MATRIX SERVICE CO 10-K

Item 8. Financial Statements and Supplementary Data Financial Statements of the Company Management’s Report on Internal Control Over Financial Reporting 43 Reports of Independent Registered Public Accounting Firm (PCAOB ID 34 ) 44 Consolidated Statements of Income for the Fiscal Years Ended June 30, 2022, June 30, 2021, and June 30, 2020 48 Consolidated Statements of Comprehensive Income for the Fiscal Years Ended June 30, 2022, June 30, 2021, and June 30, 2020 49 Consolidated Balance Sheets as of June 30, 2022 and June 30, 2021 50 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2022, June 30, 2021, and June 30, 2020 52 Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years Ended June 30, 2022, June 30, 2021, and June 30, 2020 54 Notes to Consolidated Financial Statements 55 Schedule II—Valuation and Qualifying Accounts 81 Financial Statement Schedules The financial statement schedule is filed as a part of this report under Schedule II – Valuation and Qualifying Accounts for the three fiscal years ended June 30, 2022, June 30, 2021 and June 30, 2020 immediately following Notes to Consolidated Financial Statements. All other schedules are omitted because they are not applicable or the required information is shown in the financial statements, or notes thereto, included herein. 42 Table of Contents MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Matrix Service Company and its wholly-owned subsidiaries (the “Company”) are responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. All internal control systems, no matter how well designed, have inherent limitations and cannot provide absolute assurance that all objectives will be met. Internal control over financial reporting is a process that involves diligence and is subject to lapses in judgment and human error. Internal control over financial reporting can also be circumvented by collusion or management override of controls. Because of these limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2022. In making this assessment, the Company’s management used the criteria established in Internal Control—Integrated Framework (2013) set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Management’s assessment included an evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, overall control environment and information systems control environment. Based on this assessment, the Company’s management has concluded that the Company’s internal control over financial reporting as of June 30, 2022 was effective. Deloitte & Touche LLP, an independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of June 30, 2022. Deloitte & Touche LLP’s report on the Company’s internal control over financial reporting is included herein. /s/ John R. Hewitt /s/ Kevin S. Cavanah John R. Hewitt Kevin S. Cavanah President and Chief Executive Officer Vice President and Chief Financial Officer October 11, 2022 43 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Matrix Service Company Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Matrix Service Company and subsidiaries (the “Company”) as of June 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2022 based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2022, of the Company and our report dated October 11, 2022, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Tulsa, Oklahoma October 11, 2022 44 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Matrix Service Company Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Matrix Service Company and subsidiaries (the "Company") as of June 30, 2022 and 2021, the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders' equity for each of the three years in the period ended June 30, 2022 and the related notes and the schedule listed in the Index at Item 8 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 11, 2022 expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue – Fixed Price Contracts – Refer to Notes 1 and 2 to the financial statements Critical Audit Matter Description The Company enters into contracts with customers to provide engineering, procurement, and fabrication and construction services, usually provided in association with capital projects, which commonly are fixed price contracts and are billed based on project milestones. Revenue on performance obligations associated with fixed-price contracts is recognized over time since these services create or enhance assets the customer controls as they are being created or enhanced. The Company measures progress of satisfying these performance obligations by using the percentage-of-completion method, which is based on costs incurred to date compared to the total estimated costs at completion. Due to the nature of work left to be performed on many of the Company’s contracts, the estimation of total cost at completion for fixed price contracts is complex, subject to many variables and requires significant judgment. For the fiscal year ended June 30, 2022, revenue totaled $707.8 million, of which $421.2 million related to fixed-price contracts. 45 Table of Contents Given the significant judgment necessary to estimate total costs at completion for fixed price contracts, auditing these estimates required extensive audit effort due to the volume and complexity of the fixed price contracts and a high degree of auditor judgment when evaluating the results of audit procedures, including the involvement of our capital projects specialists for two selected fixed price contracts. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to estimated total costs at completion for fixed price contracts included the following, among others: • We tested the effectiveness of controls over the recognition of revenue for fixed price contracts, including management’s controls over estimates of total costs at completion. • We evaluated the appropriateness and consistency of the methods and assumptions used by management to estimate total costs on fixed price contracts. • We evaluated management’s ability to accurately estimate contract costs by comparing current gross margin to historical gross margin for certain fixed price contracts open and completed during each quarter. • We selected a sample of fixed price contracts and performed the following: ◦ Evaluated gross margin changes over time for each selected contract from bid date to the testing date to evaluate management’s historical and current estimates of total costs at completion. ◦ Evaluated management’s ability to estimate total costs at completion for each selected contract by performing corroborating inquiries with the Company’s project managers and personnel involved with the selected contracts, including inquiries related to the timeline to completion and estimates of future costs to complete the contract. ◦ Selected a sample of estimates of future costs to complete for certain selected fixed price contracts and evaluated management’s estimates of total costs at completion by performing one of the following: ▪ Comparing management’s estimates to documents such as management’s work plans, customer purchase orders, third-party invoices from suppliers, and subcontractor agreements. ▪ Developing independent estimates of total costs to completion and compared our estimates to management’s estimates. Our independent estimates were based on information such as management’s work plans, customer purchase orders, third-party invoices from suppliers, subcontractor agreements, and similar historical project experience. ◦ For two selected fixed price contracts, we used our capital projects specialists to assist us in evaluating (1) management’s ability to estimate total costs at completion and (2) management’s estimates of total costs at completion. Goodwill – Certain Reporting Units – Refer to Notes 1 and 4 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of management’s estimate of the fair value of each reporting unit to its carrying value. The estimated fair value of each reporting unit was derived primarily by utilizing a discounted cash flow analysis based on the Company’s operating and capital budgets and strategic plan. Significant judgments and assumptions including the revenue growth rate, forecasted gross margins, and discount rate are inherent in the fair value estimates. The use of alternate judgments and/or assumptions could result in a fair value that differs from management’s estimate and could result in the recognition of additional impairment charges in the financial statements. The Company performed goodwill impairment tests as of March 31, 2022 and May 31, 2022, which resulted in $18.3 million of total impairment to goodwill in the third quarter of fiscal year 2022 and no impairment of goodwill in the fourth quarter of fiscal year 2022, respectively. Four reporting units with a combined total of $33.8 million of goodwill as of June 30, 2022 were at higher risk of future impairment than others and their estimated fair values exceed their carrying values by 4% to 23%. The Company’s total goodwill was $42.1 million as of June 30, 2022. We identified goodwill for four identified reporting units with a combined total of $33.8 million of goodwill as a critical audit matter because of the significant judgments made by management to estimate the fair values of these reporting units. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the revenue growth rate, forecasted gross margins, and discount rate. 46 Table of Contents How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the revenue growth rate, forecasted gross margins, and the discount rate used by management to estimate the fair value of the three identified reporting units included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the four identified reporting units, such as controls related to management’s selection of the revenue growth rate and discount rate and forecasts of gross margins. • We evaluated management’s ability to accurately forecast the revenue growth rate and future gross margins by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s revenue growth rate and forecasted gross margins by comparing the forecasts to: ◦ Historical revenue growth and gross margins. ◦ Internal communications to management and the Board of Directors, including other forward estimates prepared or used by management for other accounting estimates. ◦ Remaining performance obligations. ◦ Information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies and in industry outlooks. • With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) the discount rate, including testing the source information underlying the determination of the discount rate, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rate selected by management. /s/ DELOITTE & TOUCHE LLP Tulsa, Oklahoma October 11, 2022 We have served as the Company's auditor since 2006. 47 Table of Contents Matrix Service Company Consolidated Statements of Income (In thousands, except per share data) Fiscal Years Ended June 30, 2022 June 30, 2021 June 30, 2020 Revenue $ 707,780 $ 673,398 $ 1,100,938 Cost of revenue 708,986 640,633 998,762 Gross profit (loss) ( 1,206 ) 32,765 102,176 Selling, general and administrative expenses 67,690 69,756 86,276 Goodwill and other intangible asset impairment 18,312 — 38,515 Restructuring costs 646 6,756 14,010 Operating loss ( 87,854 ) ( 43,747 ) ( 36,625 ) Other income (expense): Interest expense ( 2,951 ) ( 1,559 ) ( 1,597 ) Interest income 90 126 1,270 Other (Note 3) 32,432 1,917 308 Loss before income tax expense (benefit) ( 58,283 ) ( 43,263 ) ( 36,644 ) Provision (benefit) for federal, state and foreign income taxes 5,617 ( 12,039 ) ( 3,570 ) Net loss $ ( 63,900 ) $ ( 31,224 ) $ ( 33,074 ) Basic loss per common share $ ( 2.39 ) $ ( 1.18 ) $ ( 1.24 ) Diluted loss per common share $ ( 2.39 ) $ ( 1.18 ) $ ( 1.24 ) Weighted average common shares outstanding: Basic 26,733 26,451 26,621 Diluted 26,733 26,451 26,621 See accompanying notes 48 Table of Contents Matrix Service Company Consolidated Statements of Comprehensive Income (In thousands) Fiscal Years Ended June 30, 2022 June 30, 2021 June 30, 2020 Net loss $ ( 63,900 ) $ ( 31,224 ) $ ( 33,074 ) Other comprehensive loss, net of tax: Foreign currency translation gain (loss) (net of tax expense (benefit) of $71, $223 and $(88) for the fiscal years ended June 30, 2022, 2021 and 2020, respectively) ( 1,426 ) 1,624 ( 622 ) Comprehensive loss $ ( 65,326 ) $ ( 29,600 ) $ ( 33,696 ) See accompanying notes 49 Table of Contents Matrix Service Company Consolidated Balance Sheets (In thousands) June 30, 2022 June 30, 2021 Assets Current assets: Cash and cash equivalents $ 52,371 $ 83,878 Accounts receivable, less allowances (2022 - $1,320; 2021 - $898) 153,879 148,030 Costs and estimated earnings in excess of billings on uncompleted contracts 44,752 30,774 Inventories 9,974 7,342 Income taxes receivable 13,547 16,965 Other current assets 12,889 4,230 Total current assets 287,412 291,219 Restricted cash 25,000 — Property, plant and equipment - net 53,869 69,407 Operating lease right-of-use assets 22,067 22,412 Goodwill 42,135 60,636 Other intangible assets, net of accumulated amortization 4,796 6,614 Deferred income taxes — 5,295 Other assets, non-current 5,514 11,973 Total assets $ 440,793 $ 467,556 See accompanying notes 50 Table of Contents Matrix Service Company Consolidated Balance Sheets (continued) (In thousands, except share data) June 30, 2022 June 30, 2021 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 74,886 $ 60,920 Billings on uncompleted contracts in excess of costs and estimated earnings 65,106 53,832 Accrued wages and benefits 21,526 21,008 Accrued insurance 6,125 6,568 Operating lease liabilities 5,715 5,747 Other accrued expenses 4,427 5,327 Total current liabilities 177,785 153,402 Deferred income taxes 26 34 Operating lease liabilities 19,904 20,771 Borrowings under asset-backed credit facility 15,000 — Other liabilities, non-current 372 7,810 Total liabilities 213,087 182,017 Commitments and contingencies Stockholders’ equity: Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of June 30, 2022 and June 30, 2021; 26,790,514 and 26,549,438 shares outstanding as of June 30, 2022 and June 30, 2021, respectively 279 279 Additional paid-in capital 139,854 137,575 Retained earnings 111,278 175,178 Accumulated other comprehensive loss ( 8,175 ) ( 6,749 ) 243,236 306,283 Treasury stock, at cost — 1,097,703 and 1,338,779 shares as of June 30, 2022 and June 30, 2021, respectively ( 15,530 ) ( 20,744 ) Total stockholders' equity 227,706 285,539 Total liabilities and stockholders’ equity $ 440,793 $ 467,556 See accompanying notes 51 Table of Contents Matrix Service Company Consolidated Statements of Cash Flows (In thousands) Fiscal Years Ended June 30, 2022 June 30, 2021 June 30, 2020 Operating activities: Net loss $ ( 63,900 ) $ ( 31,224 ) $ ( 33,074 ) Adjustments to reconcile net loss to net cash provided (used) by operating activities Depreciation and amortization 15,254 17,858 19,124 Goodwill and other intangible asset impairment (Note 4) 18,312 — 38,515 Stock-based compensation expense 7,877 8,156 9,877 Operating lease, fixed asset, and other intangible asset impairments due to restructuring (Note 14) — 454 5,215 Deferred income tax 5,358 889 ( 3,630 ) Gain on sale of property, plant and equipment (Note 3) ( 33,114 ) ( 1,201 ) ( 767 ) Provision for uncollectable accounts 738 85 1,158 Accelerated amortization of deferred debt amendment fees (Note 5) 1,518 — — Other 169 460 ( 7 ) Changes in operating assets and liabilities increasing (decreasing) cash: Accounts receivable ( 6,587 ) 11,109 56,603 Costs and estimated earnings in excess of billings on uncompleted contracts ( 13,978 ) 28,774 36,535 Inventories ( 2,632 ) ( 882 ) 1,557 Other assets and liabilities ( 530 ) ( 21,916 ) 11,029 Accounts payable 13,654 ( 12,387 ) ( 38,915 ) Billings on uncompleted contracts in excess of costs and estimated earnings 11,274 ( 8,610 ) ( 41,737 ) Accrued expenses ( 7,609 ) 5,464 ( 17,398 ) Net cash provided (used) by operating activities ( 54,196 ) ( 2,971 ) 44,085 Investing activities: Capital expenditures ( 3,345 ) ( 4,354 ) ( 18,539 ) Proceeds from asset sales (Note 3) 39,018 2,090 1,423 Net cash provided (used) by investing activities $ 35,673 $ ( 2,264 ) $ ( 17,116 ) See accompanying notes 52 Table of Contents Matrix Service Company Consolidated Statements of Cash Flows (continued) (In thousands) Fiscal Years Ended June 30, 2022 June 30, 2021 June 30, 2020 Financing activities: Advances under senior secured revolving credit facility $ — $ 1,125 $ 18,567 Repayments of advances under senior secured revolving credit facility — ( 10,913 ) ( 14,357 ) Advances under asset-backed credit facility 20,000 — — Repayments of advances under asset-backed credit facility ( 5,000 ) — — Payment of debt amendment fees ( 1,263 ) ( 1,275 ) — Open market purchase of treasury shares — — ( 17,045 ) Issuances of common stock 199 349 — Proceeds from issuance of common stock under employee stock purchase plan 270 299 320 Repurchase of common stock for payment of statutory taxes due on equity-based compensation ( 853 ) ( 1,554 ) ( 3,524 ) Other ( 654 ) ( 355 ) — Net cash provided (used) by financing activities 12,699 ( 12,324 ) ( 16,039 ) Effect of exchange rate changes on cash ( 683 ) 1,401 ( 609 ) Net increase (decrease) in cash and cash equivalents ( 6,507 ) ( 16,158 ) 10,321 Cash, cash equivalents, and restricted cash, beginning of period (Note 1) 83,878 100,036 89,715 Cash, cash equivalents, and restricted cash, end of period (Note 1) $ 77,371 $ 83,878 $ 100,036 Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Income taxes $ ( 2,864 ) $ 451 $ 6,394 Interest $ 2,773 $ 1,834 $ 2,148 Non-cash investing and financing activities: Purchases of property, plant and equipment on account $ 54 $ 106 $ 48 See accompanying notes 53 Table of Contents Matrix Service Company Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share data) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balances, June 30, 2019 $ 279 $ 137,712 $ 239,476 $ ( 7,751 ) $ ( 17,759 ) $ 351,957 Net loss — — ( 33,074 ) — — ( 33,074 ) Other comprehensive loss — — — ( 622 ) — ( 622 ) Treasury Shares sold to Employee Stock Purchase Plan (20,733 shares) — ( 19 ) — — 339 320 Issuance of deferred shares (542,279 shares) — ( 8,604 ) — — 8,604 — Treasury shares repurchased to satisfy tax withholding obligations (181,081 shares) — — — — ( 3,524 ) ( 3,524 ) Open market purchases of treasury shares (1,047,606 shares) — — — — ( 17,045 ) ( 17,045 ) Stock-based compensation expense — 9,877 — — — 9,877 Balances, June 30, 2020 279 138,966 206,402 ( 8,373 ) ( 29,385 ) 307,889 Net loss — — ( 31,224 ) — — ( 31,224 ) Other comprehensive income — — — 1,624 — 1,624 Treasury Shares sold to Employee Stock Purchase Plan (29,171 shares) — ( 207 ) — — 506 299 Exercise of stock options (34,150 shares) — ( 257 ) — — 606 349 Issuance of deferred shares (515,218 shares) — ( 9,083 ) — — 9,083 — Treasury shares repurchased to satisfy tax withholding obligations (170,629 shares) — — — — ( 1,554 ) ( 1,554 ) Stock-based compensation expense — 8,156 — — — 8,156 Balances, June 30, 2021 279 137,575 175,178 ( 6,749 ) ( 20,744 ) 285,539 Net loss — — ( 63,900 ) — — ( 63,900 ) Other comprehensive loss — — — ( 1,426 ) — ( 1,426 ) Treasury Shares Sold to Employee Stock Purchase Plan (29,826 shares) — ( 307 ) — — 577 270 Exercise of stock options (19,550 shares) — ( 189 ) — — 388 199 Issuance of deferred shares (268,403 shares) — ( 5,102 ) — — 5,102 — Treasury shares repurchased to satisfy tax withholding obligations (76,703 shares) — — — — ( 853 ) ( 853 ) Stock-based compensation expense — 7,877 — — — 7,877 Balances, June 30, 2022 $ 279 $ 139,854 $ 111,278 $ ( 8,175 ) $ ( 15,530 ) $ 227,706 See accompanying notes 54 Table of Contents Matrix Service Company Notes to Consolidated Financial Statements Note 1— Summary of Significant Accounting Policies Organization and Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of Matrix Service Company and its subsidiaries (“Matrix”, the “Company” or “we”, “our”, and “us” are to Matrix Service Company and its subsidiaries), all of which are wholly owned. Intercompany transactions and balances have been eliminated in consolidation. We operate in the United States, Canada, South Korea and Australia. Our reportable segments are Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We believe the most significant estimates and judgments are associated with revenue recognition, the recoverability tests that must be periodically performed with respect to our goodwill and other intangible assets, deferred tax assets, and the estimation of loss contingencies, including liabilities associated with litigation and with the self-insured retentions on our insurance programs. Actual results could materially differ from those estimates. Revenue Recognition General Information about our Contracts with Customers Our revenue comes from contracts to provide engineering, procurement, fabrication and construction, repair and maintenance and other services. Our engineering, procurement and fabrication and construction services are usually provided in association with capital projects, which are commonly fixed-price contracts that are billed based on project milestones. Our repair and maintenance services typically are cost reimbursable or time and material based contracts and are billed monthly or, for projects of short duration, at the conclusion of the project. The elapsed time from award to completion of performance may exceed one year for capital projects. Step 1: Contract Identification We do not recognize revenue unless we have identified a contract with a customer. A contract with a customer exists when it has approval and commitment from both parties, the rights and obligations of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability is probable. We also evaluate whether a contract should be combined with other contracts and accounted for as a single contract. This evaluation requires judgment and could change the timing of the amount of revenue and profit recorded for a given period. Step 2: Identify Performance Obligations Next, we identify each performance obligation in the contract. A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services to the customer. Revenue is recognized separately for each performance obligation in the contract. Many of our contracts have one clearly identifiable performance obligation. However, many of our contracts provide the customer an integrated service that includes two or more of the following services: engineering, procurement, fabrication, construction, repair and maintenance services. For these contracts, we do not consider the integrated services to be distinct within the context of the contract when the separate scopes of work combine into a single commercial objective or capability for the customer. Accordingly, we generally identify one performance obligation in our contracts. The determination of the number of performance obligations in a contract requires significant judgment and could change the timing of the amount of revenue recorded for a given period. 55 Matrix Service Company Notes to Consolidated Financial Statements (continued) Step 3: Determine Contract Price After determining the performance obligations in the contract, we determine the contract price. The contract price is the amount of consideration we expect to receive from the customer for completing the performance obligation(s). In a fixed-price contract, the contract price is a single lump-sum amount. In reimbursable and time and materials based contracts, the contract price is determined by the agreed upon rates or reimbursements for time and materials expended in completing the performance obligation(s) in the contract. A number of our contracts contain various cost and performance incentives and penalties that can either increase or decrease the contract price. These variable consideration amounts are generally earned or incurred based on certain performance metrics, most commonly related to project schedule or cost targets. We estimate variable consideration at the most likely amount of additional consideration to be received (or paid in the case of penalties), provided that meeting the variable condition is probable. We include estimated amounts of variable consideration in the contract price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the contract price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We reassess the amount of variable consideration each accounting period until the uncertainty associated with the variable consideration is resolved. Changes in the assessed amount of variable consideration are accounted for prospectively as a cumulative adjustment to revenue recognized in the current period. Step 4: Assign Contract Price to Performance Obligations After determining the contract price, we assign such price to the performance obligation(s) in the contract. If a contract has multiple performance obligations, we assign the contract price to each performance obligation based on the stand-alone selling prices of the distinct services that comprise each performance obligation. Step 5: Recognize Revenue as Performance Obligations are Satisfied We record revenue for contracts with our customers as we satisfy the contracts' performance obligations. We recognize revenue on performance obligations associated with fixed-price contracts for engineering, procurement, fabrication and construction services over time since these services create or enhance assets the customer controls as they are being created or enhanced. We measure progress of satisfying these performance obligations by using the percentage-of-completion method, which is based on costs incurred to date compared to the total estimated costs at completion, since it best depicts the transfer of control of assets being created or enhanced to the customer. We recognize revenue over time for reimbursable and time and material based repair and maintenance contracts since the customer simultaneously receives and consumes the benefit of those services as we perform work under the contract. As a practical expedient allowed under the revenue accounting standards, we record revenue for these contracts in the amount to which we have a right to invoice for the services performed provided that we have a right to consideration from the customer in an amount that corresponds directly with the value of the performance completed to date. Costs incurred may include direct labor, direct materials, subcontractor costs and indirect costs, such as salaries and benefits, supplies and tools, equipment costs and insurance costs. Indirect costs are charged to projects based upon direct costs and overhead allocation rates per dollar of direct costs incurred or direct labor hours worked. Typically, customer contracts will include standard warranties that provide assurance that products and services will function as expected. We do not sell separate warranties. We have numerous contracts that are in various stages of completion which require estimates to determine the forecasted costs at completion. Due to the nature of the work left to be performed on many of our contracts, the estimation of total cost at completion for fixed-price contracts is complex, subject to many variables and requires significant judgment. Estimates of total cost at completion are made each period and changes in these estimates are accounted for prospectively as cumulative adjustments to revenue recognized in the current period. If estimates of costs to complete fixed-price contracts indicate a loss, a provision is made through a contract write-down for the total loss anticipated. 56 Matrix Service Company Notes to Consolidated Financial Statements (continued) Change Orders Contracts are often modified through change orders, which are changes to the agreed upon scope of work. Most of our change orders, which may be priced or unpriced, are for goods or services that are not distinct from the existing contract due to the significant integration of services provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a change order on the contract price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. For unpriced change orders, we estimate the increase or decrease to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Unpriced change orders are more fully discussed in Note 7 - Commitments and Contingencies. Claims Sometimes we seek claims for amounts in excess of the contract price for delays, errors in specifications and designs, contract terminations, change orders in dispute or other causes of additional costs incurred by us. Recognition of amounts as additional contract price related to claims is appropriate only if there is a legal basis for the claim. The determination of our legal basis for a claim requires significant judgment. We estimate the change to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Claims are more fully discussed in Note 7 - Commitments and Contingencies. Cash, Cash Equivalents and Restricted Cash We include as cash equivalents all investments with original maturities of three months or less which are readily convertible into cash. We have cash on deposit at June 30, 2022 with banks in the United States, Canada, South Korea and Australia in excess of Federal Deposit Insurance Corporation ("FDIC"), Canada Deposit Insurance Corporation ("CDIC"), Korea Deposit Insurance Corporation ("KDIC") and Financial Claims Scheme ("FCS") protection limits, respectively. The United States Dollar equivalent of Canadian, South Korean and Australian deposits totaled $ 5.7 million as of June 30, 2022. 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 Consolidated Balance Sheets. The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Consolidated Balance Sheets to the total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows (in thousands): June 30, 2022 June 30, 2021 Cash and cash equivalents $ 52,371 $ 83,878 Restricted cash $ 25,000 — Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows $ 77,371 $ 83,878 Accounts Receivable Accounts receivable are carried on a gross basis, less the allowance for credit losses. We estimate the allowance for credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Our customers consist primarily of major integrated oil companies, independent refiners and marketers, power companies, petrochemical companies, pipeline companies, mining companies, contractors and engineering firms. We are exposed to the risk of individual customer defaults or depressed cycles in our customers’ industries. To mitigate this risk, many of our contracts require payment as projects progress or advance payment in some circumstances. In addition, in most cases we can place liens against the property, plant or equipment constructed or terminate the contract if a material contract default occurs. Accounts are written off against the allowance for credit losses only after all reasonable collection attempts have been exhausted. 57 Matrix Service Company Notes to Consolidated Financial Statements (continued) Retentions Contract retentions collectable beyond one year are included in Other assets in the Consolidated Balance Sheets. Accounts payable retentions are generally settled within one year. Loss Contingencies Various legal actions, claims and other contingencies arise in the normal course of our business. Contingencies are recorded in the consolidated financial statements, or are otherwise disclosed, in accordance with ASC 450-20, “Loss Contingencies”. Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and estimable. We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes known. We believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results of operations or liquidity. 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. Inventories Inventories consist primarily of steel plate and pipe and aluminum coil and extrusions. Cost is determined primarily using the average cost method and inventories are stated at the lower of cost or net realizable value. Depreciation Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. Depreciable lives are as follows: buildings— 40 years, construction equipment— 3 to 15 years, transportation equipment— 3 to 5 years, and office equipment and software— 3 to 10 years. Leasehold improvements are amortized over the shorter of the useful life of the asset or the lease term. Leases We enter into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. We determine if an arrangement is or contains a lease at inception of the arrangement. An arrangement is determined to be a lease if it conveys the right to control the use of identified property and equipment for a period of time in exchange for consideration. Operating lease right-of-use assets are recognized as the present value of future lease payments over the lease term as of the commencement date, plus any lease payments made prior to commencement, and less any lease incentives received. Operating lease liabilities are recognized as the present value of the future lease payments over the lease term as of the commencement date. Operating lease expense is recognized based on the undiscounted future lease payments over the remaining lease term on a straight-line basis. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term. Determinations with respect to lease term (including any renewals and terminations), incremental borrowing rate used to discount lease payments, variable lease expense and future lease payments require the use of judgment based on the facts and circumstances related to each lease. We consider various factors, including economic incentives, intent, past history and business need, to determine the likelihood that a renewal option will be exercised. Right-of-use assets are evaluated for impairment in accordance with our policy for impairment of long-lived assets. Impairment of Long-Lived Assets We evaluate long-lived assets for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets used in operations may not be recoverable. The determination of whether an impairment has occurred is based on management’s estimate of undiscounted future cash flows attributable to the assets as compared to the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and, to the extent the carrying value exceeds the fair value of the assets, recording a loss provision. 58 Matrix Service Company Notes to Consolidated Financial Statements (continued) For assets identified to be disposed of in the future, the carrying value of the assets are compared to the estimated fair value less the cost of disposal to determine if an impairment has occurred. Until the assets are disposed of, an estimate of the fair value is redetermined when related events or circumstances change. Goodwill Goodwill represents the excess of the purchase price of acquisitions over the acquisition date fair value of the net identifiable tangible and intangible assets acquired. In accordance with current accounting guidance, goodwill is not amortized and 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 in the fourth quarter of each fiscal year, or in between annual tests whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable, 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. The goodwill impairment test involves comparing management’s estimate of the fair value of a reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, then goodwill is not impaired. If the fair value of a reporting unit is less than its carrying value, then goodwill is impaired to the extent of the difference, but the impairment may not exceed the balance of goodwill assigned to that reporting unit. We utilize a discounted cash flow analysis, referred to as an income approach, and market multiples, referred to as a market approach, to determine the estimated fair value of our reporting units. For the income approach, significant judgments and assumptions including forecasted project awards, discount rate, anticipated revenue growth rate, gross margins, operating expenses, working capital needs and capital expenditures are inherent in the fair value estimates, which are based on our operating and capital budgets and on our strategic plan. As a result, actual results may differ from the estimates utilized in our income approach. For the market approach, significant judgments and assumptions include the selection of guideline companies, forecasted guideline company EBITDA and our forecasted EBITDA. The use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate and could result in the recognition of additional impairment charges in the financial statements. As a test for reasonableness, we also consider the combined fair values of our reporting units to our market capitalization. Other Intangible Assets Intangible assets that have finite useful lives are amortized by the straight-line method over their useful lives ranging from 6 years to 15 years. A finite intangible asset is considered impaired when its carrying amount is not recoverable and exceeds the asset's fair value. The carrying amount is deemed unrecoverable if it is greater than the sum of undiscounted cash flows expected to result from use and eventual disposition of the asset. An impairment loss is equal to the excess of the carrying amount over the fair value of the asset. If quoted market prices are not available, the fair values of the intangible assets are based on present values of expected future cash flows or royalties avoided using discount rates commensurate with the risks involved. Insurance Reserves We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses through the use of deductibles, coverage limits and self-insured retentions. We establish reserves for claims using a combination of actuarially determined estimates and case-by-case evaluations of the underlying claim data and update our evaluations as further information becomes known. Judgments and assumptions are inherent in our reserve accruals; as a result, changes in assumptions or claims experience could result in changes to these estimates in the future. If actual results of claim settlements are different than the amounts estimated, we may be exposed to future gains and losses that could be material. Stock-Based Compensation We have issued stock options, nonvested deferred share awards and cash-settled restricted share units under our long-term incentive compensation plans. The fair value of these awards is calculated at grant date. The fair value of time-based, nonvested deferred shares and cash-settled restricted share units is the value of our common stock at the grant date. The fair value of market-based nonvested deferred shares is based on several factors, including the probability that the market condition specified in the grant will be achieved, which is calculated using a Monte Carlo model. Cash-settled restricted share units must be settled in cash and are accounted for as liability-type awards and are remeasured at the end of each reporting period at fair 59 Matrix Service Company Notes to Consolidated Financial Statements (continued) value until settlement. For all awards, expense is recognized over the requisite service period with forfeitures recorded as they occur. Income Taxes We use the asset and liability approach for financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances based on our judgments and estimates are established when necessary to reduce deferred tax assets to the amount expected to be realized in future operating results. Our estimates are based on facts and circumstances in existence as well as interpretations of existing tax regulations and laws applied to the facts and circumstances, with the help of professional tax advisors. Therefore, we estimate and provide for amounts of additional income taxes that may be assessed by the various taxing authorities. Foreign Currency The functional currencies of our operations in Canada, South Korea and Australia are the Canadian Dollar, South Korean Won and U.S. Dollar, respectively. The functional currency of our Australian operations is the U.S. Dollar since its sales are primarily denominated in that currency. For subsidiaries with operations using a foreign functional currency, assets and liabilities are translated at the year-end exchange rates and the income statement accounts are translated at average exchange rates throughout the year. Translation gains and losses are reported in Accumulated Other Comprehensive Loss, net of tax, in the Consolidated Statements of Changes in Stockholders’ Equity and in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income. Translation gains and losses are reversed from Accumulated Other Comprehensive Income (Loss) and are recognized in current period income in the event we dispose of an entity with accumulated translation gains or losses. Transaction gains and losses are reported as a component of Other income (expense) in the Consolidated Statements of Income. Note 2 – Revenue Remaining Performance Obligations We had $ 484.2 million of remaining performance obligations yet to be satisfied as of June 30, 2022. We expect to recognize approximately $ 389.9 million of our remaining performance obligations as revenue within the next twelve months. Contract Balances Contract terms with customers include the timing of billing and payment, which usually differs from the timing of revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets and liabilities are calculated on a contract-by-contract basis and reported on a net basis at the end of each period and are classified as current. We present our contract assets in the balance sheet as Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts ("CIE"). CIE consists of revenue recognized in excess of billings. We present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and Estimated Earnings ("BIE"). BIE consists of billings in excess of revenue recognized. The following table provides information about CIE and BIE: June 30, 2022 June 30, 2021 Change (In thousands) Costs and estimated earnings in excess of billings on uncompleted contracts $ 44,752 $ 30,774 $ 13,978 Billings on uncompleted contracts in excess of costs and estimated earnings ( 65,106 ) ( 53,832 ) ( 11,274 ) Net contract liabilities $ ( 20,354 ) $ ( 23,058 ) $ 2,704 60 Matrix Service Company Notes to Consolidated Financial Statements (continued) 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 fiscal year ended June 30, 2022 that was included in the prior period BIE balance was $ 49.2 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 June 30, 2022 and June 30, 2021 included retentions to be collected within one year of $ 16.1 million and $ 19.9 million, respectively. Contract retentions collectable beyond one year are included in other assets in the Consolidated Balance Sheets and totaled $ 4.0 million as of June 30, 2022 and $ 3.1 million as of June 30, 2021. Disaggregated Revenue Revenue disaggregated by reportable segment is presented in Note 13 - Segment Information. The following series of tables presents revenue disaggregated by geographic area where the work was performed and by contract type: Geographic Disaggregation: Fiscal Years Ended June 30, 2022 June 30, 2021 June 30, 2020 (In thousands) United States $ 640,512 $ 604,739 $ 1,020,083 Canada 63,045 61,703 70,133 Other international 4,223 6,956 10,722 Total $ 707,780 $ 673,398 $ 1,100,938 Contract Type Disaggregation: Fiscal Years Ended June 30, 2022 June 30, 2021 June 30, 2020 (In thousands) Fixed-price contracts $ 421,188 $ 444,042 $ 685,559 Time and materials and other cost reimbursable contracts 286,592 229,356 415,379 Total $ 707,780 $ 673,398 $ 1,100,938 Typically, we assume more risk with fixed-price contracts since increases in cost 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. The project reduced gross profit by $ 8.7 million during fiscal 2022. The increase in forecasted costs was primarily due to poor performance of a now terminated subcontractor, which required rework, as well as supply chain and escalation issues, in order to meet our client's expectations. We expect to complete the project during the second quarter of fiscal 2023. 61 Matrix Service Company Notes to Consolidated Financial Statements (continued) Our results of operations were materially impacted by changes in the forecasted costs to complete two large capital projects in the Utility and Power Infrastructure segment. Improved project execution on the first project resulted in an increase in gross profit of $ 2.2 million during the second half of fiscal 2022. However, increases in the forecasted costs to complete this project during the first half of fiscal 2022 resulted in the project reducing gross profit by $ 3.6 million during fiscal 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. Increased forecasted costs to the complete the second project resulted in the project reducing gross profit by $ 2.2 million during the fourth quarter of fiscal 2022 and $ 0.1 million during fiscal 2022. We recognized $ 78.1 million of revenue on this project during the year at a near break-even margin as a result of the change in estimate. The increase in forecasted costs was the result of higher than anticipated subcontractor costs and labor costs as the project neared completion. We expect to complete the project during the second quarter of fiscal 2023. 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 $ 6.3 million in fiscal 2022. The increase in costs was primarily due to changes in repair scope, expanded client weld testing and associated schedule delays. We achieved substantial completion on this project in the fourth quarter of fiscal 2022. Note 3— Property, Plant and Equipment The following table presents the components of our property, plant and equipment - net at June 30, 2022 and 2021: June 30, 2022 June 30, 2021 (In thousands) Property, plant and equipment - at cost: Land and buildings $ 34,788 $ 41,633 Construction equipment 93,036 94,453 Transportation equipment 48,999 50,510 Office equipment and software 43,823 42,706 Construction in progress 1,646 493 Total property, plant and equipment - at cost 222,292 229,795 Accumulated depreciation ( 168,423 ) ( 160,388 ) Property, plant and equipment - net $ 53,869 $ 69,407 62 Matrix Service Company Notes to Consolidated Financial Statements (continued) Geographical Disaggregation of Long-Lived Assets Long-Lived Assets June 30, 2022 June 30, 2021 June 30, 2020 (In thousands) United States $ 137,682 $ 157,442 $ 164,056 Canada 3,436 6,523 5,659 Other international 12,263 12,372 12,435 $ 153,381 $ 176,337 $ 182,150 Sale-leaseback Transaction We sold our regional office and fabrication and warehouse facilities located in Orange, California during the fourth quarter of fiscal 2022 for net proceeds of $ 37.4 million in cash. We recorded a gain of $ 32.4 million on the sale, which is included in other income in the Consolidated Statements of Income. In connection with the sale, we also entered into a leaseback agreement for a period up to 24 months while we locate replacement facilities. We are still fully committed to our operations in Southern California - we decided to enter into the sale and leaseback transaction to take advantage of the elevated real estate market valuations in Southern California. Note 4— Goodwill and Other Intangible Assets Goodwill The changes in the carrying amount 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, 2019 $ 31,840 $ 34,842 $ 26,686 $ 93,368 Goodwill impairment ( 24,900 ) ( 7,981 ) — ( 32,881 ) Translation adjustment (1) ( 35 ) ( 15 ) ( 68 ) ( 118 ) Net balance at June 30, 2020 6,905 26,846 26,618 60,369 Translation adjustment (1) 79 32 156 267 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) ( 62 ) ( 6 ) ( 121 ) ( 189 ) Net balance at June 30, 2022 $ 4,263 $ 18,427 $ 19,445 $ 42,135 (1) The translation adjustments relate to the periodic translation of Canadian Dollar and South Korean Won denominated goodwill recorded as a part of prior acquisitions in Canada and South Korea, in which the local currency was determined to be the functional currency. We performed our annual goodwill impairment test as of May 31, 2022, which resulted in no impairment. The fiscal 2022 test indicated that four reporting units with a combined total of $ 33.8 million of goodwill as of June 30, 2022 were at higher risk of future impairment. If our view of project opportunities or gross margins deteriorates, particularly for the higher risk reporting units, then we may be required to record an impairment of goodwill. In the third quarter of fiscal 2022, 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: 63 Matrix Service Company Notes to Consolidated Financial Statements (continued) • $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. In the second quarter of fiscal 2020, we concluded that a goodwill impairment indicator existed in the Utility and Power Infrastructure segment based on the recent history of depressed gross margins and the second quarter’s downward acceleration of revenue and gross margin. Accordingly, we performed an interim impairment test as of December 31, 2019, reflecting updated revenue and gross margin assumptions, and concluded that the reporting unit's $24.9 million of goodwill was fully impaired. Additionally, we concluded that a goodwill impairment indicator existed for a Process and Industrial Facilities segment reporting unit based on several second quarter events. These events included the deterioration of our relationship with a significant customer in the iron and steel industry in the second quarter. As a result, the customer canceled other previously awarded work and we received no subsequent business from this customer. Accordingly, we performed an interim impairment test as of December 31, 2019 and concluded that the reporting unit's $8.0 million of goodwill was fully impaired. The estimated fair value of each segment was derived by utilizing a discounted cash flow analysis and market multiples of projected EBITDA. The key assumptions used are described in Note 1 - Summary of Significant Accounting Policies, and Item 7. 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 June 30, 2022 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,558 $ ( 2,276 ) $ 282 Customer based 6 to 15 17,331 ( 12,817 ) 4,514 Total other intangible assets $ 19,889 $ ( 15,093 ) $ 4,796 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 other intangible assets $ 19,837 $ ( 13,223 ) $ 6,614 Amortization expense totaled $ 1.8 million, $ 2.3 million, and $ 3.4 million in fiscal 2022, 2021, and 2020, respectively. In the fourth quarter of fiscal 2020, we fully impaired a customer relationship intangible asset with a net book value of $ 1.2 million. The customer relationship primarily related to services in the Utility and Power Infrastructure segment which were impacted by our performance improvement plan (see Note 14 - Restructuring Costs). As a result, the customer relationship intangible asset was no longer recoverable. As of June 30, 2020, this intangible asset had a remaining useful life of approximately 2 years, a gross carrying amount of $ 6.3 million and accumulated amortization of $ 5.1 million. The impairment is included in restructuring costs in the Consolidated Statements of Income. 64 Matrix Service Company Notes to Consolidated Financial Statements (continued) Also in the fourth quarter of fiscal 2020, we fully impaired a customer relationship intangible asset with a net book value of $ 0.4 million in connection with the closure of an underperforming operating unit in the Process and Industrial Facilities segment. The closure was part of our performance improvement plan (see Note 14 - Restructuring Costs). As of June 30, 2020, this intangible asset had a remaining useful life of approximately 4 years, a gross carrying amount of $ 0.9 million and accumulated amortization of $ 0.5 million. The impairment is included in the restructuring costs caption in the Consolidated Statements of Income. In the second quarter of fiscal 2020, in connection with the factors disclosed for the Process and Industrial Facilities segment goodwill impairment above, we fully impaired a customer relationship with a net book value of $ 5.6 million. As of December 31, 2019, this intangible asset had a remaining useful life of 9 years, a gross carrying amount of $ 9.4 million and accumulated amortization of $ 3.8 million. The impairment is included within the goodwill and other intangible asset impairment caption in the Consolidated Statements of Income. We estimate that future amortization of other intangible assets will be as follows (in thousands): For year ending: June 30, 2023 $ 1,729 June 30, 2024 1,416 June 30, 2025 1,096 June 30, 2026 555 Total estimated amortization expense $ 4,796 Note 5— Debt ABL Credit Facility On October 5, 2022 , we and our primary U.S. and Canada operating subsidiaries entered into the First Amendment and Waiver to Credit Agreement (the “Amendment”), which amended our asset-backed credit agreement (the "ABL Facility"), dated as of September 9, 2021 with Bank of Montreal, as Administrative Agent, Swing Line Lender and a Letter of Credit Issuer, and the lenders named therein. The Amendment (i) waives an event of default resulting from our failure to deliver the Administrative Agent and the lenders our audited financial statements for the fiscal year ended June 30, 2022 by September 28, 2022 (the “Audited Financial Statements”), provided we deliver the Audited Financial Statements by October 14, 2022, (ii) reduces the maximum amount of loans under the ABL Facility to $ 90.0 million from $ 100.0 million and (iii) replaces the London interbank offered rate with the forward term rate based on the secured overnight financing rate (the “SOFR”) as the interest rate benchmark. The ABL Facility is guaranteed by substantially all of our remaining U.S. and Canadian subsidiaries. The ABL Facility available borrowings may be increased 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 June 30, 2022, our borrowing base was $ 80.8 million, we had $ 15.0 million of outstanding borrowings, and $ 23.3 million in letters of credit outstanding, which resulted in availability of $ 42.5 million under the ABL Facility. 65 Matrix Service Company Notes to Consolidated Financial Statements (continued) Borrowings under the ABL Facility bear interest through maturity at a variable rate based upon, at our option, an annual rate of either a base rate (“Base Rate”), an Adjusted Term SOFR ("Adjusted Term SOFR"), or at the Canadian Prime Rate, plus an applicable margin. The Adjusted Term SOFR is defined as (i) the SOFR plus (ii) 11.448 basis points for a one-month tenor and 26.161 basis points for a three-month tenor; provided that the Adjusted Term SOFR cannot be below zero. The Base Rate is defined as a fluctuating interest rate equal to the greater 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) Adjusted Term SOFR for one month period plus 1.00 %; or (iv) 1.00 %. Depending on the amount of average availability, the applicable margin is between 1.00 % to 1.50 % for Base Rate and Canadian Prime Rate borrowings, which includes either U.S. or Canadian prime rate, and between 2.00 % and 2.50 % for Adjusted Term SOFR borrowings. Interest is payable either (i) monthly for Base Rate or Canadian Prime Rate borrowings or (ii) the last day of the interest period for Adjusted Term SOFR borrowings, as set forth in the ABL Facility. The fee for undrawn amounts is 0.25 % per annum and is due quarterly. The interest rate in effect for borrowings outstanding at June 30, 2022, including applicable margin, was 6.00 %. The ABL Facility contains customary conditions to borrowings, events of default and covenants, including, but not limited to, covenants that restrict our ability to sell assets, engage in mergers and acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay cash dividends, issue equity instruments, make distribution or redeem or repurchase capital stock. In the event that our availability is less than the greater of (i) $ 15.0 million and (ii) 15.00 % of the lesser of (1) the current borrowing base and (2) the commitments under the ABL Facility then in effect, a consolidated Fixed Charge Coverage Ratio of at least 1.00 to 1.00 must be maintained. We are in compliance with all covenants of the ABL Facility as of June 30, 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 Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole Book Runner, and the other Lenders party thereto. The Prior Credit Agreement provided for a three-year senior secured revolving credit facility of $ 200.0 million that expired November 2, 2023 . We had no borrowings and $ 41.3 million of letters of credit outstanding under the Prior Credit Agreement as of June 30, 2021. Interest expense during fiscal 2022 included $ 1.5 million of accelerated amortization of deferred debt amendment fees associated with the Prior Credit Agreement. Note 6— Income Taxes Sources of Pretax Income (Loss) Fiscal Years Ended June 30, 2022 June 30, 2021 June 30, 2020 (In thousands) Domestic $ ( 53,258 ) $ ( 38,867 ) $ ( 32,660 ) Foreign ( 5,025 ) ( 4,396 ) ( 3,984 ) Total $ ( 58,283 ) $ ( 43,263 ) $ ( 36,644 ) 66 Matrix Service Company Notes to Consolidated Financial Statements (continued) Components of the Provision for Income Tax Expense (Benefit) Fiscal Years Ended June 30, 2022 June 30, 2021 June 30, 2020 (In thousands) Current: Federal $ 230 $ ( 13,154 ) $ ( 376 ) State 28 465 412 Foreign 1 ( 239 ) 23 259 ( 12,928 ) 59 Deferred: Federal 2,504 774 ( 5,000 ) State 2,858 ( 291 ) ( 1,091 ) Foreign ( 4 ) 406 2,462 5,358 889 ( 3,629 ) $ 5,617 $ ( 12,039 ) $ ( 3,570 ) Reconciliation Between the Expected Income Tax Provision Applying the Domestic Federal Statutory Tax Rate and the Reported Income Tax Provision Fiscal Years Ended June 30, 2022 June 30, 2021 June 30, 2020 (In thousands) Expected benefit for federal income taxes at the statutory rate $ ( 12,239 ) $ ( 9,085 ) $ ( 7,695 ) State income taxes, net of federal benefit ( 1,971 ) ( 1,240 ) ( 768 ) Impairment of non-deductible goodwill (1) 1,132 — 1,813 Charges without tax benefit 265 961 1,707 Change in valuation allowance (2) 17,943 2,797 3,062 Excess tax expense (benefit) on stock-based compensation 1,019 1,826 230 Research and development and other tax credits ( 613 ) ( 1,707 ) ( 1,724 ) Foreign tax differential ( 232 ) ( 96 ) ( 132 ) Federal rate differential net operating loss carryback (3) 141 ( 5,223 ) — Change in uncertain tax positions ( 120 ) ( 7 ) 20 Other 292 ( 265 ) ( 83 ) Provision (benefit) for federal, state and foreign income taxes $ 5,617 $ ( 12,039 ) $ ( 3,570 ) (1) In fiscal 2022, we impaired $18.3 million of goodwill, which included $ 5.4 million of non-deductible goodwill. In fiscal 2020, we impaired $32.9 million of goodwill, which included $ 8.6 million of non-deductible goodwill. See Note 4 - Goodwill and Other Intangible Assets for more information about the impairments. (2) In fiscal 2022, due to the existence of a cumulative loss over a three-year period, we recorded a full valuation allowance of $17.9 million against our deferred tax assets. 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 we generate 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. In fiscal 2021, we placed $2.8 million of valuation allowances, including $ 1.5 million on certain state net operating loss carryforwards due to a recent history of cumulative losses for a subsidiary. In fiscal 2020, we placed $3.1 million of valuation allowances on net operating loss carryforwards and foreign tax credits primarily related to Canada. (3) Relates to fiscal 2021 net operating losses carried back under provisions of the CARES Act to fiscal years 2016 and 2017 which had a 35% federal tax rate. 67 Matrix Service Company Notes to Consolidated Financial Statements (continued) Significant Components of our Deferred Tax Assets and Liabilities June 30, 2022 June 30, 2021 (In thousands) Deferred tax assets: Warranty reserve $ 206 $ 206 Bad debt reserve 340 231 Paid-time-off accrual 315 747 Insurance reserve 1,019 1,229 Legal reserve 79 146 Net operating loss benefit and credit carryforwards 23,717 14,966 Accrued compensation and pension 736 690 Prepaid insurance 16 27 Stock compensation expense on nonvested deferred shares 1,910 1,895 Accrued losses 1,089 64 Restructuring reserve 160 725 Book over tax amortization 5,449 3,765 Deferred FICA 1,427 1,920 Foreign currency translation and other 1,002 665 Valuation allowance ( 28,615 ) ( 11,104 ) Total deferred tax assets 8,850 16,172 Deferred tax liabilities: Tax over book depreciation 7,842 10,315 Receivable holdbacks and other 1,034 596 Total deferred tax liabilities 8,876 10,911 Net deferred tax asset (liability) $ ( 26 ) $ 5,261 As reported in the Consolidated Balance Sheets: June 30, 2022 June 30, 2021 (In thousands) Deferred income tax assets — 5,295 Deferred income tax liabilities ( 26 ) ( 34 ) Net deferred tax asset (liability) ( 26 ) $ 5,261 Valuation Allowance In fiscal 2022, due to the existence of a cumulative loss over a three-year period, we recorded a full valuation allowance of $17.9 million against our deferred tax assets. 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 we generate 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. 68 Matrix Service Company Notes to Consolidated Financial Statements (continued) Operating Loss and Tax Credit Carryforwards We have net operating loss carryforwards and tax credit carryforwards in federal, state and foreign jurisdictions. The valuation allowance at June 30, 2022 and June 30, 2021 reduces the recognized tax benefit of these carryforwards to an amount that is more likely than not to be realized. The gross carryforwards will generally expire as shown below for each jurisdiction: Operating Loss and Tax Credit Carryforwards Expiration Period Amount (in thousands) Federal net operating loss Indefinite $ 27,207 Federal tax credits June 2041 to June 2042 $ 1,700 Federal foreign tax credits June 2023 to June 2025 $ 655 State net operating losses June 2025 to indefinite $ 73,889 State tax credits June 2033 to indefinite $ 912 Foreign net operating losses June 2029 to June 2042 $ 37,379 Foreign tax credits June 2035 to June 2042 $ 676 Net Operating Loss Carryback Refund Through provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (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 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 June 30, 2022, we have a balance of $ 5.6 million remaining on U.S. payroll taxes we deferred through provisions of the 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 Consolidated Balance Sheets. Other In general, it is our practice and intention to reinvest the earnings of our foreign subsidiaries in our foreign operations. We do not provide for outside basis differences under the indefinite reinvestment assertion of ASC 740-30. We file tax returns in multiple domestic and foreign taxing jurisdictions. With a few exceptions, we are no longer subject to examination by taxing authorities through fiscal 2017. At June 30, 2022, we updated our evaluation of our open tax years in all known jurisdictions. As of June 30, 2022, we have a $ 0.3 million liability for unrecognized tax positions and the payment of related interest and penalties. We treat the related interest and penalties as income tax expense. Due to the uncertainties related to these tax matters, we are unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority will occur. Note 7— Commitments and Contingencies Insurance Reserves We maintain insurance coverage for various aspects of our operations. However, exposure to potential losses is retained through the use of deductibles, self-insured retentions and coverage limits. 69 Matrix Service Company Notes to Consolidated Financial Statements (continued) Typically our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of our services and provide warranties for materials and workmanship. We may also be required to name the customer as an additional insured up to the limits of insurance available, or we may be required to purchase special insurance policies or surety bonds for specific customers or provide letters of credit in lieu of bonds to satisfy performance and financial guarantees on some projects. We maintain a performance and payment bonding line sufficient to support the business. We generally require our subcontractors to indemnify us and our customer and name us as an additional insured for activities arising out of the subcontractors’ work. We also require certain subcontractors to provide additional insurance policies, including surety bonds in favor of us, to secure the subcontractors’ work or as required by the subcontract. There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against a valid claim or loss under the contracts with our customers. Unpriced Change Orders and Claims As of June 30, 2022 and June 30, 2021, costs and estimated earnings in excess of billings on uncompleted contracts included revenue for unpriced change orders and claims of $ 8.9 million and $ 14.6 million, respectively. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings. Generally we expect collection of amounts related to unpriced change orders and claims within twelve months. However, customers may not pay these amounts until final resolution of related claims, which may extend beyond one year. 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 June 30, 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— 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 June 30, 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 a year to 14 years. Construction equipment leases generally have "month-to-month" lease terms that automatically renew as long as the equipment remains in use. In fiscal 2021 we recorded $ 0.5 million of impairments to right-of-use assets related to leased office space that was closed in connection with our restructuring activities, see Note 14 – Restructuring Costs for additional information. The components of lease expense in the Consolidated Statements of Income are as follows: Fiscal Years Ended June 30, 2022 June 30, 2021 June 30, 2020 Lease expense Location of Expense in Consolidated Statements of Income (in thousands) Operating lease expense Cost of revenue and selling, general and administrative expenses $ 7,511 $ 8,386 $ 12,274 Short-term lease expense (1) Cost of revenue 24,225 25,912 37,371 Total lease expense $ 31,736 $ 34,298 $ 49,645 (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. 70 Matrix Service Company Notes to Consolidated Financial Statements (continued) The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in our Consolidated Balance Sheets, were as follows: June 30, 2022 Maturity Analysis: (in thousands) Fiscal 2023 $ 6,956 Fiscal 2024 5,654 Fiscal 2025 3,697 Fiscal 2026 3,400 Fiscal 2027 3,288 Thereafter 8,681 Total future operating lease payments 31,676 Imputed interest ( 6,057 ) Net present value of future lease payments 25,619 Less: current portion of operating lease liabilities 5,715 Non-current operating lease liabilities $ 19,904 The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of June 30, 2022: Weighted-average remaining lease term (in years) 7.2 years Weighted-average discount rate 5.0 % Supplemental cash flow information related to leases is as follows: Fiscal Year Ended June 30, 2022 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating lease payments $ 8,060 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 5,687 Note 9— Stockholders’ Equity Preferred Stock We have 5.0 million shares of preferred stock authorized, none of which was issued or outstanding at June 30, 2022 or June 30, 2021. 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. Under the program, the aggregate number of shares repurchased may not exceed 2,707,175 shares. We may repurchase our stock from time to time in the open market at prevailing market prices or in privately negotiated transactions and are not obligated to purchase any shares. The program will continue unless and until it is modified or revoked by the Board of Directors. We made no repurchases under the program in fiscal 2022 and have no current plans to repurchase stock. The terms 71 Matrix Service Company Notes to Consolidated Financial Statements (continued) 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. There were 1,349,037 shares available for repurchase under the November 2018 Program as of June 30, 2022. Treasury Shares In addition to the stock buyback program, we may withhold shares of common stock to satisfy the tax withholding obligations upon vesting of an employee’s deferred shares. We withheld 76,703 , 170,629 , and 181,081 shares of common stock during fiscal 2022, 2021, and 2020, respectively, to satisfy these obligations. These shares were returned to our pool of treasury shares. We have 1,097,703 treasury shares as of June 30, 2022 and intend to utilize these treasury shares in connection with equity awards under our incentive plans and for sales to the Employee Stock Purchase Plan. Note 10— Stock-Based Compensation Total stock-based compensation expense for the fiscal years ended June 30, 2022, June 30, 2021, and June 30, 2020 was $ 7.9 million, $ 8.2 million and $ 9.9 million, respectively. Measured but unrecognized stock-based compensation expense at June 30, 2022 was $ 9.0 million, all of which related to nonvested deferred shares which are expected to be recognized as expense over a weighted average period of 1.7 years. We recognized excess tax expense of $ 1.0 million, $ 1.8 million, and $ 0.2 million related to stock-based compensation vesting for the fiscal years ended June 30, 2022, 2021, and 2020, respectively. Plan Information In November 2020, our stockholders approved the Matrix Service Company 2020 Stock and Incentive Compensation Plan (the "2020 Plan"), which provides stock-based and cash-based incentives for officers, directors and other key employees. Stock options, restricted stock, restricted stock units, stock appreciation rights, performance shares and cash-based awards can be issued under this plan. Upon approval of the 2020 Plan, the 2018 Stock and Incentive Compensation Plan ("2018 Plan") was frozen with the exception of normal vesting and other activity associated with awards previously granted under the 2018 Plan. The 2018 Plan was preceded by the 2016 Stock Incentive Plan ("2016 Plan"), which was frozen upon approval of the 2018 Plan with the exception of normal vesting, forfeiture and other activity associated with awards previously granted under the 2016 Plan. Shares awarded under either the 2018 Plan or 2016 Plan that are subsequently forfeited or net settled for tax withholding purposes are returned to the treasury share pool and become available for grant under the 2020 Plan. Awards totaling 1,725,000 shares have been authorized under the 2020 Plan. There were 1,392,706 shares available for grant under the 2020 Plan as of June 30, 2022. Stock Options We did not award any new stock options in fiscal years 2022, 2021, or 2020. The 19,550 options outstanding as of June 30, 2021 were exercised in the second quarter of fiscal 2022 at a weighted average exercise price of $ 10.19 per share. There were no options outstanding at June 30, 2022. The total intrinsic value of stock options exercised were less than $ 0.1 million during fiscal 2022 and $ 0.1 million during fiscal 2021. No stock options were exercised in fiscal 2020. Nonvested Deferred Shares We have issued nonvested deferred shares under the following types of arrangements: • Time-based awards—Employee awards generally vest in four equal annual installments beginning one year after the grant date. Beginning in fiscal 2019, the award agreements contain a provision that accelerates the vesting for retirement eligible participants and participants that become retirement eligible during the vesting period and who elect to retire more than one year after the date of the award. The award is forfeited if retirement occurs before the first anniversary of the award. Settlement still occurs on the normal vesting schedules. Director awards vest one year after the grant date. 72 Matrix Service Company Notes to Consolidated Financial Statements (continued) • Market-based awards—These awards are in the form of performance units which vest 3 years after the grant date only if our common stock achieves certain levels of total shareholder return when compared to the total shareholder return of a peer group of companies as selected by the Compensation Committee of the Board of Directors. The payout can range from zero to 200 % of the original award depending on the Company's relative total shareholder return during the performance period. These awards are settled in stock. As of June 30, 2022, there were approximately 163,000 , 340,000 , and 389,000 performance units that are scheduled to vest in fiscal 2023, fiscal 2024, and fiscal 2025, respectively, assuming target performance. All awards under the 2020 Plan vest upon the death or disability of the participant or upon a change of control of the Company, provided that the successor company fails to assume or replace the awards in connection with that change of control event. If the successor company does assume the awards, then vesting of the awards will be accelerated in the event of an involuntary termination or other material adverse event that occurs in connection with or following the change of control. All awards prior to the 2020 Plan vest upon the death or disability of the participant or upon a change of control of the Company. The grant date fair value of the time-based awards is determined by the market value of our common stock on the grant date. The grant date fair value of the market-based awards is calculated using a Monte Carlo model. For the fiscal 2022 grant, the model estimated the fair value of the award based on approximately 100,000 simulations of the future prices of our common stock compared to the future prices of the common stock of its peer companies based on historical volatilities. The model also took into account the expected dividends over the performance period of those peer companies which pay cash dividends. Nonvested deferred share activity for the fiscal year ended June 30, 2022 is as follows: Shares Weighted Average Grant Date Fair Value per Share Nonvested shares at June 30, 2021 1,280,707 $ 17.07 Shares granted 696,227 $ 14.13 Shares vested and released ( 268,403 ) $ 13.92 Shares canceled ( 242,743 ) $ 25.50 Nonvested shares at June 30, 2022 1,465,788 $ 14.86 There were 665,597 and 490,322 deferred shares granted in fiscal 2021 and 2020 with average grant date fair values of $ 10.60 and $ 21.79 per share, respectively. There were 515,218 and 542,279 deferred shares that vested and were released in fiscal 2021 and 2020 with weighted average fair values of $ 16.99 and $ 19.43 per share, respectively. There were 119,904 deferred shares cancelled in fiscal 2021 with an average grant date fair value of $ 20.67 . No deferred shares were cancelled in fiscal 2020. Cash-Settled Restricted Share Units We granted 231,219 and 238,848 cash-settled restricted share units during fiscal years 2022 and 2021, respectively; with weighted average fair values of $ 2.6 million and $ 2.3 million, respectively. No cash-settled restricted share units were granted in fiscal year 2020. There were 53,333 shares vested and released in fiscal 2022 with a weighted average fair value of $ 0.5 million. There were no cash-settled restricted shares vested or released in fiscal 2021 or 2020. There were 25,355 shares cancelled in fiscal 2022 with a weighted average fair value of $ 0.3 million. There were no cash-settled restricted shares cancelled in fiscal 2021 or 2020. The grant date fair value of these awards is based on the price of our common stock and the number of shares awarded on the date of grant. The award must be settled in cash and is accounted for as a liability-type award. The expense is recognized over the requisite service period with remeasurement at the end of each reporting period at fair value until settlement. The requisite service period is based on the vesting provisions of the awards which generally occur in four equal annual installments beginning one year after the grant date. These awards contain the same retirement provisions described for time-based awards in the nonvested deferred shares section above. 73 Matrix Service Company Notes to Consolidated Financial Statements (continued) We recognized $ 0.6 million and $ 1.0 million of expense in fiscal years 2022 and 2021, respectively, for cash-settled restricted share units, which was included in selling, general and administrative expenses and cost of revenue in the Consolidated Statements of Income. As of June 30, 2022, the liability for cash-settled restricted share units was $ 0.9 million and is included in accrued wages and benefits in the Consolidated Balance Sheets. Note 11— Earnings per Common Share Basic earnings per share (“EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share includes the dilutive effect of employee and director stock options and nonvested deferred shares. Stock options are considered dilutive whenever the exercise price is less than the average market price of the stock during the period and antidilutive whenever the exercise price exceeds the average market price of the common stock during the period. Nonvested deferred shares are considered dilutive (antidilutive) whenever the average market value of the shares during the period exceeds (is less than) the sum of the related average unamortized compensation expense during the period plus the related hypothetical estimated excess tax benefit that will be realized when the shares vest. Stock options and nonvested deferred shares are considered antidilutive in the event we report a net loss. The computation of basic and diluted EPS is as follows: Fiscal Years Ended June 30, 2022 June 30, 2021 June 30, 2020 (In thousands, except per share data) Basic EPS: Net loss $ ( 63,900 ) $ ( 31,224 ) $ ( 33,074 ) Weighted average shares outstanding 26,733 26,451 26,621 Basic loss per share $ ( 2.39 ) $ ( 1.18 ) $ ( 1.24 ) Diluted EPS: Weighted average shares outstanding—basic 26,733 26,451 26,621 Diluted weighted average shares 26,733 26,451 26,621 Diluted loss per share $ ( 2.39 ) $ ( 1.18 ) $ ( 1.24 ) Note 12— Employee Benefit Plans Defined Contribution Plans We sponsor defined contribution savings plans for all eligible employees meeting length of service requirements. Under the primary plan, participants may contribute an amount up to 25 % of pretax annual compensation subject to certain limitations. We match 100 % of the first 3 % of employee contributions and 50 % of the next 2 % of employee contributions. Our matching contributions vest immediately. Our matching contributions were $ 5.3 million, $ 5.4 million, and $ 6.2 million in the fiscal years ended June 30, 2022, 2021, and 2020, respectively. 74 Matrix Service Company Notes to Consolidated Financial Statements (continued) Multiemployer Pension Plans We contribute to a number of multiemployer defined benefit pension plans in the U.S. and Canada under the terms of collective-bargaining agreements that cover our union-represented employees, who are represented by more than 100 local unions. The related collective-bargaining agreements between those organizations and us, which specify the rate at which we must contribute to the multi-employer defined pension plan, expire at different times between 2022 and 2025. Benefits under these plans are generally based on compensation levels and years of service. For us, the financial risks of participating in multiemployer plans are different from single-employer plans in the following respects: • Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. • If a participating employer discontinues contributions to a plan, the unfunded obligations of the plan may be borne by the remaining participating employers. • If a participating employer chooses to stop participating in a plan, a withdrawal liability may be created based on the unfunded vested benefits for all employees in the plan. Under federal legislation regarding multiemployer pension plans, in the event of a withdrawal from a plan or plan termination, companies are required to continue funding their proportionate share of such plan’s unfunded vested benefits. We are a participant in multiple union sponsored multiemployer plans, and, as a plan participant, our potential obligation could be significant. The amount of the potential obligation is not currently ascertainable because the information required to determine such amount is not identifiable or readily available. Our participation in significant plans for the fiscal year ended June 30, 2022 is outlined in the table below. The “EIN/Pension Plan Number” column provides the Employer Identification Number (“EIN”) and the three digit plan number. The zone status is based on the latest information that the Company received from the plan and is certified by the plan’s actuary. Plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are generally less than 80 percent funded, and plans in the green zone are generally at least 80 percent funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. The “Surcharge Imposed” column includes plans in a red zone status that require a payment of a surcharge in excess of regular contributions. The last column lists the expiration date of the collective-bargaining agreement to which the plan is subject. 75 Matrix Service Company Notes to Consolidated Financial Statements (continued) Pension Fund EIN/Pension Plan Number Pension Protection Act Zone Status FIP/RP Status Pending or Implemented Company Contributions Fiscal Year Surcharge Imposed 2022 2021 2022 2021 2020 (In thousands) Boilermaker-Blacksmith National Pension Trust 48-6168020/001 Yellow Yellow Implemented $ 5,208 $ 4,003 $ 6,634 No National Electrical Benefit Fund, IBEW locals 71, 126, 488, and 1319 53-0181657/001 Described below (1) Green NA 2,973 1,865 2,674 No Joint Pension Fund Local Union 164 IBEW 22-6031199/001 Described below (1) Described below (1) Implemented 1,514 1,958 1,560 No Joint Pension Fund of Local Union No 102 IBEW 22-1615726/001 Described below (1) Green NA 906 1,341 1,227 No IBEW Local 456 Pension Plan 22-6238995/001 Green Green NA 734 595 427 No Local 351 IBEW Pension Plan 22-3417366/001 Green Green NA 395 479 1,709 No Steamfitters Local Union No 420 Pension Plan 23-2004424/001 Described below (1) Red Implemented 498 442 1,523 Yes IBEW Local 654 Pension Plan 23-6538183/001 Green Green NA 857 818 1,021 No Ohio Carpenters' Pension Fund, Locals 1090 and 351 34-6574360/001 Described below (1) Red Implemented — — 3,042 Yes Iron Workers Pension Plan, Local 55 34-6682351/001 Described below (1) Green NA — — 2,951 No Northwestern Ohio Plumbers and Pipefitters Pension, Local 50 34-6502487/001 Described below (1) Green NA — — 2,504 No Indiana Laborers Pension Fund 35-6027150/001 Described below (1) Green NA — 20 1,604 No Iron Workers Mid-America Pension Plan, Local 395 36-6488227/001 Green Green NA — — 840 No Pipefitters Retirement Fund, Local 597 62-6105084/001 Described below (1) Green NA 4 — 835 No Iron Workers Pension Plan of Western Pennsylvania, Local 3 25-1283169/001 Green Green NA — — 500 No Contributions to other multiemployer plans 3,729 3,848 8,352 Total contributions made $ 16,818 $ 15,369 $ 37,403 (1) For the National Electrical Benefit Fund for Locals 71/126/488/1319, Local 164 IBEW Pension Plan, Local IBEW 102 IBEW Pension Plan, Steamfitters Local Union No. 420 Pension Plan, Locals 1090 and 351 of the Ohio Carpenters' Pension Fund, Iron Workers Pension Plan Local 55, Northwestern Ohio Plumbers and Pipefitters Pension Local 50, Indiana Laborers Pension Fund, and Pipefitters Retirement Fund Local 597, we have not received a funding notification that covers our fiscal year 2022 during the preparation of this Form 10-K. For Local 164 IBEW Pension Plan, we have not received a funding notification that covers our fiscal year 2021 either. Under Federal pension law, if a multiemployer pension plan is determined to be in critical or endangered status, the plan must provide notice of this status to participants, beneficiaries, the bargaining parties, the Pension Benefit Guaranty Corporation, and the Department of Labor. We also observed that these plans have not submitted any Critical or Endangered Status Notices to the Department of Labor for calendar years that we have not received notification. The Critical or Endangered Status Notices can be accessed at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/public-disclosure/2022-funding-status-notices#2020-c-and-d. Employee Stock Purchase Plan The Matrix Service Company 2011 Employee Stock Purchase Plan (“ESPP”) was effective January 1, 2011. The ESPP allows employees to purchase shares through payroll deductions and members of the Board of Directors to purchase shares from amounts withheld from their cash retainers. Share purchases are limited to an aggregate market value of no greater than $ 60,000 per calendar year per participant and are purchased from us at the current market value with no discount to the participant. Contributions are with after tax earnings and are accumulated in non-interest bearing accounts for quarterly purchases of company stock. Upon the purchase of shares, the participants receive all stockholder rights including dividend and voting rights and are permitted to sell their shares at any time. We have made 1,000,000 shares available under the ESPP. The ESPP can be terminated at any time at the discretion of the Board of Directors and will automatically terminate once the plan shares are exhausted. Shares are issued from Treasury Stock under the ESPP. There were 29,826 shares issued in fiscal 2022, 29,171 shares in fiscal 2021, and 20,733 shares in fiscal 2020. 76 Matrix Service Company Notes to Consolidated Financial Statements (continued) Note 13— Segment Information In fiscal 2022, we operated our business through three reportable segments: • 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 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 storage tanks and terminals. We also include work related to cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum, hydrogen and other specialty vessels such as spheres in this segment, as well work related to marine structures and truck and rail loading/offloading facilities. Our services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, we offer tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals. 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. 77 Matrix Service Company Notes to Consolidated Financial Statements (continued) Results of Operations (In thousands) Utility and Power Infrastructure Process and Industrial Facilities Storage and Terminal Solutions Corporate Total Fiscal year ended June 30, 2022 Gross revenue $ 220,093 $ 258,497 $ 236,260 $ — $ 714,850 Less: inter-segment revenue — 3,649 3,421 — 7,070 Consolidated revenue 220,093 254,848 232,839 — 707,780 Gross profit (loss) ( 8,586 ) 9,270 262 ( 2,152 ) ( 1,206 ) Selling, general and administrative expenses 11,771 12,506 17,284 26,129 67,690 Goodwill impairment and restructuring costs 2,746 6,867 7,330 2,015 18,958 Operating loss ( 23,103 ) ( 10,103 ) ( 24,352 ) ( 30,296 ) ( 87,854 ) Segment assets 94,059 104,078 141,084 101,572 440,793 Capital expenditures 29 254 338 2,724 3,345 Depreciation and amortization 3,812 5,659 5,540 243 15,254 Fiscal year ended June 30, 2021 Gross revenue $ 210,052 $ 201,472 $ 267,982 $ — $ 679,506 Less: inter-segment revenue — 1,555 4,553 — 6,108 Consolidated revenue 210,052 199,917 263,429 — 673,398 Gross profit 1,506 17,642 13,617 — 32,765 Selling, general and administrative expenses 9,882 14,756 18,644 26,474 69,756 Restructuring costs 1,312 3,807 1,391 246 6,756 Operating loss ( 9,688 ) ( 921 ) ( 6,418 ) ( 26,720 ) ( 43,747 ) Segment assets 81,717 106,619 160,782 118,438 467,556 Capital expenditures 1,183 834 1,136 1,201 4,354 Depreciation and amortization 4,127 6,018 7,456 257 17,858 Fiscal year ended June 30, 2020 Gross revenue $ 212,001 $ 424,710 $ 470,871 $ — $ 1,107,582 Less: inter-segment revenue — 2,839 3,805 — 6,644 Consolidated revenue 212,001 421,871 467,066 — 1,100,938 Gross profit (loss) 7,081 36,349 61,413 ( 2,667 ) 102,176 Selling, general and administrative expenses 10,047 24,266 26,386 25,577 86,276 Intangible asset impairments and restructuring costs 27,625 22,914 1,066 920 52,525 Operating income (loss) ( 30,591 ) ( 10,831 ) 33,961 ( 29,164 ) ( 36,625 ) Segment assets 67,398 138,734 187,167 124,011 517,310 Capital expenditures 3,285 7,523 4,921 2,810 18,539 Depreciation and amortization 3,054 8,014 7,743 313 19,124 78 Matrix Service Company Notes to Consolidated Financial Statements (continued) Information about Significant Customers: Significant Customers as a Percentage of Segment Revenue Consolidated Utility and Power Infrastructure Process and Industrial Facilities Storage and Terminal Solutions Fiscal Year ended June 30, 2022 Customer one 12.3 % — % 33.5 % 0.8 % Customer two 11.0 % 35.5 % — % — % Customer three 4.7 % 15.1 % — % — % Fiscal Year ended June 30, 2021 Customer one 12.9 % 41.3 % — % — % Customer two 9.9 % — % 33.3 % 0.1 % Customer three 7.0 % 22.5 % — % 0.1 % Customer four 4.4 % — % — % 11.2 % Fiscal Year ended June 30, 2020 Customer one 9.7 % — % 25.4 % — % Customer two 8.2 % 42.7 % — % — % Customer three 8.2 % — % — % 19.3 % Customer four 6.8 % — % — % 16.1 % Customer five 2.0 % 10.5 % — % — % Note 14— 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. 79 Matrix Service Company Notes to Consolidated Financial Statements (continued) Restructuring costs incurred are classified as follows: Fiscal Year Ended June 30, 2022 Fiscal Year Ended June 30, 2021 Fiscal Year Ended June 30, 2020 Since Inception of Business Improvement Plan (in thousands) Utility and Power Infrastructure Severance and other personnel-related costs $ 45 $ 1,199 $ 1,340 $ 2,584 Facility costs — 113 235 348 Other intangible asset impairments — — 1,150 1,150 Other costs 1 — — 1 Total Utility and Power Infrastructure $ 46 $ 1,312 $ 2,725 $ 4,083 Process and Industrial Facilities Severance and other personnel-related costs $ ( 22 ) $ 2,951 $ 6,167 $ 9,096 Facility costs 17 431 2,757 3,205 Other intangible asset impairments — — 375 375 Other costs (1) ( 1,597 ) 426 — ( 1,171 ) Total Process and Industrial Facilities $ ( 1,602 ) $ 3,808 $ 9,299 $ 11,505 Storage and Terminal Solutions Severance and other personnel-related costs $ 69 $ 1,231 $ 347 $ 1,647 Facility costs — 159 720 879 Other costs 28 — — 28 Total Storage and Terminal Solutions $ 97 $ 1,390 $ 1,067 $ 2,554 Corporate Severance and other personnel-related costs $ 504 $ 164 $ 919 $ 1,587 Facility costs 16 82 — 98 Other costs 1,585 — — 1,585 Total Corporate $ 2,105 $ 246 $ 919 $ 3,270 Total restructuring costs $ 646 $ 6,756 $ 14,010 $ 21,412 Restructuring Costs by Type: Severance and other personnel-related costs $ 596 $ 5,545 $ 8,773 $ 14,914 Total facility costs 33 785 3,712 4,530 Total other intangible asset impairments — — 1,525 1,525 Other costs 17 426 — 443 Total restructuring costs $ 646 $ 6,756 $ 14,010 $ 21,412 (1) Other costs in the Process and Industrial Facilities segment consisted of a $1.6 million credit in the third quarter of fiscal 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. 80 Matrix Service Company Schedule II—Valuation and Qualifying Accounts June 30, 2022, June 30, 2021, and June 30, 2020 (In thousands) COL. A COL. B COL. C ADDITIONS COL. D COL. E Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts—Describe Deductions—Describe Balance at End of Period Fiscal Year 2022 Deducted from asset accounts: Allowance for doubtful accounts $ 898 $ 738 $ — $ ( 316 ) (A) $ 1,320 Valuation reserve for deferred tax assets 11,104 17,943 — ( 432 ) (B) 28,615 Total $ 12,002 $ 18,681 $ — $ ( 748 ) $ 29,935 Fiscal Year 2021 Deducted from asset accounts: Allowance for doubtful accounts 905 85 — ( 92 ) (C) 898 Valuation reserve for deferred tax assets 7,763 2,797 — 544 (D) 11,104 Total 8,668 2,882 — 452 12,002 Fiscal Year 2020 Deducted from asset accounts: Allowance for doubtful accounts 923 1,158 — ( 1,176 ) (E) 905 Valuation reserve for deferred tax assets 4,959 3,062 — ( 258 ) (B) 7,763 Total 5,882 4,220 — ( 1,434 ) 8,668 (A) Relates to the write off of a $0.3 million account receivable that was fully reserved in a prior period. (B) Relates to foreign currency translation for the portion of the valuation allowance on net operating loss and tax credit carryforwards in foreign jurisdictions. (C) Primarily relates to a $0.1 million reserve that was recognized as a credit loss and ultimately written off within fiscal 2021. (D) Relates to $ 1.1 million of foreign currency translation for the portion of the valuation allowance on net operating loss and tax credit carryforwards in foreign jurisdictions, partially offset by $ 0.6 million of fully reserved tax credits that expired in fiscal 2021. (E) Primarily relates to a $ 0.6 million reserve that was recognized as a credit loss and ultimately settled and written off within fiscal 2020 and $ 0.3 million of payments received on a balance that was fully reserved. 81 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.