less: Inter-segment revenue Process and Industrial Facilities $ 815 $ 261 $ 3,841 $ 1,543 Storage and Terminal Solutions 563 836 2,603 3,514 Total inter-segment revenue $ 1,378 $ 1,097 $ 6,444 $ 5,057 Consolidated revenue Utility and Power Infrastructure $ 59,341 $ 44,720 $ 171,298 $ 157,414 Process and Industrial Facilities 68,971 42,834 163,192 140,027 Storage and Terminal Solutions 48,691 60,706 172,571 201,058 Total consolidated revenue $ 177,003 $ 148,260 $ 507,061 $ 498,499 Gross profit (loss) Utility and Power Infrastructure $ ( 492 ) $ ( 4,692 ) $ ( 7,089 ) $ 7,818 Process and Industrial Facilities ( 441 ) ( 171 ) 6,663 11,352 Storage and Terminal Solutions ( 458 ) 6,423 ( 216 ) 12,053 Corporate ( 372 ) — ( 1,422 ) — Total gross profit (loss) $ ( 1,763 ) $ 1,560 $ ( 2,064 ) $ 31,223 Selling, general and administrative expenses Utility and Power Infrastructure $ 2,910 $ 2,356 $ 9,109 $ 7,154 Process and Industrial Facilities 3,198 3,882 8,752 11,319 Storage and Terminal Solutions 4,063 4,792 12,850 13,854 Corporate 6,870 6,149 18,881 19,704 Total selling, general and administrative expenses $ 17,041 $ 17,179 $ 49,592 $ 52,031 Goodwill impairment and restructuring costs Utility and Power Infrastructure $ 2,659 $ 403 $ 2,705 $ 1,226 Process and Industrial Facilities 6,856 781 6,839 3,645 Storage and Terminal Solutions 7,219 590 7,293 1,244 Corporate — 86 1,197 470 Total goodwill impairment and restructuring costs $ 16,734 $ 1,860 $ 18,034 $ 6,585 Operating income (loss) Utility and Power Infrastructure $ ( 6,061 ) $ ( 7,451 ) $ ( 18,903 ) $ ( 562 ) Process and Industrial Facilities ( 10,495 ) ( 4,834 ) ( 8,928 ) ( 3,612 ) Storage and Terminal Solutions ( 11,740 ) 1,041 ( 20,359 ) ( 3,045 ) Corporate ( 7,242 ) ( 6,235 ) ( 21,500 ) ( 20,174 ) Total operating loss $ ( 35,538 ) $ ( 17,479 ) $ ( 69,690 ) $ ( 27,393 ) -18- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Total assets by segment were as follows: March 31, 2022 June 30, 2021 Utility and Power Infrastructure $ 108,071 $ 81,717 Process and Industrial Facilities 92,235 106,619 Storage and Terminal Solutions 133,969 160,782 Corporate 78,805 118,438 Total segment assets $ 413,080 $ 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 consists 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. 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 Nine Months Ended Since Inception of Business Improvement Plan March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021 (In thousands) Utility and Power Infrastructure Severance and other personnel-related costs $ — $ 291 $ 45 $ 1,109 $ 2,584 Facility costs — 112 — 117 348 Other intangible asset impairments — — — — 1,150 Other costs — — 1 — 1 Total Utility and Power Infrastructure $ — $ 403 $ 46 $ 1,226 $ 4,083 Process and Industrial Facilities Severance and other personnel-related costs $ — $ 315 $ ( 22 ) $ 2,905 $ 9,096 Facility costs 12 264 13 279 3,201 Other intangible asset impairments — — — — 375 Other costs (1) ( 1,601 ) 202 ( 1,597 ) 461 ( 1,171 ) Total Process and Industrial Facilities $ ( 1,589 ) $ 781 $ ( 1,606 ) $ 3,645 $ 11,501 Storage and Terminal Solutions Severance and other personnel-related costs $ — $ 423 $ 69 $ 1,076 $ 1,647 Facility costs — 167 — 168 879 Other costs 11 — 16 — 16 Total Storage and Terminal Solutions $ 11 $ 590 $ 85 $ 1,244 $ 2,542 Corporate Severance and other personnel-related costs $ — $ 3 $ 44 $ 164 $ 1,127 Facility costs — 83 16 306 98 Other costs — — 1,137 — 1,137 Total Corporate $ — $ 86 $ 1,197 $ 470 $ 2,362 Restructuring Costs by Type: Severance and other personnel-related costs $ — $ 1,032 $ 136 $ 5,254 $ 14,454 Facility costs 12 626 29 870 4,526 Other intangible asset impairments — — — — 1,525 Other costs ( 1,590 ) 202 ( 443 ) 461 ( 17 ) Total restructuring costs $ ( 1,578 ) $ 1,860 $ ( 278 ) $ 6,585 $ 20,488 (1) Other costs in the Process and Industrial Facilities segment consisted of a $1.6 million credit in the three and nine 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. -20- Table of Contents