What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2023-02-09 · 178 added, 183 removed, 329 unchanged (52% of the section changed)

43 unchanged sentences

Operational Update

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.

We received $308.7 million of project awards during the third quarter of fiscal 2023, which resulted in a book-to-bill ratio of 1.7 for the quarter.

These awards are a continuation of the growth trend that began last fiscal year and the third quarter of fiscal 2023 marks the seventh consecutive quarter with a book-to-bill ratio at or above 1.0.

We have now received $862.0 million of project awards so far during fiscal 2023 and expect that amount to be over $1.0 billion at the conclusion of the fiscal year.

Revenue of $186.9 million during the third quarter of fiscal 2023 was lower than revenue of $193.8 million during the second quarter of fiscal 2023 as certain projects awarded in prior periods continue to work off while the contribution to revenue of newly awarded projects is still limited as they progress through engineering and planning stages.

Gross margin was 2.4% in the third quarter of fiscal 2023 compared to a negative gross margin of (0.7%) in the second quarter of fiscal 2023.

The primary driver of our low gross margin during the third quarter of fiscal 2023 was low revenue volumes, which led to under-recovery of construction overhead costs.

In addition, our results were impacted by increased forecasted costs to complete and close out certain midstream gas processing work, which was partly offset by the net positive impact of strong performance of other projects.

Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

Consolidated revenue was $186.9 million for the three months ended March 31, 2023, compared to $177.0 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 $30.7 million and $3.5 million, respectively.

The increases were partially offset by a decrease in revenue of $24.3 million in the Utility and Power Infrastructure segment.

Consolidated gross profit increased to $4.4 million in the three months ended March 31, 2023 compared to a gross loss of $1.8 million in the same period last year.

Gross margin increased to 2.4% in the three months ended March 31, 2023 compared to a negative gross margin of (1.0%) in the same period last year.

Gross margins in the third 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, unfavorable changes in the estimated recovery of change orders and increased forecasted costs to complete certain midstream gas processing projects, and other increases in forecasted costs to complete a limited number of projects.

Gross margins in the third quarter of fiscal 2022 were negatively impacted by low revenue volume, which led to the under recovery of construction overhead costs and an increase in forecasted costs on a midstream gas processing project in the Process and Industrial Facilities segment.

Consolidated Selling, General and Administrative ("SG&A") expenses were $16.9 million in the three months ended March 31, 2023 compared to $17.0 million in the same period last year.

During the third quarter of fiscal 2022, we recorded a goodwill impairment of $18.3 million.

Financial Statements, Note 4 - Goodwill and Other Intangible Assets, Goodwill, for more information about the impairment.

We recorded restructuring costs of $0.3 million in the three months ended March 31, 2023 compared to a credit of $1.6 million to restructuring costs in the same period last year.

The credit was due to a favorable settlement of a restructuring obligation related to our exit from the domestic iron and steel industry in fiscal 2020.

Financial Statements, Note 10 - Restructuring Costs, for more information about our business improvement plan.

Interest expense was $0.3 million in the three months ended March 31, 2023 compared to $0.2 million in the three months ended March 31, 2022.

Interest expense in the three months ended March 31, 2023 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 March 31, 2023 and March 31, 2022 were 2.8% and 0.4%, respectively.

The effective tax rates for both periods were impacted by valuation allowances of $3.6 million and $7.7 million, respectively, placed on deferred tax assets.

We placed a valuation allowance on all of 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 March 31, 2023, we had a net loss of $12.7 million, or $0.47 per fully diluted share, compared to a net loss of $34.9 million, or $1.30 per fully diluted share, in the three months ended March 31, 2022.

Utility and Power Infrastructure

Revenue for the Utility and Power Infrastructure segment was $35.0 million in the three months ended March 31, 2023 compared to $59.3 million in the same period last year.

The decrease is due to lower volumes of LNG peak shaving work.

The segment gross margin was 8.0% in the third quarter of fiscal 2023 compared to a negative gross margin of (0.8%) in the same period last year.

This margin was driven by good execution on of a mix of work that that was primarily comprised of lower margin cost reimbursable power delivery work.

The negative segment gross margin for the third quarter of fiscal 2022 was negatively impacted by low revenue volume, which led to the under recovery of construction overhead costs, an increase in forecasted cost on a capital project, and lower margins on capital work bid competitively.

Process and Industrial Facilities

Revenue for the Process and Industrial Facilities segment was $99.7 million in the three months ended March 31, 2023 compared to $69.0 million in the same period last year.

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

The segment gross margin was 3.2% for the three months ended March 31, 2023 compared to a negative gross margin of (0.6%) in the same period last year.

The segment gross margin in the third quarter of fiscal 2023 was negatively impacted by unfavorable changes in the estimated recovery of change orders and increased forecasted costs to complete certain midstream gas processing capital projects, which resulted in the projects reducing gross profit by $3.3 million for the quarter.

These charges were primarily the result of the client not approving adequate compensation to us for the impact that excessive scope changes had on our ability to progress work on the projects according to forecast and for the impact that global supply chain issues and inflation had on the projects.

We have accrued the full expected loss for the projects, which we expect to be mechanically complete in July 2023.

Finally, segment gross margin was also negatively impacted by the under recovery of construction overhead costs.

Outside of work on midstream gas processing projects, project execution was strong for the remainder of the segment.

The segment gross margin in the third quarter of fiscal 2022 was negatively impacted by an increase in forecasted costs to complete a midstream gas processing project, which resulted in a $4.8 million reduction to gross profit.

The increase in forecasted costs was primarily due to performance of a now-terminated subcontractor, which required rework in order to meet our client's expectations.

In addition, the mix of work, which was impacted by increased reimbursable maintenance activity, also contributed to lower margins.

The segment gross margin was also negatively impacted by the under recovery of construction overhead costs.

Storage and Terminal Solutions

Revenue for the Storage and Terminal Solutions segment was $52.2 million in the three months ended March 31, 2023 compared to $48.7 million in the same period last year.

Project awards, which have been strong with a year-to-date book-to-bill of 1.6, will begin to substantially impact revenue in the fourth quarter.

The segment had a negative gross margin of (1.6%) for the three months ended March 31, 2023 compared to a negative gross margin of (0.9)% in the same period last year.

The primary driver of the negative fiscal 2023 segment gross margin was the under recovery of construction overhead costs due to low revenue volumes.

Revenue volumes during the quarter were low as the strong storage project awards received in the first nine months of fiscal 2023 are not expected to positively impact revenue until the fourth quarter of fiscal 2023.

The segment gross margin for the three months ended March 31, 2022 was negatively impacted by low revenue volume, which led to the under recovery of construction overhead costs, and smaller competitively priced capital projects.

Unallocated corporate expenses were $6.6 million during the three months ended March 31, 2023 compared to $7.2 million in the same period last year.

Nine Months Ended March 31, 2023 Compared to the Nine Months Ended March 31, 2022

Consolidated revenue was $589.2 million for the nine months ended March 31, 2023, compared to $507.1 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 $103.9 million and $19.0 million, respectively.

The increases were partially offset by a decrease in revenue of $40.9 million in the Utility and Power Infrastructure segment.

Consolidated gross profit increased to $16.1 million in the nine months ended March 31, 2023 compared to a gross loss of $2.1 million in the same period last year.

Gross margin increased to 2.7% in the nine months ended March 31, 2023 compared to a negative gross margin of (0.4%) in the same period last year.

Gross margins in the first nine months of fiscal 2023 were negatively impacted by unfavorable changes in the estimated recovery of change orders and increased forecasted costs to complete certain midstream gas processing projects, 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 other increases in forecasted costs to complete a limited number of projects.

Gross margins in the nine months ended March 31, 2022 were negatively impacted by low revenue volume, which led to the under recovery of construction overhead costs.

In addition, the competitive environment and project adjustments negatively impacted gross margins.

Consolidated SG&A expenses were $51.2 million in the nine months ended March 31, 2023 compared to $49.6 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 second quarter of fiscal 2023.

During the third quarter of fiscal 2022, we recorded a goodwill impairment of $18.3 million.

Financial Statements, Note 4 - Goodwill and Other Intangible Assets, Goodwill, for more information about the impairments.

We recorded restructuring costs of $2.9 million in the nine months ended March 31, 2023 compared to ($0.3) million in the same period last year.

Financial Statements, Note 10 - Restructuring Costs, for more information about our business improvement plan.

Interest expense was $1.6 million in the nine months ended March 31, 2023 compared to $2.7 million in the nine months ended March 31, 2022.

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 nine months ended March 31, 2023 and March 31, 2022 were 0.7% and (7.8%), respectively.

The effective tax rates for both periods were impacted by valuation allowances of $13.3 million and $21.9 million, respectively, placed on deferred tax assets.

We placed a valuation allowance on all of 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 nine months ended March 31, 2023, we had a net loss of $52.0 million or $1.93 per fully diluted share, compared to a net loss of $77.4 million, or $2.90 per fully diluted share, in the nine months ended March 31, 2022.

Utility and Power Infrastructure

Revenue for the Utility and Power Infrastructure segment was $130.4 million in the nine months ended March 31, 2023 compared to $171.3 million in the same period last year.

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

The segment gross margin was 5.3% for the nine months ended March 31, 2023 compared to a negative gross margin of (4.1%) in the same period last year.

The segment gross margin for the first nine months of fiscal 2023 was negatively impacted by continued work on projects with previously reduced gross margins, projects that were bid competitively, and the under recovery of construction overhead costs due to lower revenue volumes.

These negative impacts were partially offset by strong execution of cost reimbursable power delivery work.

The segment gross margin for the nine months ended March 31, 2022 was negatively impacted by low revenue volume, which led to the under recovery of construction overhead costs.

In addition, the fiscal 2022 segment gross margin was materially impacted by changes in the forecasted costs to complete a large capital project, which resulted in the project reducing gross profit by $5.1 million during the nine months ended March 31, 2022.

Segment gross margin was also negatively impacted by an unfavorable settlement of a claim with a customer.

Process and Industrial Facilities

Revenue for the Process and Industrial Facilities segment was $267.1 million in the nine months ended March 31, 2023 compared to $163.2 million in the same period last year.

The increase was primarily due to higher volumes of refinery maintenance and turnaround activity, midstream gas processing capital work, 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 was 0.9% for the nine months ended March 31, 2023 compared to 4.1% in the same period last year.

The segment gross margin in the first nine months of fiscal 2023 was negatively impacted by unfavorable changes in the estimated recovery of change orders and increased forecasted costs to complete certain midstream gas processing capital projects, which resulted in the projects reducing gross profit by $12.7 million for the period.

We have accrued the full expected loss for the projects, which we expect to be mechanically complete in July 2023.

Finally, segment gross margin was also negatively impacted by the under recovery construction overhead costs.

Outside of work on midstream gas processing projects, project execution was strong for the remainder of the segment.

Despite generally strong project execution, the segment gross margin in the nine months ended March 31, 2022 was negatively impacted by under recovered construction overhead costs and a $4.8 million increase in forecasted costs to complete a midstream gas processing project.

The increase in forecasted costs was primarily due to performance of a now-terminated subcontractor, which required rework in order to meet our client's expectations.

Storage and Terminal Solutions

Revenue for the Storage and Terminal Solutions segment was $191.6 million in the nine months ended March 31, 2023 compared to $172.6 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.

The segment gross margin was 4.4% for the nine months ended March 31, 2023 compared to a negative gross margin of (0.1%) in the same period last year.

The fiscal 2023 segment gross margin was negatively impacted by the under recovery of construction overhead costs due to low revenue volumes.

Project awards, which have been strong with a year-to-date book-to-bill of 1.6, will begin to substantially impact revenue in the fourth quarter.

The segment gross margin for the nine months ended March 31, 2022 was negatively impacted by low revenue volume, which led to under recovery of construction overhead costs and 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, segment gross margin was negatively impacted by smaller competitively priced capital projects.

Unallocated corporate expenses were $21.8 million during the nine months ended March 31, 2023 compared to $21.5 million in the same period last year.

Non-GAAP Financial Measures

Adjusted Net Loss

2 unchanged sentences

(In thousands, except per share data)

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

March 31, 2023 March 31, 2022 March 31, 2023 March 31, 2022

Net loss, as reported $ (12,686) $ (34,899) $ (52,025) $ (77,356)

3 unchanged sentences

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

(81) (2,911) (3,912) (3,636)

Deferred tax asset valuation allowance (4)

3 unchanged sentences

Adjusted loss per share $ (0.33) $ (0.50) $ (1.02) $ (1.48)

(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.

(1) This table presents non-GAAP financial measures of our adjusted net loss and adjusted loss per share for the three and nine months ended March 31, 2023 and 2022.

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

2 unchanged sentences

(2) Interest expense in fiscal 2022 included $1.5 million of accelerated amortization of deferred debt amendment fees.

(3) Based on an estimated blended tax rate of approximately 26%, adjusted for the impact of nondeductible goodwill that was impaired.

(4) See Item 1.

27 unchanged sentences

A reconciliation of Adjusted EBITDA to net loss follows:

Three Months Ended Six Months Ended

2022 December 31,

2021 December 31,

2022 December 31,

Three Months Ended Nine Months Ended

2023 March 31,

2022 March 31,

2023 March 31,

(In thousands)

4 unchanged sentences

Interest expense 268 204 1,556 2,705

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

Provision (benefit) for federal, state and foreign income taxes (363) (147) (363) 5,564

Depreciation and amortization 3,322 3,716 10,499 11,557

Adjusted EBITDA $ (7,736) $ (12,304) $ (19,982) $ (33,673)

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 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 $0.9 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.

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 $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.

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 $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 $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.

The following arrangements are considered firm:

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For long-term maintenance contracts with no minimum commitments and other established customer agreements, we include only the amounts that we expect to recognize as revenue over the next 12 months.

For arrangements in which we have received a limited notice to proceed ("LNTP"), we include the entire scope of work in our backlog if we conclude that the likelihood of the full project proceeding as high.

For arrangements in which we have received a LNTP, we include the entire scope of work in our backlog if we conclude that the likelihood of the full project proceeding as high.

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 December 31, 2022:

The following table provides a summary of changes in our backlog for the three months ended March 31, 2023:

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

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

Project awards 25,598 217,491 65,657 308,746

Other adjustment (1)

— (6,691) (23,272) (29,963)

Revenue recognized (35,024) (99,706) (52,165) (186,895)

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

Backlog as of March 31, 2023 $ 137,879 $ 401,099 $ 293,379 $ 832,357

Book-to-bill ratio (2)

0.7 2.2 1.3 1.7

(1) Backlog was reduced by $30.0 million to account for a reduction of work available to us in an existing facility upgrade and service program.

(2) 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:

The following table provides a summary of changes in our backlog for the nine months ended March 31, 2023:

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

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Project awards 166,249 382,626 313,151 862,026

Other adjustment (1)

— (6,691) (23,272) (29,963)

Revenue recognized (130,429) (267,123) (191,614) (589,166)

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

Backlog as of March 31, 2023 $ 137,879 $ 401,099 $ 293,379 $ 832,357

Book-to-bill ratio (2)

1.3 1.4 1.6 1.5

(1) Backlog was reduced by $30.0 million to account for a reduction of work available to us in an existing facility upgrade and service program.

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

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.

Backlog increased $91.9 million or 12.4% in the third quarter of fiscal 2023 on project awards of $308.7 million and a book-to-bill ratio of 1.7.

In the Utility and Power Infrastructure segment, backlog decreased by 6.4% as we booked $25.6 million of project awards during the third quarter of fiscal 2023.

Project awards are primarily comprised of power delivery work and smaller capital projects.

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

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 increased by 9.2% as we booked $105.2 million of project awards during the second quarter of fiscal 2023.

In the Process and Industrial Facilities segment, backlog increased by 38.3% as we booked $217.5 million of project awards during the third quarter of fiscal 2023.

Included in project awards is a significant capital project to upgrade a natural gas compressor station.

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

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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.

In the Storage and Terminal Solutions segment, backlog decreased by 3.2% as we booked $65.7 million of project awards during the third quarter of fiscal 2023.

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.

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.

Bidding activity on LNG projects has been strong.

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.

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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 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:

Our primary sources of liquidity at March 31, 2023 were unrestricted cash and cash equivalents on hand, capacity under our ABL Facility, and cash generated from operations.

Unrestricted cash and cash equivalents at March 31, 2023 totaled $48.2 million and availability under the ABL Facility totaled $44.2 million, resulting in total liquidity of $92.4 million.

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

2023 December 31,

2022 September 30,

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Total cash, cash equivalents and restricted cash $ 73,204 $ 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

The following table provides a summary of changes in our liquidity for the three months ended March 31, 2023 (in thousands):

Liquidity at December 31, 2022 $ 80,469

Cash provided by operating activities 19,988

Capital expenditures (3,369)

Increase in availability under ABL Facility 6,731

Decrease in availability under ABL Facility (4,774)

Cash provided by financing activities 64

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 March 31, 2023 $ 92,435

The following table provides a summary of changes in our liquidity for the nine months ended March 31, 2023 (in thousands):

Liquidity at June 30, 2022 $ 94,831

Cash used by operating activities (17,585)

Cash provided by operating activities 2,403

Capital expenditures (6,212)

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Cash used by financing activities (110)

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.

Liquidity at March 31, 2023 $ 92,435

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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• changes to our capital structure;

• acquisitions and disposals of businesses;

• acquisitions and disposals of businesses or assets;

• purchases of shares under our stock buyback program.

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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's 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.

Our obligations under the ABL Facility are guaranteed by 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.

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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.

At March 31, 2023, our borrowing base was $78.5 million, we had $15.0 million of outstanding borrowings, and we had $19.3 million in letters of credit outstanding, which resulted in availability of $44.2 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.

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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 December 31, 2022, including applicable margin, was 8.75%.

The interest rate in effect for borrowings outstanding at March 31, 2023, including applicable margin, was approximately 7.17%.

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.

Cash Flow for the Six Months Ended December 31, 2022

Cash Flows Used by Operating Activities

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

We were in compliance with all covenants of the ABL Facility as of March 31, 2023.

Cash Flow for the Nine Months Ended March 31, 2023

Cash Flows Provided by Operating Activities

Cash provided by operating activities for the nine months ended March 31, 2023 totaled $2.4 million.

The various components are as follows:

Net Cash Used by Operating Activities

Net Cash Provided by Operating Activities

(In thousands)

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Cash effect of changes in operating assets and liabilities 26,354

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

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.

Net cash provided by operating activities $ 2,403

Cash effect of changes in operating assets and liabilities at March 31, 2023 in comparison to June 30, 2022 include the following:

• Accounts receivable, excluding credit losses recognized during the period, increased by $9.5 million during the nine months ended March 31, 2023, which decreased cash flows from operating activities.

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

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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 $4.7 million during the six months ended December 31, 2022, which decreased cash flows from operating activities.

The significant increase in BIE is related to the receipt of upfront billings on several large capital projects recently awarded.

• Inventories, income taxes receivable, prepaid expenses, other current assets, operating right-of-use lease assets and other assets, non-current, decreased $11.8 million during the nine months ended March 31, 2023, which increased cash flows from operating activities.

The primary driver of the decrease was the receipt of a $13.3 million income tax refund during the third quarter of fiscal 2023.

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 $1.1 million during the six months ended December 31, 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 $16.8 million during the nine months ended March 31, 2023, 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 $2.8 million of cash in the six months ended December 31, 2022 primarily due to capital expenditures.

Investing activities used $6.1 million of cash in the nine months ended March 31, 2023 primarily due to capital expenditures.

Those capital expenditures were comprised of $2.3 million for construction and transportation equipment, $2.1 million for buildings and leasehold improvements, and $1.7 million for office equipment.

Cash Flows Used by Financing Activities

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.

Financing activities used $0.1 million of cash in the nine months ended March 31, 2023 primarily due to $0.3 million paid to repurchase our stock for payment of withholding taxes due on equity-based compensation, partially offset by the receipt of $0.2 million in proceeds from issuance of common stock under our Employee Stock Purchase Plan.

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 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.

We made no repurchases under the program in the nine months ended March 31, 2023 and have no current plans to repurchase stock.

As of March 31, 2023, 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 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.

We had 850,661 treasury shares as of March 31, 2023 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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Our engineering, procurement and fabrication and construction services are usually provided in association with capital projects, which are commonly fixed-price contracts that are billed based on project milestones.

Our repair and maintenance services typically are cost reimbursable or time and material-based contracts and are billed monthly or, for projects of short duration, at the conclusion of the project.

Our repair and maintenance services typically are cost reimbursable or time and materials-based contracts and are billed monthly or, for projects of short duration, at the conclusion of the project.

The elapsed time from award to completion of performance may exceed one year for capital projects.

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Claims are more fully discussed in Note 7 - 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 $18.2 million at December 31, 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 $14.7 million at March 31, 2023 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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However, the results of litigation are inherently unpredictable and the possibility exists that the ultimate resolution of one or more of these matters could result in a material effect on our financial position, results of operations or liquidity.

Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in market risk faced by us from those reported in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, filed with the Securities and Exchange Commission.

For more information on market risk, see Part II, Item 7A in our fiscal 2022 Annual Report on Form 10-K.

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