MATRIX SERVICE CO 10-Q

Item 1. Financial Statements Matrix Service Company Condensed Consolidated Statements of Income (In thousands, except per share data) (unaudited) Three Months Ended September 30, 2022 September 30, 2021 Revenue $ 208,431 $ 168,093 Cost of revenue 195,423 171,601 Gross profit (loss) 13,008 ( 3,508 ) Selling, general and administrative expenses 16,811 16,629 Restructuring costs 1,287 605 Operating loss ( 5,090 ) ( 20,742 ) Other income (expense): Interest expense ( 372 ) ( 1,999 ) Interest income 24 21 Other ( 1,074 ) ( 83 ) Loss before income tax benefit ( 6,512 ) ( 22,803 ) Benefit for federal, state and foreign income taxes — ( 5,265 ) Net loss $ ( 6,512 ) $ ( 17,538 ) Basic loss per common share $ ( 0.24 ) $ ( 0.66 ) Diluted loss per common share $ ( 0.24 ) $ ( 0.66 ) Weighted average common shares outstanding: Basic 26,862 26,611 Diluted 26,862 26,611 See accompanying notes. -1- Table of Contents Matrix Service Company Condensed Consolidated Statements of Comprehensive Income (In thousands) (unaudited) Three Months Ended September 30, 2022 September 30, 2021 Net loss $ ( 6,512 ) $ ( 17,538 ) Other comprehensive loss, net of tax: Foreign currency translation loss (net of tax expense of $0 and $54 for the three months ended September 30, 2022 and 2021, respectively) ( 1,753 ) ( 795 ) Comprehensive loss $ ( 8,265 ) $ ( 18,333 ) See accompanying notes. -2- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands) (unaudited) September 30, 2022 June 30, 2022 Assets Current assets: Cash and cash equivalents (Note 1) $ 14,342 $ 52,371 Accounts receivable, less allowances (September 30, 2022—$1,222 and June 30, 2022—$1,320) 149,345 153,879 Costs and estimated earnings in excess of billings on uncompleted contracts 59,609 44,752 Inventories 8,379 9,974 Income taxes receivable 13,546 13,547 Prepaid expenses 9,833 4,024 Other current assets 5,550 8,865 Total current assets 260,604 287,412 Restricted cash (Note 1) 25,000 25,000 Property, plant and equipment - net 51,659 53,869 Operating lease right-of-use assets 21,185 22,067 Goodwill 41,916 42,135 Other intangible assets, net of accumulated amortization 4,364 4,796 Other assets, non-current 6,184 5,514 Total assets $ 410,912 $ 440,793 See accompanying notes. -3- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands, except share data) (unaudited) September 30, 2022 June 30, 2022 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 68,557 $ 74,886 Billings on uncompleted contracts in excess of costs and estimated earnings 53,286 65,106 Accrued wages and benefits 16,643 21,526 Accrued insurance 6,981 6,125 Operating lease liabilities 4,895 5,715 Other accrued expenses 4,236 4,427 Total current liabilities 154,598 177,785 Deferred income taxes 23 26 Operating lease liabilities 19,698 19,904 Borrowings under asset-backed credit facility 15,000 15,000 Other liabilities, non-current 342 372 Total liabilities 189,661 213,087 Commitments and contingencies Stockholders’ equity: Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of September 30, 2022 and June 30, 2022; 26,955,510 and 26,790,514 shares outstanding as of September 30, 2022 and June 30, 2022, respectively 279 279 Additional paid-in capital 137,651 139,854 Retained earnings 104,766 111,278 Accumulated other comprehensive loss ( 9,928 ) ( 8,175 ) 232,768 243,236 Treasury stock, at cost — 932,707 shares as of September 30, 2022, and 1,097,703 shares as of June 30, 2022 ( 11,517 ) ( 15,530 ) Total stockholders' equity 221,251 227,706 Total liabilities and stockholders’ equity $ 410,912 $ 440,793 See accompanying notes. -4- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Three Months Ended September 30, 2022 September 30, 2021 Operating activities: Net loss $ ( 6,512 ) $ ( 17,538 ) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 3,642 4,052 Stock-based compensation expense 2,055 1,869 Deferred income tax — ( 5,343 ) Loss (gain) on sale of property, plant and equipment 65 ( 101 ) Provision for uncollectible accounts ( 88 ) 4 Accelerated amortization of deferred debt amendment fees — 1,518 Other 63 — Changes in operating assets and liabilities increasing (decreasing) cash: Accounts receivable 4,622 3,134 Costs and estimated earnings in excess of billings on uncompleted contracts ( 14,857 ) ( 2,992 ) Inventories 1,595 1,028 Other assets and liabilities ( 3,370 ) ( 5,921 ) Accounts payable ( 6,376 ) 5,108 Billings on uncompleted contracts in excess of costs and estimated earnings ( 11,820 ) ( 2,859 ) Accrued expenses ( 4,248 ) ( 1,112 ) Net cash used by operating activities ( 35,229 ) ( 19,153 ) Investing activities: Capital expenditures ( 1,578 ) ( 219 ) Proceeds from asset sales 4 103 Net cash used by investing activities $ ( 1,574 ) $ ( 116 ) See accompanying notes. -5- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Three Months Ended September 30, 2022 September 30, 2021 Financing activities: Payment of debt amendment fees $ — $ ( 922 ) Proceeds from issuance of common stock under employee stock purchase plan 65 76 Repurchase of common stock for payment of statutory taxes due on equity-based compensation ( 310 ) ( 853 ) Other — ( 118 ) Net cash used by financing activities ( 245 ) ( 1,817 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 981 ) ( 514 ) Decrease in cash, cash equivalents and restricted cash ( 38,029 ) ( 21,600 ) Cash, cash equivalents and restricted cash, beginning of period (Note 1) 77,371 83,878 Cash, cash equivalents and restricted cash, end of period (Note 1) $ 39,342 $ 62,278 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest, including payment of debt amendment fees $ 421 $ 1,603 Non-cash investing and financing activities: Purchases of property, plant and equipment on account $ 101 $ 51 See accompanying notes. -6- Table of Contents Matrix Service Company Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share data) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balances, June 30, 2022 $ 279 $ 139,854 $ 111,278 $ ( 8,175 ) $ ( 15,530 ) $ 227,706 Net loss — — ( 6,512 ) — — ( 6,512 ) Other comprehensive loss — — — ( 1,753 ) — ( 1,753 ) Issuance of deferred shares (204,827 shares) — ( 4,064 ) — — 4,064 — Treasury shares sold to Employee Stock Purchase Plan (13,033 shares) — ( 194 ) — — 259 65 Treasury shares purchased to satisfy tax withholding obligations (52,864 shares) — — — — ( 310 ) ( 310 ) Stock-based compensation expense — 2,055 — — — 2,055 Balances, September 30, 2022 $ 279 $ 137,651 $ 104,766 $ ( 9,928 ) $ ( 11,517 ) $ 221,251 Balances, June 30, 2021 $ 279 $ 137,575 $ 175,178 $ ( 6,749 ) $ ( 20,744 ) $ 285,539 Net loss — — ( 17,538 ) — — ( 17,538 ) Other comprehensive loss — — — ( 795 ) — ( 795 ) Issuance of deferred shares (217,084 shares) — ( 4,084 ) — — 4,084 — Treasury shares sold to Employee Stock Purchase Plan (7,209 shares) — ( 52 ) — — 128 76 Treasury shares purchased to satisfy tax withholding obligations (76,703 shares) — — — — ( 853 ) ( 853 ) Stock-based compensation expense — 1,869 — — — 1,869 Balances, September 30, 2021 $ 279 $ 135,308 $ 157,640 $ ( 7,544 ) $ ( 17,385 ) $ 268,298 -7- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 – Basis of Presentation and Significant Accounting Policies Basis of Presentation The condensed consolidated financial statements include the accounts of Matrix Service Company and its subsidiaries (“Matrix”, “we”, “our”, “us”, “its” or the “Company”), unless otherwise indicated. Intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. The information furnished reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations, cash flows and financial position for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2022, included in our Annual Report on Form 10-K for the year then ended. The results of operations for the three months ended September 30, 2022 may not necessarily be indicative of the results of operations for the full year ending June 30, 2023. Significant Accounting Policies Cash, Cash Equivalents and Restricted Cash Our asset-backed credit agreement (the "ABL Facility") requires us to maintain a minimum of $25.0 million of restricted cash at all times (See Note 6 - Debt for more information about the ABL Facility). Since this cash must be restricted through the maturity date of the ABL Facility, which is beyond one year, we have classified this restricted cash as non-current in our Condensed Consolidated Balance Sheets. The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Condensed Consolidated Balance Sheets to the total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows (in thousands): September 30, 2022 June 30, 2022 Cash and cash equivalents $ 14,342 $ 52,371 Restricted cash 25,000 25,000 Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows $ 39,342 $ 77,371 Our other significant accounting policies are detailed in “Note 1 - Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended June 30, 2022. Note 2 – Revenue Remaining Performance Obligations We had $ 438.6 million of remaining performance obligations yet to be satisfied as of September 30, 2022 . We expect to recognize $ 367.2 million of our remaining performance obligations as revenue within the next twelve months. -8- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Contract Balances Contract terms with customers include the timing of billing and payments, which usually differs from the timing of revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets and liabilities are calculated on a contract-by-contract basis and reported on a net basis at the end of each period and are classified as current. We present our contract assets in the balance sheet as Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts ("CIE"). CIE consists of revenue recognized in excess of billings. We present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and Estimated Earnings ("BIE"). BIE consists of billings in excess of revenue recognized. The following table provides information about CIE and BIE: September 30, 2022 June 30, 2022 Change (in thousands) Costs and estimated earnings in excess of billings on uncompleted contracts $ 59,609 $ 44,752 $ 14,857 Billings on uncompleted contracts in excess of costs and estimated earnings ( 53,286 ) ( 65,106 ) 11,820 Net contract assets (liabilities) $ 6,323 $ ( 20,354 ) $ 26,677 The difference between the beginning and ending balances of our CIE and BIE primarily results from the timing of revenue recognized relative to its billings. The amount of revenue recognized during the three months ended September 30, 2022 that was included in the June 30, 2022 BIE balance was $ 37.6 million. This revenue consists primarily of work performed during the period on contracts with customers that had advance billings. Progress billings in accounts receivable at September 30, 2022 and June 30, 2022 included retentions to be collected within one year of $ 19.1 million and $ 16.1 million, respectively. Contract retentions collectible beyond one year are included in other assets, non-current in the Condensed Consolidated Balance Sheets and totaled $ 4.9 million as of September 30, 2022 and $ 4.0 million as of June 30, 2022. Disaggregated Revenue Revenue disaggregated by reportable segment is presented in Note 10 - Segment Information. The following tables presents revenue disaggregated by geographic area where the work was performed and by contract type: Geographic Disaggregation: Three Months Ended September 30, 2022 September 30, 2021 (In thousands) United States $ 176,180 $ 153,284 Canada 24,925 13,510 Other international 7,326 1,299 Total Revenue $ 208,431 $ 168,093 Contract Type Disaggregation: Three Months Ended September 30, 2022 September 30, 2021 (In thousands) Fixed-price contracts $ 109,473 $ 102,065 Time and materials and other cost reimbursable contracts 98,958 66,028 Total Revenue $ 208,431 $ 168,093 -9- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Typically, we assume more risk with fixed-price contracts since increases in costs to perform the work may not be recoverable. However, these types of contracts typically offer higher profits than time and materials and other cost reimbursable contracts when completed at or below the costs originally estimated. The profitability of time and materials and other cost reimbursable contracts is typically lower than fixed-price contracts and is usually less volatile than fixed-price contracts since the profit component is factored into the rates charged for labor, equipment and materials, or is expressed in the contract as a percentage of the reimbursable costs incurred. Note 3 – Property, Plant and Equipment The following table presents the components of our property, plant and equipment - net at September 30, 2022 and June 30, 2022: September 30, 2022 June 30, 2022 (In thousands) Property, plant and equipment - at cost: Land and buildings $ 34,290 $ 34,788 Construction equipment 91,546 93,036 Transportation equipment 49,516 48,999 Office equipment and software 41,387 43,823 Construction in progress 1,017 1,646 Total property, plant and equipment - at cost 217,756 222,292 Accumulated depreciation ( 166,097 ) ( 168,423 ) Property, plant and equipment - net $ 51,659 $ 53,869 Note 4 – 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 98 % of all right-of-use assets as of September 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 one year to 13 years. Construction equipment leases generally have "month-to-month" lease terms that automatically renew as long as the equipment remains in use. The components of lease expense in the Condensed Consolidated Statements of Income are as follows: Three Months Ended September 30, 2022 September 30, 2021 Lease expense Location of Expense (in thousands) Operating lease expense Cost of revenue and Selling, general and administrative expenses $ 1,763 $ 2,092 Short-term lease expense (1) Cost of revenue 2,356 5,571 Total lease expense $ 4,119 $ 7,663 (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. -10- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in our Condensed Consolidated Balance Sheets, were as follows: September 30, 2022 Maturity Analysis: (in thousands) Remainder of Fiscal 2023 $ 6,538 Fiscal 2024 5,564 Fiscal 2025 3,669 Fiscal 2026 3,371 Fiscal 2027 3,266 Thereafter 8,677 Total future operating lease payments 31,085 Imputed interest ( 6,492 ) Net present value of future lease payments 24,593 Less: current portion of operating lease liabilities 4,895 Non-current operating lease liabilities $ 19,698 The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of September 30, 2022 : Weighted-average remaining lease term (in years) 6.5 years Weighted-average discount rate 5.4 % Supplemental cash flow information related to leases is as follows: Three Months Ended September 30, 2022 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating lease payments $ 1,854 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 1,089 Note 5 – Goodwill and Other Intangible Assets Goodwill The changes in the carrying value of goodwill by segment are as follows: Utility and Power Infrastructure Process and Industrial Facilities Storage and Terminal Solutions Total (In thousands) Net balance at June 30, 2022 $ 4,263 $ 18,427 $ 19,445 $ 42,135 Translation adjustment (1) ( 74 ) — ( 145 ) ( 219 ) Net balance at September 30, 2022 $ 4,189 $ 18,427 $ 19,300 $ 41,916 (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. -11- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) 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. We concluded, that based on the totality of both positive and negative factors, no impairment indicators existed at September 30, 2022. However, if our view of project opportunities or gross margins deteriorates, particularly for the higher risk reporting units, then we may need to perform an interim goodwill impairment test, which could result in an impairment. Other Intangible Assets Information on the carrying value of other intangible assets is as follows: At September 30, 2022 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,558 $ ( 2,318 ) $ 240 Customer-based (1) 6 to 15 13,144 ( 9,020 ) 4,124 Total amortizing intangible assets $ 15,702 $ ( 11,338 ) $ 4,364 (1) Customer-based intangible assets have been adjusted in fiscal 2023 to remove $ 4.2 million of customer relationships that have been fully amortized. 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 amortizing intangible assets $ 19,889 $ ( 15,093 ) $ 4,796 Amortization expense totaled $ 0.4 million and $ 0.5 million during the three months ended September 30, 2022 and 2021, respectively. We estimate that the remaining amortization expense related to September 30, 2022 amortizing intangible assets will be as follows (in thousands): Period ending: Remainder of Fiscal 2023 $ 1,297 Fiscal 2024 1,416 Fiscal 2025 1,096 Fiscal 2026 555 Total estimated remaining amortization expense at September 30, 2022 $ 4,364 -12- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 6 – Debt On October 5, 2022 , 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) waived 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) reduced the maximum amount of loans under the ABL Facility to $ 90.0 million from $ 100.0 million and (iii) replaced the London interbank offered rate with the forward term rate based on the secured overnight financing rate (the “SOFR”) as the interest rate benchmark. We subsequently delivered the Audited Financial Statements on October 11, 2022. 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 September 30, 2022, our borrowing base was $ 79.0 million, we had $ 15.0 million of outstanding borrowings, and $ 21.7 million in letters of credit outstanding, which resulted in availability of $ 42.3 million under the ABL Facility. Borrowings under the ABL Facility bear interest through maturity at a variable rate based upon, at our option, an annual rate 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 September 30, 2022, including applicable margin, was 7.50 %. 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. Except for the covenant to deliver Audited Financial Statements by September 28, 2022, which was waived in the Amendment, we were in compliance with all covenants of the ABL Facility as of September 30, 2022. Note 7 – Income Taxes Effective Tax Rate Our effective tax rates were 0.0 % and 23.1 % for the three months ended September 30, 2022 and 2021, respectively. The effective tax rate during the first quarter of fiscal 2023 was impacted by a $ 1.4 million valuation allowance placed on deferred tax assets generated during the quarter. -13- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Full Valuation Allowance We placed a full valuation allowance on our deferred tax assets in the second quarter of fiscal 2022 due to the existence of a cumulative loss over a three-year period. We will continue to place valuation allowances on newly generated deferred tax assets and will realize the benefit associated with the deferred tax assets for which the valuation allowance has been provided 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. 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 Condensed Consolidated Balance Sheets. Deferred Payroll Taxes As of September 30, 2022, we have a balance of $ 5.6 million remaining for U.S. payroll taxes we deferred through provisions of CARES Act. We must repay this balance by December 31, 2022. The remaining balance of deferred payroll taxes is included within accrued wages and benefits in the Condensed Consolidated Balance Sheets. Note 8 – Commitments and Contingencies Insurance Reserves We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses through the use of deductibles, self-insured retentions and coverage limits. Typically, our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of our services and provide warranties for materials and workmanship. We may also be required to name the customer as an additional insured up to the limits of insurance available, or we may be required to purchase special insurance policies or surety bonds for specific customers or provide letters of credit in lieu of bonds to satisfy performance and financial guarantees on some projects. We maintain a performance and payment bonding line sufficient to support the business. We generally require our subcontractors to indemnify us and our customer and name us as an additional insured for activities arising out of the subcontractors’ work. We also require certain subcontractors to provide additional insurance policies, including surety bonds in favor of us, to secure the subcontractors’ work or as required by the subcontract. There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against a valid claim or loss under the contracts with our customers. Unpriced Change Orders and Claims Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $ 13.7 million at September 30, 2022 and $ 8.9 million at June 30, 2022. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings. The determination of our legal basis for a claim requires significant judgment. Generally, collection of amounts related to unpriced change orders and claims is expected within twelve months. However, since customers may not pay these amounts until final resolution of related claims, collection of these amounts may extend beyond one year. Other During the third quarter of fiscal 2020, we commenced litigation in an effort to collect accounts receivable from an iron and steel customer following the deterioration of the relationship in the second quarter of fiscal 2020. The unpaid account receivable balance at September 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 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. -14- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 9 – Earnings per Common Share Basic earnings per share (“Basic EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share (“Diluted EPS”) includes the dilutive effect of stock options and nonvested deferred shares. In the event we report a loss, stock options and nonvested deferred shares are not included since they are anti-dilutive. The computation of basic and diluted earnings per share is as follows: Three Months Ended September 30, 2022 September 30, 2021 (In thousands, except per share data) Basic EPS: Net loss $ ( 6,512 ) $ ( 17,538 ) Weighted average shares outstanding 26,862 26,611 Basic loss per share $ ( 0.24 ) $ ( 0.66 ) Diluted EPS: Net loss ( 6,512 ) ( 17,538 ) Diluted weighted average shares outstanding 26,862 26,611 Diluted loss per share $ ( 0.24 ) $ ( 0.66 ) Note 10 – Segment Information We report our results of operations through three reportable segments: Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions. • Utility and Power Infrastructure : consists of power delivery services provided to investor-owned utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, upgrades and maintenance, as well as emergency and storm restoration services. We also provide engineering, fabrication, and construction services for LNG utility peak shaving facilities, and provide construction and maintenance services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configuration. • Process and Industrial Facilities : primarily serves customers in the downstream and midstream petroleum industries who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. We also serve customers in various other industries such as petrochemical, sulfur, mining and minerals companies engaged primarily in the extraction of non-ferrous metals, aerospace and defense, cement, agriculture, and other industrial customers. Our services include plant maintenance, turnarounds, industrial cleaning services, engineering, fabrication, and capital construction. • Storage and Terminal Solutions : consists of work related to aboveground crude oil and refined product storage tanks and terminals. We also include work related to cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum, hydrogen and other specialty vessels such as spheres in this segment, as well as work related to marine structures and truck and rail loading/offloading facilities. Our services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, we offer tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals. We evaluate performance and allocate resources based on operating income. We eliminate intersegment sales; therefore, no intercompany profit or loss is recognized. Corporate selling, general and administrative expenses are excluded from our three reportable segments in order to better align controllable costs with the responsibility of segment management, and to be consistent with how our chief operating decision-maker assesses segment performance and allocates resources. Segment assets consist primarily of accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, property, plant and equipment, right-of-use lease assets, goodwill and other intangible assets. -15- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Results of Operations (In thousands) Three Months Ended September 30, 2022 September 30, 2021 Gross revenue Utility and Power Infrastructure $ 44,870 $ 57,204 Process and Industrial Facilities 86,745 45,210 Storage and Terminal Solutions 77,290 68,312 Total gross revenue $ 208,905 $ 170,726 Less: Inter-segment revenue Process and Industrial Facilities $ 117 $ 1,305 Storage and Terminal Solutions 357 1,328 Total inter-segment revenue $ 474 $ 2,633 Consolidated revenue Utility and Power Infrastructure $ 44,870 $ 57,204 Process and Industrial Facilities 86,628 43,905 Storage and Terminal Solutions 76,933 66,984 Total consolidated revenue $ 208,431 $ 168,093 Gross profit (loss) Utility and Power Infrastructure $ 1,714 $ ( 6,107 ) Process and Industrial Facilities 4,330 2,871 Storage and Terminal Solutions 7,564 413 Corporate ( 600 ) ( 685 ) Total gross profit (loss) $ 13,008 $ ( 3,508 ) Selling, general and administrative expenses Utility and Power Infrastructure $ 1,738 $ 3,050 Process and Industrial Facilities 4,070 2,762 Storage and Terminal Solutions 4,158 4,506 Corporate 6,845 6,311 Total selling, general and administrative expenses $ 16,811 $ 16,629 Restructuring costs Utility and Power Infrastructure $ 37 $ 9 Process and Industrial Facilities 315 7 Storage and Terminal Solutions 522 ( 33 ) Corporate 413 622 Total restructuring costs $ 1,287 $ 605 Operating income (loss) Utility and Power Infrastructure $ ( 61 ) $ ( 9,166 ) Process and Industrial Facilities ( 55 ) 102 Storage and Terminal Solutions 2,884 ( 4,060 ) Corporate ( 7,858 ) ( 7,618 ) Total operating loss $ ( 5,090 ) $ ( 20,742 ) -16- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Total assets by segment were as follows: September 30, 2022 June 30, 2022 Utility and Power Infrastructure $ 67,860 $ 94,059 Process and Industrial Facilities 130,461 104,078 Storage and Terminal Solutions 143,238 141,084 Corporate 69,353 101,572 Total segment assets $ 410,912 $ 440,793 Note 11 – 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. We expect to complete these restructuring efforts in fiscal 2023 or early fiscal 2024. The restructuring costs consist primarily of severance costs, facility closure costs, consulting fees and other liabilities. -17- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Restructuring costs under our business improvement plan are classified as follows: Three Months Ended Since Inception of Business Improvement Plan September 30, 2022 September 30, 2021 (In thousands) Utility and Power Infrastructure Severance and other personnel-related costs $ 37 $ 9 $ 2,621 Facility costs — — 348 Other intangible asset impairments — — 1,150 Other costs — — 1 Total Utility and Power Infrastructure $ 37 $ 9 $ 4,120 Process and Industrial Facilities Severance and other personnel-related costs $ 312 $ 5 $ 9,408 Facility costs 3 — 3,208 Other intangible asset impairments — — 375 Other costs — 2 ( 1,171 ) Total Process and Industrial Facilities $ 315 $ 7 $ 11,820 Storage and Terminal Solutions Severance and other personnel-related costs $ 522 $ ( 33 ) $ 2,169 Facility costs — — 879 Other costs — — 28 Total Storage and Terminal Solutions $ 522 $ ( 33 ) $ 3,076 Corporate Severance and other personnel-related costs $ 397 $ 44 $ 1,984 Facility costs — 16 98 Other costs 16 562 1,601 Total Corporate $ 413 $ 622 $ 3,683 Restructuring Costs by Type: Severance and other personnel-related costs $ 1,268 $ 25 $ 16,182 Facility costs 3 16 4,533 Other intangible asset impairments — — 1,525 Other costs 16 564 459 Total restructuring costs $ 1,287 $ 605 $ 22,699 -18- Table of Contents