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 Six Months Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Revenue $ 193,840 $ 161,965 $ 402,271 $ 330,058 Cost of revenue 195,142 158,758 390,565 330,359 Gross profit (loss) ( 1,302 ) 3,207 11,706 ( 301 ) Selling, general and administrative expenses 17,545 15,922 34,356 32,551 Goodwill impairment 12,316 — 12,316 — Restructuring costs 1,278 695 2,565 1,300 Operating loss ( 32,441 ) ( 13,410 ) ( 37,531 ) ( 34,152 ) Other income (expense): Interest expense ( 916 ) ( 502 ) ( 1,288 ) ( 2,501 ) Interest income 46 29 70 50 Other 484 ( 60 ) ( 590 ) ( 143 ) Loss before income tax expense ( 32,827 ) ( 13,943 ) ( 39,339 ) ( 36,746 ) Provision for federal, state and foreign income taxes — 10,976 — 5,711 Net loss $ ( 32,827 ) $ ( 24,919 ) $ ( 39,339 ) $ ( 42,457 ) Basic loss per common share $ ( 1.22 ) $ ( 0.93 ) $ ( 1.46 ) $ ( 1.59 ) Diluted loss per common share $ ( 1.22 ) $ ( 0.93 ) $ ( 1.46 ) $ ( 1.59 ) Weighted average common shares outstanding: Basic 26,999 26,749 26,916 26,680 Diluted 26,999 26,749 26,916 26,680 See accompanying notes. -1- Table of Contents Matrix Service Company Condensed Consolidated Statements of Comprehensive Income (In thousands) (unaudited) Three Months Ended Six Months Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Net loss $ ( 32,827 ) $ ( 24,919 ) $ ( 39,339 ) $ ( 42,457 ) Other comprehensive loss, net of tax: Foreign currency translation gain (loss) (net of tax expense (benefit) of $0 for the three and six months ended December 31, 2022 and $(8) and $46 for the three and six months ended December 31, 2021, respectively) 1,265 99 ( 488 ) ( 696 ) Comprehensive loss $ ( 31,562 ) $ ( 24,820 ) $ ( 39,827 ) $ ( 43,153 ) See accompanying notes. -2- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands) (unaudited) December 31, 2022 June 30, 2022 Assets Current assets: Cash and cash equivalents $ 31,464 $ 52,371 Accounts receivable, less allowances (December 31, 2022—$1,112 and June 30, 2022—$1,320) 182,054 153,879 Costs and estimated earnings in excess of billings on uncompleted contracts 46,588 44,752 Inventories 7,981 9,974 Income taxes receivable 13,546 13,547 Prepaid expenses 8,104 4,024 Other current assets 4,745 8,865 Total current assets 294,482 287,412 Restricted cash 25,000 25,000 Property, plant and equipment - net 50,684 53,869 Operating lease right-of-use assets 23,938 22,067 Goodwill 29,733 42,135 Other intangible assets, net of accumulated amortization 3,931 4,796 Other assets, non-current 10,350 5,514 Total assets $ 438,118 $ 440,793 See accompanying notes. -3- Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands, except share data) (unaudited) December 31, 2022 June 30, 2022 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 80,561 $ 74,886 Billings on uncompleted contracts in excess of costs and estimated earnings 99,762 65,106 Accrued wages and benefits 12,352 21,526 Accrued insurance 5,818 6,125 Operating lease liabilities 4,534 5,715 Other accrued expenses 5,525 4,427 Total current liabilities 208,552 177,785 Deferred income taxes 27 26 Operating lease liabilities 22,713 19,904 Borrowings under asset-backed credit facility 15,000 15,000 Other liabilities, non-current 374 372 Total liabilities 246,666 213,087 Commitments and contingencies Stockholders’ equity: Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of December 31, 2022 and June 30, 2022; 27,027,323 and 26,790,514 shares outstanding as of December 31, 2022 and June 30, 2022, respectively 279 279 Additional paid-in capital 137,989 139,854 Retained earnings 71,939 111,278 Accumulated other comprehensive loss ( 8,663 ) ( 8,175 ) 201,544 243,236 Treasury stock, at cost — 860,894 shares as of December 31, 2022, and 1,097,703 shares as of June 30, 2022 ( 10,092 ) ( 15,530 ) Total stockholders' equity 191,452 227,706 Total liabilities and stockholders’ equity $ 438,118 $ 440,793 See accompanying notes. -4- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Six Months Ended December 31, 2022 December 31, 2021 Operating activities: Net loss $ ( 39,339 ) $ ( 42,457 ) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 7,177 7,841 Goodwill impairment 12,316 — Stock-based compensation expense 3,747 3,735 Deferred income tax — 5,340 Loss (gain) on sale of property, plant and equipment 42 ( 102 ) Provision for uncollectible accounts ( 50 ) ( 35 ) Accelerated amortization of deferred debt amendment fees — 1,518 Other 132 45 Changes in operating assets and liabilities increasing (decreasing) cash: Accounts receivable ( 28,125 ) 26,464 Costs and estimated earnings in excess of billings on uncompleted contracts ( 1,836 ) ( 3,729 ) Inventories 1,993 1,045 Other assets and liabilities ( 5,170 ) ( 3,784 ) Accounts payable 5,253 ( 4,866 ) Billings on uncompleted contracts in excess of costs and estimated earnings 34,656 31,027 Accrued expenses ( 8,381 ) ( 10,657 ) Net cash provided (used) by operating activities ( 17,585 ) 11,385 Investing activities: Capital expenditures ( 2,843 ) ( 569 ) Proceeds from asset sales 31 108 Net cash used by investing activities $ ( 2,812 ) $ ( 461 ) See accompanying notes. -5- Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Six Months Ended December 31, 2022 December 31, 2021 Financing activities: Advances under asset-backed credit facility $ 10,000 $ — Repayments of advances under asset-backed credit facility ( 10,000 ) — Payment of debt amendment fees — ( 1,010 ) Issuances of common stock — 199 Proceeds from issuance of common stock under employee stock purchase plan 136 143 Repurchase of common stock for payment of statutory taxes due on equity-based compensation ( 310 ) ( 853 ) Other Treasury Share Purchases — ( 236 ) Net cash used by financing activities ( 174 ) ( 1,757 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 336 ) ( 405 ) Net increase (decrease) in cash, cash equivalents and restricted cash ( 20,907 ) 8,762 Cash, cash equivalents and restricted cash, beginning of period 77,371 83,878 Cash, cash equivalents and restricted cash, end of period $ 56,464 $ 92,640 Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Income taxes $ — $ ( 341 ) Interest, including payment of debt amendment fees $ 1,056 $ 1,798 Non-cash investing and financing activities: Purchases of property, plant and equipment on account $ 476 $ 5 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, September 30, 2022 $ 279 $ 137,651 $ 104,766 $ ( 9,928 ) $ ( 11,517 ) $ 221,251 Net loss — — ( 32,827 ) — — ( 32,827 ) Other comprehensive income — — — 1,265 — 1,265 Issuance of deferred shares (54,702 shares) — ( 1,085 ) — — 1,085 — Treasury shares sold to Employee Stock Purchase Plan (17,111 shares) — ( 269 ) — — 340 71 Stock-based compensation expense — 1,692 — — — 1,692 Balances, December 31, 2022 $ 279 $ 137,989 $ 71,939 $ ( 8,663 ) $ ( 10,092 ) $ 191,452 Balances, September 30, 2021 $ 279 $ 135,308 $ 157,640 $ ( 7,544 ) $ ( 17,385 ) $ 268,298 Net loss — — ( 24,919 ) — — ( 24,919 ) Other comprehensive income — — — 99 — 99 Exercise of stock options (19,550 shares) — ( 189 ) — — 388 199 Issuance of deferred shares (51,319 shares) — ( 1,018 ) — — 1,018 — Treasury shares sold to Employee Stock Purchase Plan (6,078 shares) — ( 54 ) — — 121 67 Stock-based compensation expense — 1,866 — — — 1,866 Balances, December 31, 2021 $ 279 $ 135,913 $ 132,721 $ ( 7,445 ) $ ( 15,858 ) $ 245,610 -7- Table of Contents 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 — — ( 39,339 ) — — ( 39,339 ) Other comprehensive loss — — — ( 488 ) — ( 488 ) Issuance of deferred shares (259,529 shares) — ( 5,149 ) — — 5,149 — Treasury shares sold to Employee Stock Purchase Plan (30,144 shares) — ( 463 ) — — 599 136 Treasury shares purchased to satisfy tax withholding obligations (52,864 shares) — — — — ( 310 ) ( 310 ) Stock-based compensation expense — 3,747 — — — 3,747 Balances, December 31, 2022 $ 279 $ 137,989 $ 71,939 $ ( 8,663 ) $ ( 10,092 ) $ 191,452 Balances, June 30, 2021 $ 279 $ 137,575 $ 175,178 $ ( 6,749 ) $ ( 20,744 ) $ 285,539 Net loss — — ( 42,457 ) — — ( 42,457 ) Other comprehensive income loss — — — ( 696 ) — ( 696 ) Exercise of stock options (19,550 shares) — ( 189 ) — — 388 199 Issuance of deferred shares (268,403 shares) — ( 5,102 ) — — 5,102 — Treasury shares sold to Employee Stock Purchase Plan (13,287 shares) — ( 106 ) — — 249 143 Treasury shares purchased to satisfy tax withholding obligations (76,703 shares) — — — — ( 853 ) ( 853 ) Stock-based compensation expense — 3,735 — — — 3,735 Balances, December 31, 2021 $ 279 $ 135,913 $ 132,721 $ ( 7,445 ) $ ( 15,858 ) $ 245,610 -8- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 – Basis of Presentation and Significant Accounting Policies Basis of Presentation The condensed consolidated financial statements include the accounts of Matrix Service Company and its subsidiaries (“Matrix”, “we”, “our”, “us”, “its” or the “Company”), unless otherwise indicated. Intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. The information furnished reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations, cash flows and financial position for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2022, included in our Annual Report on Form 10-K for the year then ended. The results of operations for the three and six month periods ended December 31, 2022 may not necessarily be indicative of the results of operations for the full year ending June 30, 2023. Significant Accounting Policies Our 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 $ 574.6 million of remaining performance obligations yet to be satisfied as of December 31, 2022 . We expect to recognize $ 432.8 million of our remaining performance obligations as revenue within the next twelve months. Contract Balances Contract terms with customers include the timing of billing and 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: December 31, 2022 June 30, 2022 Change (in thousands) Costs and estimated earnings in excess of billings on uncompleted contracts $ 46,588 $ 44,752 $ 1,836 Billings on uncompleted contracts in excess of costs and estimated earnings ( 99,762 ) ( 65,106 ) ( 34,656 ) Net contract liabilities $ ( 53,174 ) $ ( 20,354 ) $ ( 32,820 ) 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 six months ended December 31, 2022 that was included in the June 30, 2022 BIE balance was $ 52.3 million. This revenue consists primarily of work performed during the period on contracts with customers that had advance billings. -9- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Progress billings in accounts receivable at December 31, 2022 and June 30, 2022 included retentions to be collected within one year of $ 19.7 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 $ 9.0 million as of December 31, 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 Six Months Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 (In thousands) United States $ 170,290 $ 145,917 $ 346,470 $ 299,201 Canada 20,885 15,260 45,810 28,770 Other international 2,665 788 9,991 2,087 Total Revenue $ 193,840 $ 161,965 $ 402,271 $ 330,058 Contract Type Disaggregation: Three Months Ended Six Months Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 (In thousands) Fixed-price contracts $ 105,283 $ 100,841 $ 214,756 $ 202,906 Time and materials and other cost reimbursable contracts 88,557 61,124 187,515 127,152 Total Revenue $ 193,840 $ 161,965 $ 402,271 $ 330,058 Typically, we assume more risk with fixed-price contracts since increases in costs to perform the work may not be recoverable. However, these types of contracts typically offer higher profits than time and materials and other cost reimbursable contracts when completed at or below the costs originally estimated. The profitability of time and materials and other cost reimbursable contracts is typically lower than fixed-price contracts and is usually less volatile than fixed-price contracts since the profit component is factored into the rates charged for labor, equipment and materials, or is expressed in the contract as a percentage of the reimbursable costs incurred. Revisions in Estimates 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 and $9.4 million during the three and six months ended December 31, 2022, respectively. We have accrued the full expected loss for the project, which we expect to be mechanically complete in the fourth quarter of fiscal 2023. -10- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 3 – Property, Plant and Equipment The following table presents the components of our property, plant and equipment - net at December 31, 2022 and June 30, 2022: December 31, 2022 June 30, 2022 (In thousands) Property, plant and equipment - at cost: Land and buildings $ 36,391 $ 34,788 Construction equipment 91,954 93,036 Transportation equipment 48,908 48,999 Office equipment and software 41,984 43,823 Construction in progress 828 1,646 Total property, plant and equipment - at cost 220,065 222,292 Accumulated depreciation ( 169,381 ) ( 168,423 ) Property, plant and equipment - net $ 50,684 $ 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 December 31, 2022 . Most real estate and information technology equipment leases generally have fixed payments that follow an agreed upon payment schedule and have remaining lease terms ranging from less than one year to 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 Six Months Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Lease expense Location of Expense (in thousands) Operating lease expense Cost of revenue and Selling, general and administrative expenses $ 1,788 $ 1,878 $ 3,551 $ 3,970 Short-term lease expense (1) Cost of revenue 7,534 5,292 14,817 10,863 Total lease expense $ 9,322 $ 7,170 $ 18,368 $ 14,833 (1) Primarily represents the lease expense of construction equipment that is subject to month-to-month rental agreements with expected rental durations of less than one year. -11- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in our Condensed Consolidated Balance Sheets, were as follows: December 31, 2022 Maturity Analysis: (in thousands) Remainder of Fiscal 2023 $ 2,863 Fiscal 2024 5,634 Fiscal 2025 4,269 Fiscal 2026 4,246 Fiscal 2027 4,161 Thereafter 12,843 Total future operating lease payments 34,016 Imputed interest ( 6,769 ) Net present value of future lease payments 27,247 Less: current portion of operating lease liabilities 4,534 Non-current operating lease liabilities $ 22,713 The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of December 31, 2022 : Weighted-average remaining lease term (in years) 6.8 years Weighted-average discount rate 6.1 % Supplemental cash flow information related to leases is as follows: Six Months Ended December 31, 2022 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating lease payments $ 3,617 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 5,219 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 Goodwill impairment — ( 12,316 ) — ( 12,316 ) Translation adjustment (1) ( 29 ) — ( 57 ) ( 86 ) Net balance at December 31, 2022 $ 4,234 $ 6,111 $ 19,388 $ 29,733 (1) The translation adjustments relate to the periodic translation of Canadian Dollar and South Korean Won denominated goodwill recorded as a part of prior acquisitions in Canada and South Korea, in which the local currency was determined to be the functional currency. -12- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) 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. Recent negative operating results of one of our reporting units at higher risk of impairment indicated that it was more likely than not that its goodwill was impaired. This reporting unit is in the Process and Industrial Facilities segment and includes the midstream gas processing project referenced in Note 2 - Revenue, Revisions in Estimates, which experienced a material adverse change in gross profit during the second quarter of fiscal 2023. Based on the indicated outcome of this project and our near-term outlook for the reporting unit, we performed an interim impairment test for the unit and concluded that its $12.3 million of goodwill was fully impaired. The impairment was recognized in operating income during the three and six months ended December 31, 2022. Based on the totality of both positive and negative factors, no impairment indicators related to the other reporting units existed at December 31, 2022. However, if our view of project opportunities or gross margins deteriorates, particularly for the remaining 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 December 31, 2022 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,483 $ ( 2,286 ) $ 197 Customer-based (1) 6 to 15 13,144 ( 9,410 ) 3,734 Total amortizing intangible assets $ 15,627 $ ( 11,696 ) $ 3,931 (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 $ 0.9 million during the three and six months ended December 31, 2022 and $ 0.4 million and $ 1.0 million during the three and six months ended December 31, 2021, respectively. We estimate that the remaining amortization expense related to December 31, 2022 amortizing intangible assets will be as follows (in thousands): Period ending: Remainder of Fiscal 2023 $ 864 Fiscal 2024 1,416 Fiscal 2025 1,096 Fiscal 2026 555 Total estimated remaining amortization expense at December 31, 2022 $ 3,931 -13- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 6 – Debt 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 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. 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 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; 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 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 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. Note 7 – Income Taxes Effective Tax Rate Our effective tax rates were zero percent for the three and six months ended December 31, 2022 , compared to ( 78.7 )% and ( 15.5 )% during the three and six months ended December 31, 2021, respectively. The effective tax rates during fiscal 2023 were impacted by valuation allowances of $ 8.4 million and $ 9.8 million placed on deferred tax assets during the three and six months ended December 31, 2022, respectively. 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. -14- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) 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 During the second quarter of fiscal 2023, we repaid the remaining $ 5.6 million of U.S. payroll taxes we deferred through provisions of the CARES Act. The balance of deferred payroll taxes was 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 $ 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. 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 December 31, 2022 was $ 17.0 million. Litigation is unpredictable, however, based on the terms of the contract with this customer, we believe we are entitled to collect the full amount owed under the contract. We are participants in various legal actions. It is the opinion of management that none of the other known legal actions will have a material impact on our financial position, results of operations or liquidity. Note 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. -15- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) The computation of basic and diluted earnings per share is as follows: Three Months Ended Six Months Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 (In thousands, except per share data) Basic EPS: Net loss $ ( 32,827 ) $ ( 24,919 ) $ ( 39,339 ) $ ( 42,457 ) Weighted average shares outstanding 26,999 26,749 26,916 26,680 Basic loss per share $ ( 1.22 ) $ ( 0.93 ) $ ( 1.46 ) $ ( 1.59 ) Diluted EPS: Net loss $ ( 32,827 ) $ ( 24,919 ) $ ( 39,339 ) $ ( 42,457 ) Diluted weighted average shares outstanding 26,999 26,749 26,916 26,680 Diluted loss per share $ ( 1.22 ) $ ( 0.93 ) $ ( 1.46 ) $ ( 1.59 ) 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. In fiscal year 2022, we commenced a project to centralize and standardize certain support functions including accounting, human resources and project support. These centralized support functions are now included in corporate selling, general and administrative expense, but were previously included in our operating segment selling, general and administrative expense. 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. -16- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Results of Operations (In thousands) Three Months Ended Six Months Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Gross revenue Utility and Power Infrastructure $ 50,589 $ 54,752 $ 95,459 $ 111,956 Process and Industrial Facilities 80,789 52,037 167,526 97,247 Storage and Terminal Solutions 63,130 57,607 140,420 125,919 Total gross revenue $ 194,508 $ 164,396 $ 403,405 $ 335,122 Less: Inter-segment revenue Utility and Power Infrastructure $ 54 $ — $ 54 $ — Process and Industrial Facilities — 1,721 109 3,026 Storage and Terminal Solutions 614 710 971 2,038 Total inter-segment revenue $ 668 $ 2,431 $ 1,134 $ 5,064 Consolidated revenue Utility and Power Infrastructure $ 50,535 $ 54,752 $ 95,405 $ 111,956 Process and Industrial Facilities 80,789 50,316 167,417 94,221 Storage and Terminal Solutions 62,516 56,897 139,449 123,881 Total consolidated revenue $ 193,840 $ 161,965 $ 402,271 $ 330,058 Gross profit (loss) Utility and Power Infrastructure $ 2,426 $ ( 491 ) $ 4,139 $ ( 6,598 ) Process and Industrial Facilities ( 5,131 ) 4,235 ( 801 ) 7,106 Storage and Terminal Solutions 1,648 ( 172 ) 9,213 241 Corporate ( 245 ) ( 365 ) ( 845 ) ( 1,050 ) Total gross profit (loss) $ ( 1,302 ) $ 3,207 $ 11,706 $ ( 301 ) Selling, general and administrative expenses Utility and Power Infrastructure $ 1,787 $ 3,150 $ 3,525 $ 6,200 Process and Industrial Facilities 3,682 2,792 7,752 5,554 Storage and Terminal Solutions 5,450 4,280 9,608 8,786 Corporate 6,626 5,700 13,471 12,011 Total selling, general and administrative expenses $ 17,545 $ 15,922 $ 34,356 $ 32,551 Goodwill impairment and restructuring costs Utility and Power Infrastructure $ — $ 37 $ 37 $ 46 Process and Industrial Facilities 12,698 ( 24 ) 13,012 ( 17 ) Storage and Terminal Solutions 383 107 906 74 Corporate 513 575 926 1,197 Total goodwill impairment and restructuring costs $ 13,594 $ 695 $ 14,881 $ 1,300 Operating income (loss) Utility and Power Infrastructure $ 639 $ ( 3,678 ) $ 577 $ ( 12,844 ) Process and Industrial Facilities ( 21,511 ) 1,467 ( 21,565 ) 1,569 Storage and Terminal Solutions ( 4,185 ) ( 4,559 ) ( 1,301 ) ( 8,619 ) Corporate ( 7,384 ) ( 6,640 ) ( 15,242 ) ( 14,258 ) Total operating loss $ ( 32,441 ) $ ( 13,410 ) $ ( 37,531 ) $ ( 34,152 ) -17- Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Total assets by segment were as follows: December 31, 2022 June 30, 2022 Utility and Power Infrastructure $ 89,480 $ 94,059 Process and Industrial Facilities 119,401 104,078 Storage and Terminal Solutions 144,561 141,084 Corporate 84,676 101,572 Total segment assets $ 438,118 $ 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. 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. 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. -18- 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 Six Months Ended Since Inception of Business Improvement Plan December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 (In thousands) Utility and Power Infrastructure Severance and other personnel-related costs $ — $ 36 $ 37 $ 45 $ 2,621 Facility costs — — — — 348 Other intangible asset impairments — — — — 1,150 Other costs — 1 — 1 1 Total Utility and Power Infrastructure $ — $ 37 $ 37 $ 46 $ 4,120 Process and Industrial Facilities Severance and other personnel-related costs $ 354 $ ( 27 ) $ 666 $ ( 22 ) $ 9,762 Facility costs — 1 2 1 3,208 Other intangible asset impairments — — — — 375 Other costs 28 2 28 4 ( 1,143 ) Total Process and Industrial Facilities $ 382 $ ( 24 ) $ 696 $ ( 17 ) $ 12,202 Storage and Terminal Solutions Severance and other personnel-related costs $ 379 $ 102 $ 902 $ 69 $ 2,548 Facility costs — — — — 879 Other costs 4 5 4 5 32 Total Storage and Terminal Solutions $ 383 $ 107 $ 906 $ 74 $ 3,459 Corporate Severance and other personnel-related costs $ 311 $ — $ 708 $ 44 $ 2,295 Facility costs 126 — 126 16 224 Other costs 76 575 92 1,137 1,677 Total Corporate $ 513 $ 575 $ 926 $ 1,197 $ 4,196 Restructuring Costs by Type: Severance and other personnel-related costs $ 1,044 $ 111 $ 2,313 $ 136 $ 17,226 Facility costs 126 1 128 17 4,659 Other intangible asset impairments — — — — 1,525 Other costs 108 583 124 1,147 567 Total restructuring costs $ 1,278 $ 695 $ 2,565 $ 1,300 $ 23,977 -19- Table of Contents