What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-09 compared with 2022-11-09 · 199 added, 108 removed, 313 unchanged (50% of the section changed)

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Operational Update

Bidding activity, project award volumes, and revenue volumes all continued to improve from the two year period impacted by the pandemic and we are now beginning to see these trends positively affect our operating results.

Repair and maintenance activities have increased significantly and returned to near pre-pandemic levels.

In addition, capital project award opportunities have strengthened during the past year, which has resulted in more project awards and is beginning to drive higher revenue volumes.

We expect these trends to continue and expect significant project awards in the second quarter of fiscal 2023.

Gross margins are also improving as lower margin projects bid competitively during the pandemic continue to be completed and are being replaced by projects with an improved margin profile.

Higher revenue volumes have also resulted in improved overhead cost recovery, which is critical to improved gross margin and operating income performance.

We have still not reached the level of revenue that allows us to fully recover construction overhead costs and to adequately leverage SG&A costs, but we expect to see significant progress towards those objectives as we progress through fiscal 2023.

Project award volumes continued to improve from the two-year period impacted by the pandemic.

We received $318.7 million of project awards during the second quarter of fiscal 2023, which is the highest quarterly award amount since the first quarter of fiscal 2020.

However, subsequent to the end of the second quarter of fiscal 2023, we received notice from a client that they would not approve adequate compensation to us for the impact that excessive scope changes had on our ability to progress work on a midstream gas processing project according to forecast, as well as for the impact that global supply chain issues and inflation had on the project.

The project is included in the Process and Industrial Facilities segment and reduced gross profit by $9.6 million during the quarter.

We have accrued the full expected loss for the project, which we expect to be mechanically complete in the fourth quarter of fiscal 2023.

Revenue of $193.8 million during the second quarter of fiscal 2023 was lower than revenue of $208.4 million during the first quarter of fiscal 2023 as certain projects awarded in prior periods are working off while the newly awarded projects' contribution to revenue is limited as they progress through contract finalization, engineering, and planning stages.

Revenue levels were also lower than expected as a large LNG project that was expected to be awarded in the first half of fiscal 2023 has not been awarded and award timing is unknown.

Lastly, normal seasonality resulted in lower volumes of work as we moved through the quarter.

We are anticipating revenue volumes in the third quarter of fiscal 2023 to be relatively unchanged from the second quarter of fiscal 2023 and to increase meaningfully in the fourth quarter of fiscal 2023 as newly awarded projects enter the revenue stream.

Gross margin (loss) was (0.7%) in the second quarter of fiscal 2023 compared to 6.2% in the first quarter of fiscal 2023.

Our results of operations were materially impacted by the $9.6 million project adjustment referenced above.

Gross margins during the second quarter of fiscal 2023 were also negatively impacted by the under recovery of construction overhead costs due to lower revenue and continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period.

Adjusted Net Loss

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(In thousands, except per share data)

Three Months Ended

September 30, 2022 September 30, 2021

Three Months Ended Six Months Ended

December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021

Net loss, as reported $ (32,827) $ (24,919) $ (39,339) $ (42,457)

Goodwill impairment 12,316 — 12,316 —

Restructuring costs 1,278 695 2,565 1,300

Accelerated amortization of deferred debt amendment fees (2)

Tax impact of above adjustments (331) (546)

Tax impact of goodwill impairment, restructuring costs and accelerated amortization of debt amendment fees (3,499) (179) (3,830) (725)

Deferred tax asset valuation allowance (3)

8,370 14,198 9,764 14,198

Adjusted net loss $ (14,362) $ (10,205) $ (18,524) $ (26,166)

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Adjusted loss per share $ (0.53) $ (0.38) $ (0.69) $ (0.98)

(1) This table presents non-GAAP financial measures of our adjusted net loss and adjusted loss per share for the three months ended September 30, 2022 and 2021.

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

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

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Adjusted EBITDA

We have presented Adjusted EBITDA, which we define as net loss before restructuring costs, stock-based compensation, interest expense, income taxes, and depreciation and amortization, because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses.

We have presented Adjusted EBITDA, which we define as net loss before goodwill impairment, restructuring costs, stock-based compensation, interest expense, income taxes, and depreciation and amortization, because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses.

We believe that the line item on our Condensed Consolidated Statements of Income entitled “Net loss” is the most directly comparable GAAP measure to Adjusted EBITDA.

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

• It does not include impairment to goodwill.

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

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

• It does not include restructuring costs.

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A reconciliation of Adjusted EBITDA to net loss follows:

Three Months Ended

September 30,

2022 September 30,

Three Months Ended Six Months Ended

2022 December 31,

2021 December 31,

2022 December 31,

(In thousands)

Net loss $ (32,827) $ (24,919) $ (39,339) $ (42,457)

Goodwill impairment 12,316 — 12,316 —

Restructuring costs 1,278 695 2,565 1,300

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Interest expense 916 502 1,288 2,501

Benefit for federal, state and foreign income taxes — (5,265)

Provision for federal, state and foreign income taxes — 10,976 — 5,711

Depreciation and amortization 3,535 3,789 7,177 7,841

Adjusted EBITDA $ (13,090) $ (7,091) $ (12,246) $ (21,369)

Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

Consolidated revenue was $208.4 million for the three months ended September 30, 2022, compared to $168.1 million in the same period last year.

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

Consolidated revenue was $193.8 million for the three months ended December 31, 2022, compared to $162.0 million in the same period last year.

On a segment basis, revenue increased in the Process and Industrial Facilities and Storage and Terminal Solutions segments by $30.5 million and $5.6 million, respectively.

The increases were partially offset by a decrease in revenue of $4.2 million in the Utility and Power Infrastructure segment.

Consolidated gross profit increased to $13.0 million in the three months ended September 30, 2022 compared to a gross loss of $3.5 million in the same period last year.

Gross margin (loss) increased to 6.2% in the three months ended September 30, 2022 compared to (2.1%) in the same period last year.

Gross margins in the first quarter of fiscal 2023 improved significantly from recent quarters, but were still negatively impacted by the under recovery of construction overhead costs.

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

In addition, gross margins in the first quarter of fiscal 2022 were also negatively impacted by lower than forecasted volumes, which led to under recovery of construction overhead costs.

Consolidated SG&A expenses were $16.8 million in the three months ended September 30, 2022 compared to $16.6 million in the same period last year.

We recorded restructuring costs of $1.3 million in the three months ended September 30, 2022 compared to $0.6 million in the same period last year.

Consolidated gross profit decreased to a loss of $1.3 million in the three months ended December 31, 2022 compared to a gross profit of $3.2 million in the same period last year.

Gross margin (loss) decreased to (0.7%) in the three months ended December 31, 2022 compared to 2.0% in the same period last year.

Gross margins in the second quarter of fiscal 2023 were negatively impacted by a client not approving adequate compensation to us for the impact that excessive scope changes had on our ability to progress work on a midstream gas processing project according to forecast, as well as for the impact that global supply chain issues and inflation had on the project.

The project reduced gross profit by $9.6 million during the three months ended December 31, 2022.

We have accrued the full expected loss for the project, which we expect to be mechanically complete in the fourth quarter of fiscal 2023.

In addition, gross margins during the second quarter of fiscal 2023 were negatively impacted by the under recovery of construction overhead costs, continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period, and increased forecasted costs to complete a smaller capital storage project.

While we are still not fully recovering construction overhead costs, higher revenue volumes in fiscal 2023 have resulted in improved overhead cost recovery.

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

Consolidated SG&A expenses were $17.5 million in the three months ended December 31, 2022 compared to $15.9 million in the same period last year.

The increase was primarily attributable to higher project pursuit costs and other costs to support higher revenue volumes.

We recorded a goodwill impairment of $12.3 million in the three months ended December 31, 2022.

Financial Statements, Note 5 - Goodwill and Other Intangible Assets, Goodwill, for more information about the impairment.

We recorded restructuring costs of $1.3 million in the three months ended December 31, 2022 compared to $0.7 million in the same period last year.

During the second quarter of fiscal 2023, we closed an underperforming office and ceased its associated operations, which resulted in $0.7 million of restructuring costs.

Financial Statements, Note 11 - Restructuring Costs, for more information about our business improvement plan.

Interest expense was $0.4 million in the three months ended September 30, 2022 compared to $2.0 million in the three months ended September 30, 2021.

Interest expense in the three months ended September 30, 2022 consisted primarily of interest on debt outstanding, unused capacity fees, amortization of deferred debt issuance costs, and letter of credit fees.

Interest expense in fiscal 2022 included $1.5 million of accelerated amortization of deferred debt amendment fees associated with terminating our prior credit facility.

Our effective tax rates for the three months ended September 30, 2022 and September 30, 2021 were 0.0% and 23.1%, 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.

Interest expense was $0.9 million in the three months ended December 31, 2022 compared to $0.5 million in the three months ended December 31, 2021.

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

Our effective tax rates for the three months ended December 31, 2022 and December 31, 2021 were zero and (78.7)%, respectively.

The effective tax rate during the three months ended December 31, 2022 was impacted by a $8.4 million valuation allowance placed on deferred tax assets.

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.

For the three months ended September 30, 2022, we had a net loss of $6.5 million, or $0.24 per fully diluted share, compared to a net loss of $17.5 million, or $0.66 per fully diluted share, in the three months ended September 30, 2021.

For the three months ended December 31, 2022, we had a net loss of $32.8 million, or $1.22 per fully diluted share, compared to a net loss of $24.9 million, or $0.93 per fully diluted share, in the three months ended December 31, 2021.

Utility and Power Infrastructure

Revenue for the Utility and Power Infrastructure segment was $44.9 million in the three months ended September 30, 2022 compared to $57.2 million in the same period last year.

The decrease is primarily due to lower volumes of LNG peak shaving work, partially offset by higher volumes of power delivery and power generation work.

The segment gross margin (loss) was 3.8% in fiscal 2023 compared to (10.7%) in fiscal 2022.

The segment gross margin for the first quarter of fiscal 2023 was negatively impacted by low revenue volume, which led to the under recovery of construction overhead costs, and work on a large capital project with a previously reduced gross margin.

The fiscal 2022 segment gross margin was negatively impacted by an increase in the forecasted costs to complete a large capital project, which resulted in a decrease in gross profit of $5.9 million.

The change in estimate was principally due to unexpected equipment repairs during commissioning that delayed the scheduled completion and increased the estimated costs to complete.

Revenue for the Utility and Power Infrastructure segment was $50.5 million in the three months ended December 31, 2022 compared to $54.8 million in the same period last year.

The decrease is primarily due to lower volumes of LNG peak shaving work, partially offset by higher volumes of power delivery work.

The segment gross margin was 4.8% in the second quarter of fiscal 2023 compared to a loss of (0.9%) in the same period last year.

While this was an improvement compared to the prior quarter, gross margin was negatively impacted by previously-booked projects with reduced gross margins awarded in a highly competitive time period.

This was partially offset by better than expected outcomes on other recently awarded projects in the segment.

The segment gross margin (loss) for the three months ended December 31, 2021 was negatively impacted by lower margins on power delivery work bid competitively and revenue recognized on a large capital project at a margin reduced in prior periods.

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

Process and Industrial Facilities

Revenue for the Process and Industrial Facilities segment was $80.8 million in the three months ended December 31, 2022 compared to $50.3 million in the same period last year.

The increase was primarily due to higher volumes of midstream gas processing capital work, higher volumes of refinery maintenance and turnaround activity, work on a capital project at a biodiesel facility, and work on a capital project at a small-scale boron facility.

The segment gross margin (loss) was (6.4%) for the three months ended December 31, 2022 compared to 8.4% in the same period last year.

The segment gross margin (loss) in the second quarter of fiscal 2023 was negatively impacted by a client not approving adequate compensation to us for the impact that excessive scope changes had on our ability to progress work on a midstream gas processing project according to forecast, as well as for the impact that global supply chain issues and inflation had on the project.

The project reduced gross profit by $9.6 million during the three months ended December 31, 2022.

We have accrued the full expected loss for the project, which we expect to be mechanically complete in the fourth quarter of fiscal 2023.

The segment gross margin (loss) in the second quarter of fiscal 2023 was also negatively impacted by the under recovery of construction overhead costs and continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period.

This was partially offset by better than expected outcomes on other projects in the segment.

Despite generally strong project execution, the lower segment gross margin for the three months ended December 31, 2021 was the result of low volumes, which lead to under recovery of construction overhead costs.

Storage and Terminal Solutions

Revenue for the Storage and Terminal Solutions segment was $62.5 million in the three months ended December 31, 2022 compared to $56.9 million in the same period last year.

The increase in segment revenue is primarily a result of higher volumes of specialty vessel capital projects along with higher volumes of tank repair and maintenance work.

However, revenue levels were still lower than expected as a large LNG project that was expected to be awarded in the first half of fiscal 2023 has not been awarded and award timing is unknown.

Other storage project awards have been strong and are expected to significantly improve revenue in the latter part of the fiscal year.

The segment gross margin was 2.6% for the three months ended December 31, 2022 compared to a loss of (0.3)% in the same period last year.

The fiscal 2023 segment gross margin was negatively impacted by the under recovery of construction overhead costs and increased forecasted costs to complete a smaller capital storage project.

The segment gross margin (loss) for the three months ended December 31, 2021 was negatively impacted by a lower than previously forecasted margin on a thermal energy storage tank repair and maintenance project due to changes in repair scope, expanded client weld testing and associated schedule delays, which reduced segment gross profit by $2.8 million.

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

Unallocated corporate expenses were $7.4 million during the three months ended December 31, 2022 compared to $6.6 million in the same period last year.

The increase in fiscal 2023 is primarily due to a project that commenced in fiscal 2022 to centralize certain support functions to corporate including accounting, human resources and project support that were previously included in operating segment expenses.

Six Months Ended December 31, 2022 Compared to the Six Months Ended December 31, 2021

Consolidated revenue was $402.3 million for the six months ended December 31, 2022, compared to $330.1 million in the same period last year.

On a segment basis, revenue increased in the Process and Industrial Facilities and Storage and Terminal Solutions segments by $73.2 million and $15.6 million, respectively.

The increases were partially offset by a decrease in revenue of $16.6 million in the Utility and Power Infrastructure segment.

Consolidated gross profit increased to $11.7 million in the six months ended December 31, 2022 compared to a gross loss of $0.3 million in the same period last year.

Gross margin increased to 2.9% in the six months ended December 31, 2022 compared to a loss of (0.1)% in the same period last year.

Gross margins in the first six months of fiscal 2023 were negatively impacted by a client not approving adequate compensation to us for the impact that excessive scope changes had on our ability to progress work on a midstream gas processing project according to forecast, as well as for the impact that global supply chain issues and inflation had on the project.

The project reduced gross profit by $9.4 million during the six months ended December 31, 2022.

We have accrued the full expected loss for the project, which we expect to be mechanically complete in the fourth quarter of fiscal 2023.

In addition, gross margins during the first six months of fiscal 2023 were negatively impacted by the under recovery of construction overhead costs, continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period, and increased forecasted costs to complete a smaller capital storage project.

While we are still not fully recovering construction overhead costs, higher revenue volumes in fiscal 2023 have resulted in improved overhead cost recovery.

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

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

Consolidated SG&A expenses were $34.4 million in the six months ended December 31, 2022 compared to $32.6 million in the same period last year.

The increase was primarily attributable to higher project pursuit costs and other costs to support higher revenue volumes.

We recorded a goodwill impairment of $12.3 million in the three months ended December 31, 2022.

Financial Statements, Note 5 - Goodwill and Other Intangible Assets, Goodwill, for more information about the impairment.

We recorded restructuring costs of $2.6 million in the six months ended December 31, 2022 compared to $1.3 million in the same period last year.

During the second quarter of fiscal 2023, we closed an underperforming office and ceased its associated

operations, which resulted in $0.7 million of restructuring costs.

Financial Statements, Note 11 - Restructuring Costs, for more information about our business improvement plan.

Interest expense was $1.3 million in the six months ended December 31, 2022 compared to $2.5 million in the six months ended December 31, 2021.

Interest expense in fiscal 2023 consisted primarily of interest on debt outstanding, unused capacity fees, amortization of deferred debt issuance costs, letter of credit fees and other interest.

Interest expense in fiscal 2022 included $1.5 million of accelerated amortization of deferred debt amendment fees associated with terminating our prior credit facility along with a similar level of other interest costs.

Our effective tax rates for the six months ended December 31, 2022 and December 31, 2021 were zero and (15.5)%, respectively.

The effective tax rate during the six months ended December 31, 2022 was impacted by a $9.8 million valuation allowance placed on deferred tax assets.

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.

For the six months ended December 31, 2022, we had a net loss of $39.3 million or $1.46 per fully diluted share, compared to a net loss of $42.5 million, or $1.59 per fully diluted share, in the six months ended December 31, 2021.

Utility and Power Infrastructure

Revenue for the Utility and Power Infrastructure segment was $95.4 million in the six months ended December 31, 2022 compared to $112.0 million in the same period last year.

The decrease is primarily due to lower volumes of LNG peak shaving and storm work, partially offset by higher volumes of power delivery work.

The segment gross margin was 4.3% for the six months ended December 31, 2022 compared to a loss of (5.9)% in the same period last year.

The segment gross margin for the first six months of fiscal 2023 was negatively impacted by continued work on projects with previously reduced gross margins and projects that were bid competitively.

The segment gross margin for the six months ended December 31, 2021 was negatively impacted by an increase in the forecasted costs to complete a large capital project in the first quarter, which resulted in a decrease in gross profit of $5.9 million.

The change in forecasted costs was principally due to unexpected equipment repairs during commissioning that delayed the scheduled completion and increased the estimated costs to complete.

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

Process and Industrial Facilities

Revenue for the Process and Industrial Facilities segment was $86.6 million in the three months ended September 30, 2022 compared to $43.9 million in the same period last year.

This 97.3% increase reflects the improved market environment and was primarily due to higher volumes of refinery maintenance and turnaround work, work on a capital project at a biodiesel facility, and higher volumes of midstream gas processing capital work.

The segment gross margin was 5.0% for the three months ended September 30, 2022 compared to 6.5% in the same period last year.

The segment gross margin in the first quarter of fiscal 2023 was negatively impacted by work on a midstream gas processing project that experienced increases in forecasted costs to complete in the prior year, which reduced the remaining margin realized on the project.

In addition, revenue volumes were still too low to fully recover construction overhead costs, which negatively impacted segment gross margin.

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

Revenue for the Process and Industrial Facilities segment was $167.4 million in the six months ended December 31, 2022 compared to $94.2 million in the same period last year.

The increase was primarily due to higher volumes of midstream gas processing capital work, work on a capital project at a biodiesel facility, higher volumes of refinery maintenance and turnaround activity, and work on a capital project at a small-scale boron facility.

The segment gross margin was (0.5)% for the six months ended December 31, 2022 compared to 7.5% in the same period last year.

The segment gross margin in the first six months of fiscal 2023 was negatively impacted by a client not approving adequate compensation to us for the impact that excessive scope changes had on our ability to progress work on a midstream gas processing project according to forecast, as well as for the impact that global supply chain issues and inflation had on the project.

The project reduced gross profit by $9.4 million during the six months ended December 31, 2022.

We have accrued the full expected loss for the project, which we expect to be mechanically complete in the fourth quarter of fiscal 2023.

The segment gross margin (loss) in the first six months of fiscal 2023 was also negatively impacted by the under recovery of construction overhead costs and continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period.

This was partially offset by better than expected outcomes on other projects in the segment.

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

Storage and Terminal Solutions

Revenue for the Storage and Terminal Solutions segment was $76.9 million in the three months ended September 30, 2022 compared to $67.0 million in the same period last year.

The increase in segment revenue is primarily a result of higher volumes of LNG and specialty vessel tank and terminal capital work.

The segment gross margin was 9.8% for the three months ended September 30, 2022 compared to 0.6% in the same period last year.

The fiscal 2023 segment gross margin was positively impacted by strong project execution, partially offset by low revenue volume, which led to under recovery of construction overhead costs.

The fiscal 2022 segment gross margin was negatively impacted by lower than previously forecasted margins on a limited number of projects and a higher percentage of lower margin maintenance work.

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

Unallocated corporate expenses were $7.9 million during the three months ended September 30, 2022 compared to $7.6 million in the same period last year.

Revenue for the Storage and Terminal Solutions segment was $139.4 million in the six months ended December 31, 2022 compared to $123.9 million in the same period last year.

The increase in segment revenue is primarily a result of higher volumes of specialty vessel and tank and terminal capital projects along with higher volumes of tank repair and maintenance work.

However, revenue levels were still lower than expected as a large LNG project that was expected to be awarded in the first half of fiscal 2023 has not been awarded and award timing is unknown.

Other storage project awards have been strong and are expected to significantly improve revenue in the latter part of the fiscal year.

The segment gross margin was 6.6% for the six months ended December 31, 2022 compared to 0.2% in the same period last year.

The segment gross margin for the six months ended December 31, 2022 was negatively impacted by the under recovery of construction overhead costs and increased forecasted costs to complete a smaller capital storage project.

The segment gross margin for the six months ended December 31, 2021 was negatively impacted by a lower than previously forecasted margin on a thermal energy storage tank repair and maintenance project due to changes in repair scope, expanded client weld testing and associated schedule delays, which reduced segment gross profit by $5.5 million.

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

Unallocated corporate expenses were $15.2 million during the six months ended December 31, 2022 compared to $14.3 million in the same period last year.

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

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

The following table provides a summary of changes in our backlog for the three months ended September 30, 2022:

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

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

(In thousands)

Backlog as of September 30, 2022 $ 99,807 $ 265,641 $ 250,209 $ 615,657

Project awards 98,033 105,153 115,466 318,652

Revenue recognized (50,535) (80,789) (62,516) (193,840)

Backlog as of December 31, 2022 $ 147,305 $ 290,005 $ 303,159 $ 740,469

Book-to-bill ratio (1)

1.9 1.3 1.8 1.6

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

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

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

(In thousands)

Backlog as of June 30, 2022 $ 102,059 $ 292,287 $ 195,114 $ 589,460

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Revenue recognized (95,405) (167,417) (139,449) (402,271)

Backlog as of September 30, 2022 $ 99,807 $ 265,641 $ 250,209 $ 615,657

Backlog as of December 31, 2022 $ 147,305 $ 290,005 $ 303,159 $ 740,469

Book-to-bill ratio (1)

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

Backlog increased $26.2 million or 4.4% in the first quarter of fiscal 2023 on project awards of $234.6 million and a book-to-bill ratio of 1.1.

In the Utility and Power Infrastructure segment, backlog decreased by 2.2% as we booked $42.6 million of project awards during the first quarter of fiscal 2023, primarily related to power delivery work.

Backlog increased $124.8 million or 20.3% in the second quarter of fiscal 2023 on project awards of $318.7 million and a book-to-bill ratio of 1.6.

In the Utility and Power Infrastructure segment, backlog increased by 47.6% as we booked $98.0 million of project awards during the second quarter of fiscal 2023.

Project awards are primarily comprised of a project for the engineering, procurement, and construction of upgrades being made to an existing LNG peak shaving facility and power delivery work.

Our opportunity pipeline for LNG peak shaving projects continues to be promising, however those awards, while significant, can be less frequent.

While we did not book any LNG peak shaver projects in the first quarter of fiscal 2023, early in the second quarter, the Company was awarded the engineering, procurement, and construction of upgrades being made to an existing LNG peak shaving facility that include a new gas liquefaction system and vaporization system.

Project opportunities and bidding activity are strong for both the power delivery portion of the business and LNG peak shaving.

In the Process and Industrial Facilities segment, backlog decreased by 9.1% as we booked $60.0 million of project awards during the first quarter of fiscal 2023.

Client spending related to refinery maintenance and turnaround operations has returned to near-normal pre-pandemic levels.

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

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

In the Storage and Terminal Solutions segment, backlog increased by 28.2% as we booked $132.0 million of project awards during the first quarter of fiscal 2023.

We received an LNTP on a significant ethane/ethylene tank EPC project during the quarter and booked several other storage projects related to a variety of other refined products.

We were also awarded a large-scale specialty vessel project early in the second quarter of fiscal 2023.

In the Process and Industrial Facilities segment, backlog increased by 9.2% as we booked $105.2 million of project awards during the second quarter of fiscal 2023.

Client spending related to refinery maintenance and turnaround operations has continued to be strong.

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

In addition, we are continuing to pursue opportunities for midstream gas work, including some larger scale projects.

In the Storage and Terminal Solutions segment, backlog increased by 21.2% as we booked $115.5 million of project awards during the second quarter of fiscal 2023.

We were awarded a large-scale specialty vessel project in the second quarter following a similar award in the first quarter.

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

We believe LNG and hydrogen projects in particular will be key growth drivers for this segment.

Korea’s development of a hydrogen economy as it transforms itself from natural gas and the signing of a MOU with Chart Industries, Inc.

Bidding activity on LNG projects has been strong and we have been positioning ourselves for growth in hydrogen by entering into key relationships, such as the signing of a memorandum of understanding ("MOU") with Korea Gas Corporation in August 2022 to support South Korea’s development of a hydrogen economy as it transforms itself from natural gas and the signing of a MOU with Chart Industries, Inc.

in January of 2021 to support the development of hydrogen solutions.

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

However, the price of crude oil and natural gas increased significantly since the world emerged from the COVID-19 pandemic, which, if sustained, may lead to higher production volumes and more opportunities for crude oil tanks, terminals and export facilities in the coming quarters.

Project awards in all segments are cyclical and are typically the result of a sales process that can take several months or years to complete.

It is common for awards to shift from one period to another as the timing of awards is dependent upon a number of factors including changes in market conditions, permitting, off take agreements, project financing and other factors.

These same factors also impact the timing of project starts and the associated revenue recognized.

Backlog volatility may increase for some segments from time to time when individual project awards are less frequent, but more significant.

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We define liquidity as the ongoing ability to pay our liabilities as they become due, fund business operations and meet all monetary contractual obligations.

Our primary sources of liquidity at September 30, 2022 were unrestricted cash and cash equivalents on hand, capacity under our ABL Facility, and cash generated from operations.

Unrestricted cash and cash equivalents at September 30, 2022 totaled $14.3 million and availability under the ABL Facility totaled $42.3 million, resulting in total liquidity of $56.6 million.

The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Condensed Consolidated Balance Sheets to the total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows (in thousands):

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

Unrestricted cash and cash equivalents at December 31, 2022 totaled $31.5 million and availability under the ABL Facility totaled $49.0 million, resulting in total liquidity of $80.5 million.

The following table provides a trend of cash, cash equivalents and restricted cash in the Condensed Consolidated Balance Sheets during fiscal 2023:

2022 September 30,

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Restricted cash 25,000 25,000 25,000

Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows $ 39,342 $ 77,371

The following table provides a summary of changes in our liquidity for the three months ended September 30, 2022 (in thousands):

Total cash, cash equivalents and restricted cash $ 56,464 $ 39,342 $ 77,371

The following table provides a summary of changes in our liquidity for the three months ended December 31, 2022 (in thousands):

Liquidity at September 30, 2022 $ 56,616

Cash provided by operating activities 17,644

Capital expenditures (1,265)

Increase in availability under ABL Facility 6,731

Cash provided by financing activities 71

Liquidity at December 31, 2022 $ 80,469

The following table provides a summary of changes in our liquidity for the six months ended December 31, 2022 (in thousands):

Liquidity at June 30, 2022 $ 94,831

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Capital expenditures (2,843)

Decrease in availability under ABL Facility (186)

Increase in availability under ABL Facility 6,545

Cash used by financing activities (174)

Liquidity at September 30, 2022 $ 56,616

As a result of rising revenue volumes, especially for cost-reimbursable and maintenance-type work, we have invested heavily into working capital during the first quarter of fiscal 2023, which is the primary driver of the decrease in liquidity since June 30, 2022.

While bidding activity, project award volumes, and revenue volumes all continued to improve as we moved into fiscal 2023, the market environment is still uncertain.

As a result, we continue to cautiously manage our liquidity, which is adequate to support our needs.

We are continuing to take the following actions:

• strategically reviewing business processes and organizational structure;

• proactively managing our the cost structure and working capital;

• limiting capital expenditures.

Liquidity at December 31, 2022 $ 80,469

As a result of rising revenue volumes, especially for cost-reimbursable and maintenance-type work, we invested heavily into working capital during the first quarter of fiscal 2023, which led to a significant decrease in liquidity in that quarter.

However, advanced billings on newly awarded capital projects in the second quarter of fiscal 2023 and a larger credit facility borrowing base driven by higher accounts receivable balances have led to an improvement of liquidity since the first quarter.

We expect our liquidity position to continue to improve for several reasons, including expected improved operating results in our fourth fiscal quarter, the receipt of approximately $13 million of tax refunds in the third fiscal quarter, and positive cash flow from newly-awarded capital projects.

Factors that routinely impact our short-term liquidity and may impact our long-term liquidity include, but are not limited to:

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• borrowing constraints under our ABL Facility and maintaining compliance with all covenants contained in the ABL Facility;

• changes to our capital structure;

• acquisitions and disposals of businesses;

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ABL Credit Facility

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.

On September 9, 2021, the Company and our primary U.S.

and Canada operating subsidiaries entered into an asset-based credit agreement, which was amended on October 5, 2022 (as amended, the "ABL Facility"), with Bank of Montreal, as Administrative Agent, Swing Line Lender and a Letter of Credit Issuer, and the lenders named therein.

The maximum amount of loans under the ABL Facility is limited to $90.0 million.

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.

Our obligations under the ABL Facility are guaranteed by us and substantially all of our U.S.

and Canadian subsidiaries and 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.

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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.

At December 31, 2022, our borrowing base was $83.2 million, we had $15.0 million of outstanding borrowings, and we had $19.2 million in letters of credit outstanding, which resulted in availability of $49.0 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 Secured Overnight Financing Rate ("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;

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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 interest rate in effect for borrowings outstanding at December 31, 2022, including applicable margin, was 8.75%.

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.

Cash Flow for the Three Months Ended September 30, 2022

In the event that our availability is less than the greater of (i) $15.0 million and (ii) 15.00% of the commitments under the ABL Facility then in effect, a consolidated Fixed Charge Coverage Ratio of at least 1.00 to 1.00 must be maintained.

We were in compliance with all covenants of the ABL Facility as of December 31, 2022.

Cash Flow for the Six Months Ended December 31, 2022

Cash Flows Used by Operating Activities

Cash used by operating activities for the three months ended September 30, 2022 totaled $35.2 million.

Cash used by operating activities for the six months ended December 31, 2022 totaled $17.6 million.

The various components are as follows:

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Depreciation and amortization 7,177

Goodwill impairment 12,316

Stock-based compensation 3,747

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Net cash used by operating activities $ (17,585)

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

• Accounts receivable, excluding credit losses recognized during the period, decreased $4.6 million during the three months ended September 30, 2022, which increased cash flows from operating activities.

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

• Accounts receivable, excluding credit losses recognized during the period, increased by $28.1 million during the six months ended December 31, 2022, which decreased cash flows from operating activities.

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

• Costs and estimated earnings in excess of billings on uncompleted contracts ("CIE") increased $1.8 million, which decreased cash flows from operating activities.

The increase in CIE was primarily due to increased revenue on time and materials-type work during the first quarter of fiscal 2023.

Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") decreased $11.8 million, which decreased cash flows from operating activities.

The decrease in BIE was primarily due to continued work on capital projects that received upfront billings in the prior year.

Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") increased $34.7 million, which increased cash flows from operating activities.

CIE and BIE balances can experience significant fluctuations based on business volumes and the timing of when job costs are incurred and the timing of customer billings and payments.

• Inventories, income taxes receivable, prepaid expenses, other current assets, operating right-of-use lease assets and other assets, non-current, increased $0.7 million during the three months ended September 30, 2022, which decreased cash flows from operating activities.

• Inventories, income taxes receivable, prepaid expenses, other current assets, operating right-of-use lease assets and other assets, non-current, increased $4.7 million during the six months ended December 31, 2022, which decreased cash flows from operating activities.

These operating assets can fluctuate based on the timing of inventory builds and draw-downs, accrual and receipt of income taxes receivable;

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and other timing differences.

• Accounts payable, accrued wages and benefits, accrued insurance, operating lease liabilities, other accrued expenses, and other liabilities, non-current decreased by $11.6 million during the three months ended September 30, 2022, which decreased cash flows from operating activities.

• Accounts payable, accrued wages and benefits, accrued insurance, operating lease liabilities, other accrued expenses, and other liabilities, non-current decreased by $1.1 million during the six months ended December 31, 2022, which decreased cash flows from operating activities.

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

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Cash Flows Used by Investing Activities

Investing activities used $1.6 million of cash in the three months ended September 30, 2022 primarily due to capital expenditures.

Investing activities used $2.8 million of cash in the six months ended December 31, 2022 primarily due to capital expenditures.

Cash Flows Used by Financing Activities

Financing activities used $0.2 million of cash in the three months ended September 30, 2022 primarily due to $0.3 million paid to repurchase our stock for payment of withholding taxes due on equity-based compensation.

Financing activities used $0.2 million of cash in the six months ended December 31, 2022 primarily due to $0.3 million paid to repurchase our stock for payment of withholding taxes due on equity-based compensation.

Dividend Policy

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The program will continue unless and until it is modified or revoked by the Board of Directors.

We made no repurchases under the program in the three months ended September 30, 2022 and have no current plans to repurchase stock.

As of September 30, 2022, there were 1,349,037 shares available for repurchase under the Stock Buyback Program.

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

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

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

Treasury Shares

We had 932,707 treasury shares as of September 30, 2022 and intend to utilize these treasury shares in connection with equity awards under the our stock incentive plans and for sales to the Employee Stock Purchase Plan.

We had 860,894 treasury shares as of December 31, 2022 and intend to utilize these treasury shares in connection with equity awards under the our stock incentive plans and for sales to the Employee Stock Purchase Plan.

CRITICAL ACCOUNTING POLICIES

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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 collectibility is probable.

We also evaluate whether a contract should be combined with other contracts and accounted for as a single contract.

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Claims are more fully discussed in Note 8 - Commitments and Contingencies of the Notes to Financial Statements.

Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $13.7 million at September 30, 2022 and $8.9 million at June 30, 2022.

Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $18.2 million at December 31, 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.

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As a test for reasonableness, we also consider the combined fair values of our reporting units compared to our market capitalization.

Financial Statements, Note 5 - Goodwill and Other Intangible Assets, Goodwill, for disclosure information about our goodwill balances the results of impairment tests.

We use the asset and liability approach for financial accounting and reporting for income taxes.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis