MATRIX SERVICE CO 10-K

Item 8. Financial Statements and Supplementary Data Financial Statements of the Company Management’s Report on Internal Control Over Financial Reporting 39 Reports of Independent Registered Public Accounting Firm (PCAOB ID 34 ) 40 Consolidated Statements of Income for the Fiscal Years Ended June 30, 2023, June 30, 2022, and June 30, 2021 44 Consolidated Statements of Comprehensive Income for the Fiscal Years Ended June 30, 2023, June 30, 2022, and June 30, 2021 45 Consolidated Balance Sheets as of June 30, 2023 and June 30, 2022 46 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2023, June 30, 2022, and June 30, 2021 48 Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years Ended June 30, 2023, June 30, 2022, and June 30, 2021 50 Notes to Consolidated Financial Statements 51 Schedule II—Valuation and Qualifying Accounts 77 Financial Statement Schedules The financial statement schedule is filed as a part of this report under Schedule II – Valuation and Qualifying Accounts for the three fiscal years ended June 30, 2023, June 30, 2022 and June 30, 2021 immediately following Notes to Consolidated Financial Statements. All other schedules are omitted because they are not applicable or the required information is shown in the financial statements, or notes thereto, included herein. 38 Table of Contents MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Matrix Service Company and its wholly-owned subsidiaries (the “Company”) are responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. All internal control systems, no matter how well designed, have inherent limitations and cannot provide absolute assurance that all objectives will be met. Internal control over financial reporting is a process that involves diligence and is subject to lapses in judgment and human error. Internal control over financial reporting can also be circumvented by collusion or management override of controls. Because of these limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2023. In making this assessment, the Company’s management used the criteria established in Internal Control—Integrated Framework (2013) set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Management’s assessment included an evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, overall control environment and information systems control environment. Based on this assessment, the Company’s management has concluded that the Company’s internal control over financial reporting as of June 30, 2023 was effective. Deloitte & Touche LLP, an independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of June 30, 2023. Deloitte & Touche LLP’s report on the Company’s internal control over financial reporting is included herein. /s/ John R. Hewitt /s/ Kevin S. Cavanah John R. Hewitt Kevin S. Cavanah President and Chief Executive Officer Vice President and Chief Financial Officer September 12, 2023 39 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Matrix Service Company Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Matrix Service Company and subsidiaries (the “Company”) as of June 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2023 based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2023, of the Company and our report dated September 12, 2023, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Tulsa, Oklahoma September 12, 2023 40 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Matrix Service Company Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Matrix Service Company and subsidiaries (the "Company") as of June 30, 2023 and 2022, the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders' equity for each of the three years in the period ended June 30, 2023 and the related notes and the schedule listed in the Index at Item 8 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 12, 2023 expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue – Fixed Price Contracts – Refer to Notes 1 and 2 to the financial statements Critical Audit Matter Description The Company enters into contracts with customers to provide engineering, procurement, and fabrication and construction services, usually provided in association with capital projects, which commonly are fixed price contracts and are billed based on project milestones. Revenue on performance obligations associated with fixed-price contracts is recognized over time since these services create or enhance assets the customer controls as they are being created or enhanced. The Company measures progress of satisfying these performance obligations by using the percentage-of-completion method, which is based on costs incurred to date compared to the total estimated costs at completion. Due to the nature of work left to be performed on many of the Company’s contracts, the estimation of total cost at completion for fixed price contracts is complex, subject to many variables and requires significant judgment. For the fiscal year ended June 30, 2023, revenue totaled $795.0 million, of which $419.4 million related to fixed-price contracts. 41 Table of Contents Given the significant judgment necessary to estimate total costs at completion for fixed price contracts, auditing these estimates required extensive audit effort due to the volume and complexity of the fixed price contracts and a high degree of auditor judgment when evaluating the results of audit procedures, including the involvement of our capital projects specialists for certain fixed price contracts. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to estimated total costs at completion for fixed price contracts included the following, among others: • We tested the effectiveness of controls over the recognition of revenue for fixed price contracts, including management’s controls over estimates of total costs at completion. • We evaluated the appropriateness and consistency of the methods and assumptions used by management to estimate total costs on fixed price contracts. • We evaluated management’s ability to accurately estimate contract costs by comparing current gross margin to historical gross margin for certain fixed price contracts open and completed during each quarter. • We selected a sample of fixed price contracts and performed the following: ◦ Evaluated gross margin changes over time for each selected contract from bid date to the testing date to evaluate management’s historical and current estimates of total costs at completion. ◦ Evaluated management’s ability to estimate total costs at completion for each selected contract by performing corroborating inquiries with the Company’s project managers and personnel involved with the selected contracts, including inquiries related to the timeline to completion and estimates of future costs to complete the contract. ◦ Selected a sample of estimates of future costs to complete for certain selected fixed price contracts and evaluated management’s estimates of total costs at completion by performing one of the following: ▪ Comparing management’s estimates to documents such as management’s work plans, customer purchase orders, third-party invoices from suppliers, and subcontractor agreements. ▪ Developing independent estimates of total costs at completion and compared our estimates to management’s estimates. Our independent estimates were based on information such as management’s work plans, customer purchase orders, third-party invoices from suppliers, subcontractor agreements, and similar historical project experience. ◦ For certain fixed price contract, we used our capital projects specialists to assist us in evaluating (1) management’s ability to estimate total costs at completion and (2) management’s estimates of total costs at completion. Goodwill – Certain Reporting Units– Refer to Notes 1 and 4 to the financial statements The Company’s evaluation of goodwill for impairment involves the comparison of management’s estimate of the fair value of each reporting unit to its carrying value. The estimated fair value of each reporting unit was derived primarily by utilizing a discounted cash flow analysis based on the Company’s operating and capital budgets and strategic plan. Significant judgments and assumptions including the revenue growth rate, forecasted gross margins, and discount rate are inherent in the fair value estimates. The use of alternate judgments and/or assumptions could result in a fair value that differs from management’s estimate and could result in the recognition of impairment charges in the financial statements. The Company performed an interim goodwill impairment test as of December 31, 2022, which resulted in $12.3 million of total impairment to goodwill in the second quarter of fiscal year 2023, and an annual goodwill impairment test as of May 31, 2023, which resulted in no impairment of goodwill in the fourth quarter of fiscal year 2023. Three reporting units with a combined total of $20.9 million of goodwill as of June 30, 2023 were at higher risk of future impairment than others and their estimated fair values exceed their carrying values by 11% to 28%. The Company’s total goodwill was $29.1 million as of June 30, 2023. 42 Table of Contents We identified goodwill for three identified reporting units with a combined total of $20.9 million of goodwill as a critical audit matter because of the significant judgments made by management to estimate the fair values of these reporting units. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the revenue growth rate, forecasted gross margins, and discount rate. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the revenue growth rate, forecasted gross margins, and the discount rate used by management to estimate the fair value of the three identified reporting units included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the four identified reporting units, such as controls related to management’s selection of the revenue growth rate and discount rate and forecasts of gross margins. • We evaluated management’s ability to accurately forecast the revenue growth rate and future gross margins by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s revenue growth rate and forecasted gross margins by comparing the forecasts to: ◦ Historical revenue growth and gross margins. ◦ Internal communications to management and the Board of Directors, including other forward estimates prepared or used by management for other accounting estimates. ◦ Remaining performance obligations. ◦ Information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies and in industry outlooks. • With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) the discount rate, including testing the source information underlying the determination of the discount rate, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rate selected by management. /s/ DELOITTE & TOUCHE LLP Tulsa, Oklahoma September 12, 2023 We have served as the Company's auditor since 2006. 43 Table of Contents Matrix Service Company Consolidated Statements of Income (In thousands, except per share data) Fiscal Years Ended June 30, 2023 June 30, 2022 June 30, 2021 Revenue $ 795,020 $ 707,780 $ 673,398 Cost of revenue 764,200 708,986 640,633 Gross profit (loss) 30,820 ( 1,206 ) 32,765 Selling, general and administrative expenses 68,249 67,690 69,756 Goodwill impairment (Note 4) 12,316 18,312 — Restructuring costs 3,142 646 6,756 Operating loss ( 52,887 ) ( 87,854 ) ( 43,747 ) Other income (expense): Interest expense ( 2,024 ) ( 2,951 ) ( 1,559 ) Interest income 290 90 126 Other (Note 3) 1,860 32,432 1,917 Loss before income tax expense (benefit) ( 52,761 ) ( 58,283 ) ( 43,263 ) Provision (benefit) for federal, state and foreign income taxes ( 400 ) 5,617 ( 12,039 ) Net loss $ ( 52,361 ) $ ( 63,900 ) $ ( 31,224 ) Basic loss per common share $ ( 1.94 ) $ ( 2.39 ) $ ( 1.18 ) Diluted loss per common share $ ( 1.94 ) $ ( 2.39 ) $ ( 1.18 ) Weighted average common shares outstanding: Basic 26,988 26,733 26,451 Diluted 26,988 26,733 26,451 See accompanying notes 44 Table of Contents Matrix Service Company Consolidated Statements of Comprehensive Income (In thousands) Fiscal Years Ended June 30, 2023 June 30, 2022 June 30, 2021 Net loss $ ( 52,361 ) $ ( 63,900 ) $ ( 31,224 ) Other comprehensive loss, net of tax: Foreign currency translation gain (loss) (net of tax expense of $0, $71 and $223 for the fiscal years ended June 30, 2023, 2022 and 2021, respectively) ( 594 ) ( 1,426 ) 1,624 Comprehensive loss $ ( 52,955 ) $ ( 65,326 ) $ ( 29,600 ) See accompanying notes 45 Table of Contents Matrix Service Company Consolidated Balance Sheets (In thousands) June 30, 2023 June 30, 2022 Assets Current assets: Cash and cash equivalents $ 54,812 $ 52,371 Accounts receivable, less allowances (2023 - $1,061; 2022 - $1,320) 145,764 153,879 Costs and estimated earnings in excess of billings on uncompleted contracts 44,888 44,752 Inventories 7,437 9,974 Income taxes receivable 496 13,547 Prepaid expenses 5,741 4,024 Other current assets 3,118 8,865 Total current assets 262,256 287,412 Restricted cash 25,000 25,000 Property, plant and equipment - net 47,545 53,869 Operating lease right-of-use assets 21,799 22,067 Goodwill 29,120 42,135 Other intangible assets, net of accumulated amortization 3,066 4,796 Other assets, non-current 11,718 5,514 Total assets $ 400,504 $ 440,793 See accompanying notes 46 Table of Contents Matrix Service Company Consolidated Balance Sheets (continued) (In thousands, except share data) June 30, 2023 June 30, 2022 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 76,365 $ 74,886 Billings on uncompleted contracts in excess of costs and estimated earnings 85,436 65,106 Accrued wages and benefits 13,679 21,526 Accrued insurance 5,579 6,125 Operating lease liabilities 4,661 5,715 Other accrued expenses 1,815 4,427 Total current liabilities 187,535 177,785 Deferred income taxes 26 26 Operating lease liabilities 20,660 19,904 Borrowings under asset-backed credit facility 10,000 15,000 Other liabilities, non-current 799 372 Total liabilities 219,020 213,087 Commitments and contingencies Stockholders’ equity: Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of June 30, 2023 and June 30, 2022; 27,047,318 and 26,790,514 shares outstanding as of June 30, 2023 and June 30, 2022, respectively 279 279 Additional paid-in capital 140,810 139,854 Retained earnings 58,917 111,278 Accumulated other comprehensive loss ( 8,769 ) ( 8,175 ) 191,237 243,236 Treasury stock, at cost — 840,899 and 1,097,703 shares as of June 30, 2023 and June 30, 2022, respectively ( 9,753 ) ( 15,530 ) Total stockholders' equity 181,484 227,706 Total liabilities and stockholders’ equity $ 400,504 $ 440,793 See accompanying notes 47 Table of Contents Matrix Service Company Consolidated Statements of Cash Flows (In thousands) Fiscal Years Ended June 30, 2023 June 30, 2022 June 30, 2021 Operating activities: Net loss $ ( 52,361 ) $ ( 63,900 ) $ ( 31,224 ) Adjustments to reconcile net loss to net cash provided (used) by operating activities Depreciation and amortization 13,694 15,254 17,858 Goodwill impairment (Note 4) 12,316 18,312 — Stock-based compensation expense 6,791 7,877 8,156 Operating lease, fixed asset, and other intangible asset impairments due to restructuring — — 454 Deferred income tax — 5,358 889 Gain on sale of property, plant and equipment (Note 3) ( 2,841 ) ( 33,114 ) ( 1,201 ) Provision for uncollectable accounts ( 101 ) 738 85 Accelerated amortization of deferred debt amendment fees (Note 5) — 1,518 — Other 248 169 460 Changes in operating assets and liabilities increasing (decreasing) cash: Accounts receivable 8,663 ( 6,587 ) 11,109 Costs and estimated earnings in excess of billings on uncompleted contracts ( 136 ) ( 13,978 ) 28,774 Inventories 2,506 ( 2,632 ) ( 882 ) Other assets and liabilities 10,538 ( 530 ) ( 21,916 ) Accounts payable 1,210 13,654 ( 12,387 ) Billings on uncompleted contracts in excess of costs and estimated earnings 20,330 11,274 ( 8,610 ) Accrued expenses ( 10,610 ) ( 7,609 ) 5,464 Net cash provided (used) by operating activities 10,247 ( 54,196 ) ( 2,971 ) Investing activities: Capital expenditures ( 9,009 ) ( 3,345 ) ( 4,354 ) Proceeds from asset sales (Note 3) 6,466 39,018 2,090 Net cash provided (used) by investing activities $ ( 2,543 ) $ 35,673 $ ( 2,264 ) See accompanying notes 48 Table of Contents Matrix Service Company Consolidated Statements of Cash Flows (continued) (In thousands) Fiscal Years Ended June 30, 2023 June 30, 2022 June 30, 2021 Financing activities: Advances under senior secured revolving credit facility $ — $ — $ 1,125 Repayments of advances under senior secured revolving credit facility — — ( 10,913 ) Advances under asset-backed credit facility 10,000 20,000 — Repayments of advances under asset-backed credit facility ( 15,000 ) ( 5,000 ) — Payment of debt amendment fees — ( 1,263 ) ( 1,275 ) Issuances of common stock — 199 349 Proceeds from issuance of common stock under employee stock purchase plan 252 270 299 Repurchase of common stock for payment of statutory taxes due on equity-based compensation ( 310 ) ( 853 ) ( 1,554 ) Other — ( 654 ) ( 355 ) Net cash provided (used) by financing activities ( 5,058 ) 12,699 ( 12,324 ) Effect of exchange rate changes on cash ( 205 ) ( 683 ) 1,401 Net increase (decrease) in cash and cash equivalents 2,441 ( 6,507 ) ( 16,158 ) Cash, cash equivalents, and restricted cash, beginning of period (Note 1) 77,371 83,878 100,036 Cash, cash equivalents, and restricted cash, end of period (Note 1) $ 79,812 $ 77,371 $ 83,878 Supplemental disclosure of cash flow information: Cash paid (received) during the period for: Income taxes $ ( 13,337 ) $ ( 2,864 ) $ 451 Interest $ 2,093 $ 2,773 $ 1,834 Non-cash investing and financing activities: Purchases of property, plant and equipment on account $ 104 $ 54 $ 106 See accompanying notes 49 Table of Contents Matrix Service Company Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share data) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balances, June 30, 2020 $ 279 $ 138,966 $ 206,402 $ ( 8,373 ) $ ( 29,385 ) $ 307,889 Net loss — — ( 31,224 ) — — ( 31,224 ) Other comprehensive income — — — 1,624 — 1,624 Treasury Shares sold to Employee Stock Purchase Plan (29,171 shares) — ( 207 ) — — 506 299 Exercise of stock options (34,150 shares) — ( 257 ) — — 606 349 Issuance of restricted stock (515,218 shares) — ( 9,083 ) — — 9,083 — Treasury shares repurchased to satisfy tax withholding obligations (170,629 shares) — — — — ( 1,554 ) ( 1,554 ) Stock-based compensation expense — 8,156 — — — 8,156 Balances, June 30, 2021 279 137,575 175,178 ( 6,749 ) ( 20,744 ) 285,539 Net loss — — ( 63,900 ) — — ( 63,900 ) Other comprehensive loss — — — ( 1,426 ) — ( 1,426 ) Treasury Shares sold to Employee Stock Purchase Plan (29,826 shares) — ( 307 ) — — 577 270 Exercise of stock options (19,550 shares) — ( 189 ) — — 388 199 Issuance of restricted stock (268,403 shares) — ( 5,102 ) — — 5,102 — Treasury shares repurchased to satisfy tax withholding obligations (76,703 shares) — — — — ( 853 ) ( 853 ) Stock-based compensation expense — 7,877 — — — 7,877 Balances, June 30, 2022 279 139,854 111,278 ( 8,175 ) ( 15,530 ) 227,706 Net loss — — ( 52,361 ) — — ( 52,361 ) Other comprehensive loss — — — ( 594 ) — ( 594 ) Treasury Shares Sold to Employee Stock Purchase Plan (50,139 shares) — ( 685 ) — — 937 252 Issuance of restricted stock (259,529 shares) — ( 5,150 ) — — 5,150 — Treasury shares purchased to satisfy tax withholding obligations (52,864 shares) — — — — ( 310 ) ( 310 ) Stock-based compensation expense — 6,791 — — — 6,791 Balances, June 30, 2023 $ 279 $ 140,810 $ 58,917 $ ( 8,769 ) $ ( 9,753 ) $ 181,484 See accompanying notes 50 Table of Contents Matrix Service Company Notes to Consolidated Financial Statements Note 1— Summary of Significant Accounting Policies Organization and Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of Matrix Service Company and its subsidiaries (“Matrix”, the “Company” or “we”, “our”, and “us” are to Matrix Service Company and its subsidiaries), all of which are wholly owned. Intercompany transactions and balances have been eliminated in consolidation. We operate in the United States, Canada, South Korea and Australia. Our reportable segments are Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We believe the most significant estimates and judgments are associated with revenue recognition, the recoverability tests that must be periodically performed with respect to our goodwill and other intangible assets, deferred tax assets, and the estimation of loss contingencies, including liabilities associated with litigation and with the self-insured retentions on our insurance programs. Actual results could materially differ from those estimates. Revenue Recognition General Information about our Contracts with Customers Our revenue comes from contracts to provide engineering, procurement, fabrication and construction, repair and maintenance and other services. Our engineering, procurement and fabrication and construction services are usually provided in association with capital projects, which are commonly fixed-price contracts that are billed based on project milestones. Our repair and maintenance services typically are cost reimbursable or time and material based contracts and are billed monthly or, for projects of short duration, at the conclusion of the project. The elapsed time from award to completion of performance may exceed one year for capital projects. Step 1: Contract Identification We do not recognize revenue unless we have identified a contract with a customer. A contract with a customer exists when it has approval and commitment from both parties, the rights and obligations of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability is probable. We also evaluate whether a contract should be combined with other contracts and accounted for as a single contract. This evaluation requires judgment and could change the timing of the amount of revenue and profit recorded for a given period. Step 2: Identify Performance Obligations Next, we identify each performance obligation in the contract. A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services to the customer. Revenue is recognized separately for each performance obligation in the contract. Many of our contracts have one clearly identifiable performance obligation. However, many of our contracts provide the customer an integrated service that includes two or more of the following services: engineering, procurement, fabrication, construction, repair and maintenance services. For these contracts, we do not consider the integrated services to be distinct within the context of the contract when the separate scopes of work combine into a single commercial objective or capability for the customer. Accordingly, we generally identify one performance obligation in our contracts. The determination of the number of performance obligations in a contract requires significant judgment and could change the timing of the amount of revenue recorded for a given period. 51 Matrix Service Company Notes to Consolidated Financial Statements (continued) Step 3: Determine Contract Price After determining the performance obligations in the contract, we determine the contract price. The contract price is the amount of consideration we expect to receive from the customer for completing the performance obligation(s). In a fixed-price contract, the contract price is a single lump-sum amount. In reimbursable and time and materials based contracts, the contract price is determined by the agreed upon rates or reimbursements for time and materials expended in completing the performance obligation(s) in the contract. A number of our contracts contain various cost and performance incentives and penalties that can either increase or decrease the contract price. These variable consideration amounts are generally earned or incurred based on certain performance metrics, most commonly related to project schedule or cost targets. We estimate variable consideration at the most likely amount of additional consideration to be received (or paid in the case of penalties), provided that meeting the variable condition is probable. We include estimated amounts of variable consideration in the contract price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the contract price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We reassess the amount of variable consideration each accounting period until the uncertainty associated with the variable consideration is resolved. Changes in the assessed amount of variable consideration are accounted for prospectively as a cumulative adjustment to revenue recognized in the current period. Step 4: Assign Contract Price to Performance Obligations After determining the contract price, we assign such price to the performance obligation(s) in the contract. If a contract has multiple performance obligations, we assign the contract price to each performance obligation based on the stand-alone selling prices of the distinct services that comprise each performance obligation. Step 5: Recognize Revenue as Performance Obligations are Satisfied We record revenue for contracts with our customers as we satisfy the contracts' performance obligations. We recognize revenue on performance obligations associated with fixed-price contracts for engineering, procurement, fabrication and construction services over time since these services create or enhance assets the customer controls as they are being created or enhanced. We measure progress of satisfying these performance obligations by using the percentage-of-completion method, which is based on costs incurred to date compared to the total estimated costs at completion, since it best depicts the transfer of control of assets being created or enhanced to the customer. We recognize revenue over time for reimbursable and time and material based repair and maintenance contracts since the customer simultaneously receives and consumes the benefit of those services as we perform work under the contract. As a practical expedient allowed under the revenue accounting standards, we record revenue for these contracts in the amount to which we have a right to invoice for the services performed provided that we have a right to consideration from the customer in an amount that corresponds directly with the value of the performance completed to date. Costs incurred may include direct labor, direct materials, subcontractor costs and indirect costs, such as salaries and benefits, supplies and tools, equipment costs and insurance costs. Indirect costs are charged to projects based upon direct costs and overhead allocation rates per dollar of direct costs incurred or direct labor hours worked. Typically, customer contracts will include standard warranties that provide assurance that products and services will function as expected. We do not sell separate warranties. We have numerous contracts that are in various stages of completion which require estimates to determine the forecasted costs at completion. Due to the nature of the work left to be performed on many of our contracts, the estimation of total cost at completion for fixed-price contracts is complex, subject to many variables and requires significant judgment. Estimates of total cost at completion are made each period and changes in these estimates are accounted for prospectively as cumulative adjustments to revenue recognized in the current period. If estimates of costs to complete fixed-price contracts indicate a loss, a provision is made through a contract write-down for the total loss anticipated. 52 Matrix Service Company Notes to Consolidated Financial Statements (continued) Change Orders Contracts are often modified through change orders, which are changes to the agreed upon scope of work. Most of our change orders, which may be priced or unpriced, are for goods or services that are not distinct from the existing contract due to the significant integration of services provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a change order on the contract price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. For unpriced change orders, we estimate the increase or decrease to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Unpriced change orders are more fully discussed in Note 2 - Revenue. Claims Sometimes we seek claims for amounts in excess of the contract price for delays, errors in specifications and designs, contract terminations, change orders in dispute or other causes of additional costs incurred by us. Recognition of amounts as additional contract price related to claims is appropriate only if there is a legal basis for the claim. The determination of our legal basis for a claim requires significant judgment. We estimate the change to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Claims are more fully discussed in Note 2 - Revenue. Cash, Cash Equivalents and Restricted Cash We include as cash equivalents all investments with original maturities of three months or less which are readily convertible into cash. We have cash on deposit at June 30, 2023 with banks in the United States, Canada, South Korea and Australia in excess of Federal Deposit Insurance Corporation ("FDIC"), Canada Deposit Insurance Corporation ("CDIC"), Korea Deposit Insurance Corporation ("KDIC") and Financial Claims Scheme ("FCS") protection limits, respectively. The United States Dollar equivalent of Canadian, South Korean and Australian deposits totaled $ 10.4 million as of June 30, 2023. The ABL Facility requires us to maintain a minimum of $ 25.0 million of restricted cash at all times. Since this cash must be restricted through the maturity date of the ABL Facility, which is beyond one year, we have classified this restricted cash as non-current in our Consolidated Balance Sheets. The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Consolidated Balance Sheets to the total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows (in thousands): June 30, 2023 June 30, 2022 Cash and cash equivalents $ 54,812 $ 52,371 Restricted cash 25,000 25,000 Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows $ 79,812 $ 77,371 Accounts Receivable Accounts receivable are carried on a gross basis, less the allowance for credit losses. We estimate the allowance for credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Our customers consist primarily of major integrated oil companies, independent refiners and marketers, power companies, petrochemical companies, pipeline companies, mining companies, contractors and engineering firms. We are exposed to the risk of individual customer defaults or depressed cycles in our customers’ industries. To mitigate this risk, many of our contracts require payment as projects progress or advance payment in some circumstances. In addition, in most cases we can place liens against the property, plant or equipment constructed or terminate the contract if a material contract default occurs. Accounts are written off against the allowance for credit losses only after all reasonable collection attempts have been exhausted. Retentions Contract retentions collectable beyond one year are included in Other assets, non-current in the Consolidated Balance Sheets. 53 Matrix Service Company Notes to Consolidated Financial Statements (continued) Loss Contingencies Various legal actions, claims and other contingencies arise in the normal course of our business. Contingencies are recorded in the consolidated financial statements, or are otherwise disclosed, in accordance with ASC 450-20, “Loss Contingencies”. Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and estimable. We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes known. We believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results of operations or liquidity. However, the results of litigation are inherently unpredictable, and the possibility exists that the ultimate resolution of one or more of these matters could result in a material effect on our financial position, results of operations or liquidity. Inventories Inventories consist primarily of steel plate and pipe and aluminum coil and extrusions. Cost is determined primarily using the average cost method and inventories are stated at the lower of cost or net realizable value. Depreciation Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. Depreciable lives are as follows: buildings— 40 years, construction equipment— 3 to 15 years, transportation equipment— 3 to 5 years, and office equipment and software— 3 to 10 years. Leasehold improvements are amortized over the shorter of the useful life of the asset or the lease term. Leases We enter into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. We determine if an arrangement is or contains a lease at inception of the arrangement. An arrangement is determined to be a lease if it conveys the right to control the use of identified property and equipment for a period of time in exchange for consideration. Operating lease right-of-use assets are recognized as the present value of future lease payments over the lease term as of the commencement date, plus any lease payments made prior to commencement, and less any lease incentives received. Operating lease liabilities are recognized as the present value of the future lease payments over the lease term as of the commencement date. Operating lease expense is recognized based on the undiscounted future lease payments over the remaining lease term on a straight-line basis. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term. Determinations with respect to lease term (including any renewals and terminations), incremental borrowing rate used to discount lease payments, variable lease expense and future lease payments require the use of judgment based on the facts and circumstances related to each lease. We consider various factors, including economic incentives, intent, past history and business need, to determine the likelihood that a renewal option will be exercised. Right-of-use assets are evaluated for impairment in accordance with our policy for impairment of long-lived assets. Impairment of Long-Lived Assets We evaluate long-lived assets for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets used in operations may not be recoverable. The determination of whether an impairment has occurred is based on management’s estimate of undiscounted future cash flows attributable to the assets as compared to the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and, to the extent the carrying value exceeds the fair value of the assets, recording a loss provision. For assets identified to be disposed of in the future, the carrying value of the assets are compared to the estimated fair value less the cost of disposal to determine if an impairment has occurred. Until the assets are disposed of, an estimate of the fair value is redetermined when related events or circumstances change. 54 Matrix Service Company Notes to Consolidated Financial Statements (continued) Goodwill Goodwill represents the excess of the purchase price of acquisitions over the acquisition date fair value of the net identifiable tangible and intangible assets acquired. In accordance with current accounting guidance, goodwill is not amortized and is tested at least annually for impairment at the reporting unit level, which is a level below our reportable segments. We perform our annual impairment test in the fourth quarter of each fiscal year, or in between annual tests whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable, to determine whether an impairment exists and to determine the amount of headroom. We define "headroom" as the percentage difference between the fair value of a reporting unit and its carrying value. The goodwill impairment test involves comparing management’s estimate of the fair value of a reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, then goodwill is not impaired. If the fair value of a reporting unit is less than its carrying value, then goodwill is impaired to the extent of the difference, but the impairment may not exceed the balance of goodwill assigned to that reporting unit. We utilize a discounted cash flow analysis, referred to as an income approach, and market multiples, referred to as a market approach, to determine the estimated fair value of our reporting units. For the income approach, significant judgments and assumptions including forecasted project awards, discount rate, anticipated revenue growth rate, gross margins, operating expenses, working capital needs and capital expenditures are inherent in the fair value estimates, which are based on our operating and capital budgets and on our strategic plan. As a result, actual results may differ from the estimates utilized in our income approach. For the market approach, significant judgments and assumptions include the selection of guideline companies, forecasted guideline company EBITDA and our forecasted EBITDA. The use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate and could result in the recognition of additional impairment charges in the financial statements. As a test for reasonableness, we also consider the combined fair values of our reporting units to our market capitalization. Other Intangible Assets Intangible assets that have finite useful lives are amortized by the straight-line method over their useful lives ranging from 6 years to 15 years. A finite intangible asset is considered impaired when its carrying amount is not recoverable and exceeds the asset's fair value. The carrying amount is deemed unrecoverable if it is greater than the sum of undiscounted cash flows expected to result from use and eventual disposition of the asset. An impairment loss is equal to the excess of the carrying amount over the fair value of the asset. If quoted market prices are not available, the fair values of the intangible assets are based on present values of expected future cash flows or royalties avoided using discount rates commensurate with the risks involved. Insurance Reserves We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses through the use of deductibles, coverage limits and self-insured retentions. We establish reserves for claims using a combination of actuarially determined estimates and case-by-case evaluations of the underlying claim data and update our evaluations as further information becomes known. Judgments and assumptions are inherent in our reserve accruals; as a result, changes in assumptions or claims experience could result in changes to these estimates in the future. If actual results of claim settlements are different than the amounts estimated, we may be exposed to future gains and losses that could be material. Stock-Based Compensation We have issued time-based and market-based restricted stock unit awards under our long-term incentive compensation plans. We have issued time-based awards that are equity-settled and time-based awards that are cash-settled. The fair value of time-based awards is based on the value of our common stock at the grant date. The fair value of market-based awards is based on several factors, including the probability that the market condition specified in the grant will be achieved, which is calculated using a Monte Carlo model. Cash-settled time-based awards must be settled in cash and are accounted for as liability-type awards and are remeasured at the end of each reporting period at fair value until settlement. For all awards, expense is recognized over the requisite service period with forfeitures recorded as they occur. 55 Matrix Service Company Notes to Consolidated Financial Statements (continued) Income Taxes We use the asset and liability approach for financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances based on our judgments and estimates are established when necessary to reduce deferred tax assets to the amount expected to be realized in future operating results. Our estimates are based on facts and circumstances in existence as well as interpretations of existing tax regulations and laws applied to the facts and circumstances, with the help of professional tax advisors. Therefore, we estimate and provide for amounts of additional income taxes that may be assessed by the various taxing authorities. Foreign Currency The functional currencies of our operations in Canada, South Korea and Australia are the Canadian Dollar, South Korean Won and U.S. Dollar, respectively. The functional currency of our Australian operations is the U.S. Dollar since its sales are primarily denominated in that currency. For subsidiaries with operations using a foreign functional currency, assets and liabilities are translated at the year-end exchange rates and the income statement accounts are translated at average exchange rates throughout the year. Translation gains and losses are reported in Accumulated Other Comprehensive Loss, net of tax, in the Consolidated Statements of Changes in Stockholders’ Equity and in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income. Translation gains and losses are reversed from Accumulated Other Comprehensive Income (Loss) and are recognized in current period income in the event we dispose of an entity with accumulated translation gains or losses. Transaction gains and losses are reported as a component of Other income (expense) in the Consolidated Statements of Income. Note 2 – Revenue Remaining Performance Obligations We had $ 459.7 million of remaining performance obligations yet to be satisfied as of June 30, 2023. We expect to recognize approximately $ 381.0 million of our remaining performance obligations as revenue within the next twelve months. Contract Balances Contract terms with customers include the timing of billing and payment, which usually differs from the timing of revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets and liabilities are calculated on a contract-by-contract basis and reported on a net basis at the end of each period and are classified as current. We present our contract assets in the balance sheet as Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts ("CIE"). CIE consists of revenue recognized in excess of billings. We present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and Estimated Earnings ("BIE"). BIE consists of billings in excess of revenue recognized. The following table provides information about CIE and BIE: June 30, 2023 June 30, 2022 Change (In thousands) Costs and estimated earnings in excess of billings on uncompleted contracts $ 44,888 $ 44,752 $ 136 Billings on uncompleted contracts in excess of costs and estimated earnings ( 85,436 ) ( 65,106 ) ( 20,330 ) Net contract liabilities $ ( 40,548 ) $ ( 20,354 ) $ ( 20,194 ) The difference between the beginning and ending balances of our CIE and BIE primarily results from the timing of revenue recognized relative to its billings. The amount of revenue recognized during the fiscal year ended June 30, 2023 that was included in the prior period BIE balance was $ 57.9 million. This revenue consists primarily of work performed during the period on contracts with customers that had advance billings. 56 Matrix Service Company Notes to Consolidated Financial Statements (continued) Progress billings in accounts receivable at June 30, 2023 and June 30, 2022 included retentions to be collected within one year of $ 16.3 million and $ 16.1 million, respectively. Contract retentions collectable beyond one year are included in Other assets, non-current in the Consolidated Balance Sheets and totaled $ 10.0 million as of June 30, 2023 and $ 4.0 million as of June 30, 2022. Unpriced Change Orders and Claims As of June 30, 2023 and June 30, 2022, costs and estimated earnings in excess of billings on uncompleted contracts included revenue for unpriced change orders and claims of $ 9.7 million and $ 8.9 million, respectively. The amounts ultimately realized may be different than the recorded amounts resulting in adjustments to future earnings. Generally we expect collection of amounts related to unpriced change orders and claims within twelve months. However, customers may not pay these amounts until final resolution of related claims, which may extend beyond one year. Disaggregated Revenue Revenue disaggregated by reportable segment is presented in Note 13 - Segment Information. The following series of tables presents revenue disaggregated by geographic area where the work was performed and by contract type: Geographic Disaggregation: Fiscal Years Ended June 30, 2023 June 30, 2022 June 30, 2021 (In thousands) United States $ 720,140 $ 640,512 $ 604,739 Canada 61,691 63,045 61,703 Other international 13,189 4,223 6,956 Total $ 795,020 $ 707,780 $ 673,398 Contract Type Disaggregation: Fiscal Years Ended June 30, 2023 June 30, 2022 June 30, 2021 (In thousands) Fixed-price contracts $ 419,426 $ 421,188 $ 444,042 Time and materials and other cost reimbursable contracts 375,594 286,592 229,356 Total $ 795,020 $ 707,780 $ 673,398 Revisions in Estimates Fiscal 2023 During fiscal 2023, unfavorable changes in the estimated recovery of change orders and increased forecasted costs to complete and closeout certain midstream gas processing capital work in the Process and Industrial Facilities segment resulted in a $ 12.6 million reduction of gross profit during the fiscal year. 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 the work according to forecast and for the impacts of global supply chain issues and inflation. We have accrued the full expected loss for the work, which is now mechanically complete. 57 Matrix Service Company Notes to Consolidated Financial Statements (continued) Fiscal 2022 Our results of operations were materially impacted by an increase in the forecasted costs to complete a midstream gas processing project in the Process and Industrial Facilities segment. The project reduced gross profit by $ 8.7 million during fiscal 2022. The increase in forecasted costs was primarily due to poor performance of a now terminated subcontractor, which required rework, as well as supply chain and cost escalation issues. This project has since reached mechanical completion. In fiscal 2022, our results of operations were materially impacted by an increase in the costs required to complete a thermal energy storage tank repair and maintenance project in the Storage and Terminal Solutions segment, which resulted in a decrease in gross profit of $ 6.3 million during the fiscal year. We achieved substantial completion on this project in fiscal 2022. During fiscal 2022, our results of operations were materially impacted by changes in the forecasted costs to complete two large capital projects in the Utility and Power Infrastructure segment and an unfavorable settlement of a claim with a customer in the same segment. Increases in the forecasted costs to complete the first project resulted in the project reducing gross profit by $ 3.6 million during fiscal 2022. Increased forecasted costs to the complete the second capital project resulted in the project reducing gross profit by $ 2.2 million during the fourth quarter of fiscal 2022 and $ 0.1 million during fiscal 2022. We recognized $ 78.1 million of revenue on this project during fiscal 2022 at a near break-even margin as a result of the change in estimate. Both projects reached substantial completion in fiscal 2023. The unfavorable settlement of a claim with a customer reduced gross profit by $ 2.1 million. Fiscal 2021 Our results of operations in fiscal 2021 were materially impacted by increases in the forecasted costs to complete a large capital project in the Utility and Power Infrastructure segment. The project reduced gross profit by $ 5.8 million in fiscal 2021. This project reached substantial completion in fiscal 2023. During the fourth quarter of fiscal 2021, we reached a settlement on a contract dispute over the construction of a crude oil terminal. The project's financial impact for the fiscal year ended June 30, 2021 was a $ 2.9 million reduction to gross profit in the Storage and Terminal Solutions segment. The settlement resulted in a cash receipt of $ 8.9 million in the first quarter of fiscal 2022, which enabled us to avoid future legal costs and litigation risk. During the third quarter of fiscal 2021, we achieved mechanical completion of a large crude oil terminal project, demobilized from the project site and completed its assessment of additional recovery of unpriced change orders. The project's financial impact for the fiscal year ended June 30, 2021 was a $ 3.8 million reduction to gross profit in the Storage and Terminal Solutions segment. 58 Matrix Service Company Notes to Consolidated Financial Statements (continued) Note 3— Property, Plant and Equipment The following table presents the components of our property, plant and equipment - net at June 30, 2023 and 2022: June 30, 2023 June 30, 2022 (In thousands) Property, plant and equipment - at cost: Land and buildings $ 37,263 $ 34,788 Construction equipment 84,258 93,036 Transportation equipment 40,606 48,999 Office equipment and software 38,178 43,823 Construction in progress 84 1,646 Total property, plant and equipment - at cost 200,389 222,292 Accumulated depreciation ( 152,844 ) ( 168,423 ) Property, plant and equipment - net $ 47,545 $ 53,869 Geographical Disaggregation of Long-Lived Assets Long-Lived Assets June 30, 2023 June 30, 2022 June 30, 2021 (In thousands) United States $ 122,398 $ 137,682 $ 157,442 Canada 3,988 3,436 6,523 Other international 11,862 12,263 12,372 $ 138,248 $ 153,381 $ 176,337 Industrial Cleaning Disposal We sold our industrial cleaning business during the fourth quarter of fiscal 2023 for net proceeds of $ 6.3 million in cash and a $ 0.4 million receivable for amounts to be paid upon satisfactory transfer of title of certain vehicles and equipment sold. The sale resulted in a $ 2.9 million gain, which was included in Other in the Consolidated Statements of Income. The industrial cleaning business was included in our Process and Industrial Facilities segment and was disposed of because its operations were no longer core to our growth strategy. Sale-leaseback Transaction Even though we are fully committed to our operations in southern California, we took advantage of elevated real estate prices and sold our regional office and fabrication and warehouse facilities located in Orange, California during fiscal 2022 for net proceeds of $ 37.4 million in cash and recorded a gain of $ 32.4 million on the sale. In connection with the sale, we also entered into a leaseback agreement for a period up to 24 months while we locate replacement facilities. Burlington Office Disposal - Subsequent Event During the first quarter of fiscal 2024, we sold a regional office facility in Burlington, Ontario for $ 2.9 million in cash, which resulted in a gain of approximately $ 2.7 million. During the second quarter of fiscal 2023, we closed this underperforming office and ceased its associated operations . 59 Matrix Service Company Notes to Consolidated Financial Statements (continued) Note 4— Goodwill and Other Intangible Assets Goodwill The changes in the carrying amount of goodwill by segment are as follows: Storage and Terminal Solutions Utility and Power Infrastructure Process and Industrial Facilities Total (In thousands) Net balance at June 30, 2020 $ 26,618 $ 6,905 $ 26,846 $ 60,369 Translation adjustment (1) 156 79 32 267 Net balance at June 30, 2021 26,774 6,984 26,878 60,636 Goodwill impairment ( 7,208 ) ( 2,659 ) ( 8,445 ) ( 18,312 ) Translation adjustment (1) ( 121 ) ( 62 ) ( 6 ) ( 189 ) Net balance at June 30, 2022 19,445 4,263 18,427 42,135 Goodwill impairment — — ( 12,316 ) ( 12,316 ) Disposal of business (2) — — ( 627 ) ( 627 ) Translation adjustment (1) ( 48 ) ( 24 ) — ( 72 ) Net balance at June 30, 2023 $ 19,397 $ 4,239 $ 5,484 $ 29,120 (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. (2) We sold our industrial cleaning business during the fourth quarter of fiscal 2023, which resulted in the allocation $0.6 million of goodwill to net assets sold in the transaction. See Note 3 - Property, Plant and Equipment, Industrial Cleaning Disposal, for more information. Fiscal 2023 We performed our annual goodwill impairment test as of May 31, 2023, which resulted in no impairment. The fiscal 2023 test indicated that three reporting units with a combined total of $ 20.9 million of goodwill as of June 30, 2023 were at higher risk of future impairment. If our view of project opportunities or gross margins deteriorates, particularly for the higher risk reporting units, then we may be required to record an impairment of goodwill. Subsequent to the completion of the May 31, 2023 annual impairment test, additional information regarding new project awards became available which would significantly improve the cash flows and fair values of two of the higher risk reporting units, which comprised $ 15.4 million of our total goodwill as of June 30, 2023. The estimated fair value of each segment was derived by utilizing a discounted cash flow analysis and market multiples of projected EBITDA. The key assumptions used are described in Note 1 - Summary of Significant Accounting Policies, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies, Goodwill. In the second quarter of fiscal 2023, we concluded that a goodwill impairment indicator existed in the Process and Industrial Facilities segment based on a material adverse change in gross profit on a project. 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. Fiscal 2022 In the third quarter of fiscal 2022, we concluded that goodwill impairment indicators existed based on the decline in the price of our stock and operating results that have underperformed our forecasts during the year. Accordingly, we performed an interim impairment test as of March 31, 2022 and concluded that there was $ 18.3 million of total impairment to goodwill, which was recognized in operating income during the three and nine months ended March 31, 2022 as follows: 60 Matrix Service Company Notes to Consolidated Financial Statements (continued) • $8.4 million in the Process and Industrial Facilities segment; • $7.2 million in the Storage and Terminal Solutions segment; and • $2.7 million in the Utility and Power Infrastructure segment. Other Intangible Assets Information on the carrying value of other intangible assets is as follows: At June 30, 2023 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,483 $ ( 2,371 ) $ 112 Customer based (1) 6 to 15 13,144 ( 10,190 ) 2,954 Total other intangible assets $ 15,627 $ ( 12,561 ) $ 3,066 (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 other intangible assets $ 19,889 $ ( 15,093 ) $ 4,796 Amortization expense totaled $ 1.7 million, $ 1.8 million, and $ 2.3 million in fiscal 2023, 2022, and 2021, respectively. We estimate that future amortization of other intangible assets will be as follows (in thousands): For year ending: June 30, 2024 $ 1,415 June 30, 2025 1,096 June 30, 2026 555 Total estimated amortization expense $ 3,066 Note 5— 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'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 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. 61 Matrix Service Company Notes to Consolidated Financial Statements (continued) The maximum amount that we may borrow under the ABL Facility is subject to a borrowing base, which is based on restricted cash plus a percentage of the value of certain accounts receivable, inventory and equipment, reduced for certain reserves. We are required to maintain a minimum of $ 25.0 million of restricted cash at all times, but such amounts are also included in the borrowing base. The ABL Facility matures, and any outstanding amounts become due and payable, on September 9, 2026 . At June 30, 2023, our borrowing base was $ 67.0 million, we had $ 10.0 million of outstanding borrowings, and we had $ 19.3 million in letters of credit outstanding, which resulted in availability of $ 37.7 million under the ABL Facility. Our borrowing base has ranged from $ 67.0 million to $ 83.2 million during fiscal 2023. 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 June 30, 2023, including applicable margin, was approximately 7.47 %. 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 June 30, 2023. Note 6— Income Taxes Sources of Pretax Income (Loss) Fiscal Years Ended June 30, 2023 June 30, 2022 June 30, 2021 (In thousands) Domestic $ ( 52,636 ) $ ( 53,258 ) $ ( 38,867 ) Foreign ( 125 ) ( 5,025 ) ( 4,396 ) Total $ ( 52,761 ) $ ( 58,283 ) $ ( 43,263 ) 62 Matrix Service Company Notes to Consolidated Financial Statements (continued) Components of the Provision for Income Tax Expense (Benefit) Fiscal Years Ended June 30, 2023 June 30, 2022 June 30, 2021 (In thousands) Current: Federal $ ( 369 ) $ 230 $ ( 13,154 ) State ( 31 ) 28 465 Foreign — 1 ( 239 ) ( 400 ) 259 ( 12,928 ) Deferred: Federal — 2,504 774 State — 2,858 ( 291 ) Foreign — ( 4 ) 406 — 5,358 889 $ ( 400 ) $ 5,617 $ ( 12,039 ) Reconciliation Between the Expected Income Tax Provision Applying the Domestic Federal Statutory Tax Rate and the Reported Income Tax Provision Fiscal Years Ended June 30, 2023 June 30, 2022 June 30, 2021 (In thousands) Expected benefit for federal income taxes at the statutory rate $ ( 11,080 ) $ ( 12,239 ) $ ( 9,085 ) State income taxes, net of federal benefit ( 2,320 ) ( 1,971 ) ( 1,240 ) Impairment of non-deductible goodwill (1) — 1,132 — Charges without tax benefit 358 265 961 Change in valuation allowance (2) 12,595 17,943 2,797 Excess tax expense (benefit) on stock-based compensation 1,216 1,019 1,826 Research and development and other tax credits ( 1,175 ) ( 613 ) ( 1,707 ) Foreign tax differential 50 ( 232 ) ( 96 ) Federal rate differential net operating loss carryback (3) — 141 ( 5,223 ) Change in uncertain tax positions ( 90 ) ( 120 ) ( 7 ) Other 46 292 ( 265 ) Provision (benefit) for federal, state and foreign income taxes $ ( 400 ) $ 5,617 $ ( 12,039 ) (1) In fiscal 2022, we impaired $18.3 million of goodwill, which included $ 5.4 million of non-deductible goodwill. See Note 4 - Goodwill and Other Intangible Assets for more information about the impairments. (2) Due to the existence of a cumulative loss over a three-year period, we recorded a full valuation allowance against our deferred tax assets in fiscal 2022 and recorded additional valuation allowances against newly generated deferred tax assets in fiscal 2023. These assets are primarily comprised of federal net operating losses, which have an indefinite carryforward, federal tax credits and state net operating losses. To the extent we generate taxable income in the future, or cumulative losses are no longer present and our future projections for growth or tax planning strategies are demonstrated, we will realize the benefit associated with the net operating losses for which the valuation allowance has been provided. In fiscal 2021, we placed $2.8 million of valuation allowances, including $ 1.5 million on certain state net operating loss carryforwards due to a history of cumulative losses for a subsidiary. (3) Relates to fiscal 2021 net operating losses carried back under provisions of the CARES Act to fiscal years 2016 and 2017 which had a 35 % federal tax rate. 63 Matrix Service Company Notes to Consolidated Financial Statements (continued) Significant Components of our Deferred Tax Assets and Liabilities June 30, 2023 June 30, 2022 (In thousands) Deferred tax assets: Accruals and reserves $ 504 $ 1,534 Bad debt reserve 273 340 Insurance reserve 913 1,035 Net operating loss benefit and credit carryforwards 26,888 23,717 Accrued compensation and pension 964 1,051 Stock compensation expense on nonvested restricted stock units 1,794 1,910 Book over tax amortization 7,218 5,449 Deferred FICA — 1,427 Research and development capitalization 6,592 — Foreign currency translation and other 1,608 1,002 Valuation allowance ( 41,060 ) ( 28,615 ) Total deferred tax assets 5,694 8,850 Deferred tax liabilities: Tax over book depreciation 5,472 7,842 Other 248 1,034 Total deferred tax liabilities 5,720 8,876 Net deferred tax liability $ ( 26 ) $ ( 26 ) As reported in the Consolidated Balance Sheets: June 30, 2023 June 30, 2022 (In thousands) Deferred income tax assets $ — $ — Deferred income tax liabilities ( 26 ) ( 26 ) Net deferred tax liability $ ( 26 ) $ ( 26 ) Valuation Allowance We placed a 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. Operating Loss and Tax Credit Carryforwards We have net operating loss carryforwards and tax credit carryforwards in federal, state and foreign jurisdictions. The valuation allowance at June 30, 2023 and June 30, 2022 reduces the recognized tax benefit of these carryforwards to an amount that is more likely than not to be realized. The gross carryforwards will generally expire as shown below for each jurisdiction: 64 Matrix Service Company Notes to Consolidated Financial Statements (continued) Operating Loss and Tax Credit Carryforwards Expiration Period Amount (in thousands) Federal net operating loss Indefinite $ 38,606 Federal tax credits June 2041 to June 2043 $ 3,270 Federal foreign tax credits June 2024 to June 2025 $ 548 State net operating losses June 2025 to indefinite $ 95,480 State tax credits June 2033 to indefinite $ 984 Foreign net operating losses June 2033 to June 2043 $ 31,453 Foreign tax credits June 2035 to June 2043 $ 693 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 received a $ 13.3 million tax refund in connection with this carryback during fiscal 2023, which was included in income taxes receivable in the Consolidated Balance Sheets as of June 30, 2022. 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 the provisions of the CARES Act. The balance of deferred payroll taxes was included within accrued wages and benefits in the Consolidated Balance Sheets as of June 30, 2022. Other In general, it is our practice and intention to reinvest the earnings of our foreign subsidiaries in our foreign operations. We do not provide for outside basis differences under the indefinite reinvestment assertion of ASC 740-30. We file tax returns in multiple domestic and foreign taxing jurisdictions. With a few exceptions, we are no longer subject to examination by taxing authorities through fiscal 2018. At June 30, 2023, we updated our evaluation of our open tax years in all known jurisdictions. As of June 30, 2023, we have a $ 0.2 million liability for unrecognized tax positions and the payment of related interest and penalties. We treat the related interest and penalties as income tax expense. Due to the uncertainties related to these tax matters, we are unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority will occur. Note 7— Commitments and Contingencies Insurance Reserves We maintain insurance coverage for various aspects of our operations. However, exposure to potential losses is retained through the use of deductibles, self-insured retentions and coverage limits. 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. 65 Matrix Service Company Notes to Consolidated Financial Statements (continued) Litigation During fiscal 2023, we completed cost reimbursable construction services for a customer at a mining and minerals facility. In late fiscal 2023, after numerous attempts to collect outstanding receivables, we filed a notice of default for lack of payment of outstanding balances, and in early fiscal 2024, we filed a lien on the facility. The customer responded by commencing litigation against us, alleging breach of contract and breach of express warranty. We deny all claims and filed a countersuit against the customer for failure to pay outstanding amounts of accounts receivable and CIE, which total $ 5.6 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. During fiscal 2022, we filed an arbitration demand in an effort to collect outstanding balances of $ 32.7 million from a customer for which we completed a crude oil storage terminal project. The customer has filed counterclaims for liquidated damages and miscellaneous warranty items. We deny all claims and believe we are entitled to collect the full amount owed under the contract. Our hearing for this matter is currently scheduled for October 2024. During fiscal 2020, we commenced litigation in an effort to collect an account receivable from an iron and steel customer on a reimbursable contract following the deterioration of the relationship. The unpaid receivable balance at June 30, 2023 was $ 17.0 million. In connection with our suit, the customer filed certain counterclaims against us. We deny all claims and believe we are entitled to collect the full amount owed under the contract. Our trial regarding this matter is scheduled for September 2023. We believe we have set appropriate reserves for the matters described above based on our evaluation of the possible outcomes of the litigation. We and our subsidiaries are participants in various other legal actions. It is the opinion of management that none of the other known legal actions will have a material impact on our financial position, results of operations or liquidity. Note 8— Leases We enter into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. Real estate leases accounted for most of our right-of-use assets as of June 30, 2023. Most real estate and information technology equipment leases generally have fixed payments that follow an agreed upon payment schedule and have remaining lease terms ranging from less than a year to 13 years. Construction equipment leases generally have "month-to-month" lease terms that automatically renew as long as the equipment remains in use. In fiscal 2021 we recorded $ 0.5 million of impairments to right-of-use assets related to leased office space that was closed in connection with our restructuring activities, see Note 14 – Restructuring Costs for additional information. The components of lease expense in the Consolidated Statements of Income are as follows: Fiscal Years Ended June 30, 2023 June 30, 2022 June 30, 2021 Lease expense Location of Expense in Consolidated Statements of Income (in thousands) Operating lease expense Cost of revenue and selling, general and administrative expenses $ 6,635 $ 7,511 $ 8,386 Short-term lease expense (1) Cost of revenue 29,598 24,225 25,912 Total lease expense $ 36,233 $ 31,736 $ 34,298 (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. 66 Matrix Service Company Notes to Consolidated Financial Statements (continued) The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in our Consolidated Balance Sheets, were as follows: June 30, 2023 Maturity Analysis: (in thousands) Fiscal 2024 $ 5,656 Fiscal 2025 4,283 Fiscal 2026 4,257 Fiscal 2027 4,172 Fiscal 2028 3,896 Thereafter 8,950 Total future operating lease payments 31,214 Imputed interest ( 5,893 ) Net present value of future lease payments 25,321 Less: current portion of operating lease liabilities 4,661 Non-current operating lease liabilities $ 20,660 The following is a summary of the weighted average remaining operating lease and finance lease term and weighted average discount rate as of June 30, 2023: Weighted-average remaining lease term (in years) 6.6 years Weighted-average discount rate 6.1 % Supplemental cash flow information related to leases is as follows: Fiscal Year Ended June 30, 2023 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating lease payments $ 6,618 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 5,383 Note 9— Stockholders’ Equity Preferred Stock We have 5.0 million shares of preferred stock authorized, none of which was issued or outstanding at June 30, 2023 or June 30, 2022. 67 Matrix Service Company Notes to Consolidated Financial Statements (continued) Stock Repurchase Program We may repurchase common stock pursuant to the Stock Buyback Program, which was approved by the board of directors in November 2018. Under the program, the aggregate number of shares repurchased may not exceed 2,707,175 shares. We may repurchase our stock from time to time in the open market at prevailing market prices or in privately negotiated transactions and are not obligated to purchase any shares. The program will continue unless and until it is modified or revoked by the Board of Directors. We made no repurchases under the program in fiscal 2023 and have no current plans to repurchase stock. 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. There were 1,349,037 shares available for repurchase under the November 2018 Program as of June 30, 2023. Treasury Shares In addition to the stock buyback program, we may withhold shares of common stock to satisfy the tax withholding obligations upon vesting of an employee’s restricted stock units. We withheld 52,864 , 76,703 , and 170,629 shares of common stock during fiscal 2023, 2022, and 2021, respectively, to satisfy these obligations. These shares were returned to our pool of treasury shares. We have 840,899 treasury shares as of June 30, 2023 and intend to utilize these treasury shares in connection with equity awards under our incentive plans and for sales to the Employee Stock Purchase Plan. Note 10— Stock-Based Compensation Total stock-based compensation expense for the fiscal years ended June 30, 2023, June 30, 2022, and June 30, 2021 was $ 6.8 million, $ 7.9 million and $ 8.2 million, respectively. Measured but unrecognized stock-based compensation expense at June 30, 2023 was $ 6.9 million, all of which related to nonvested restricted stock units which are expected to be recognized as expense over a weighted average period of 1.5 years. We recognized excess tax expense of $ 1.2 million, $ 1.0 million, and $ 1.8 million related to stock-based compensation vesting for the fiscal years ended June 30, 2023, 2022, and 2021, respectively. Plan Information In December 2022, our stockholders approved the First Amendment to the Matrix Service Company 2020 Stock and Incentive Compensation Plan, which amended the Matrix Service Company 2020 Stock and Incentive Compensation Plan (the "2020 Plan") to increase the maximum authorized shares under the 2020 Plan by 625,000 shares, increasing the total authorized shares under the 2020 Plan from 1,725,000 to 2,350,000 shares. In November 2020, our stockholders approved the 2020 Plan, which provides stock-based and cash-based incentives for officers, directors and other key employees. Stock options, restricted stock, restricted stock units, stock appreciation rights, performance shares and cash-based awards can be issued under this plan. Upon approval of the 2020 Plan, the 2018 Stock and Incentive Compensation Plan ("2018 Plan") was frozen with the exception of normal vesting and other activity associated with awards previously granted under the 2018 Plan. Shares awarded under the 2018 Plan that are subsequently forfeited or net settled for tax withholding purposes are returned to the treasury share pool and become available for grant under the 2020 Plan, as amended. Awards totaling 2,350,000 shares have been authorized under the 2020 Plan, as amended. There were 1,501,880 shares available for grant under the amended 2020 Plan as of June 30, 2023. Equity-settled Restricted Stock Units We have issued equity-settled restricted stock units under the following types of arrangements: • Time-based awards—Employee awards generally vest in four equal annual installments beginning one year after the grant date. The award agreements contain a provision that accelerates the vesting for retirement eligible participants and participants that become retirement eligible during the vesting period and who elect to retire more than one year after the date of the award. The award is forfeited if retirement occurs before the first anniversary of the award. Settlement still occurs on the normal vesting schedules. Director awards vest one year after the grant date. 68 Matrix Service Company Notes to Consolidated Financial Statements (continued) • Market-based awards—These awards are in the form of performance units which vest 3 years after the grant date only if our common stock achieves certain levels of total shareholder return when compared to the total shareholder return of a peer group of companies as selected by the Compensation Committee of the Board of Directors. The payout can range from zero to 200 % of the original award depending on the Company's relative total shareholder return during the performance period. As of June 30, 2023, there were approximately 329,000 , 377,000 , and 431,000 performance units that are scheduled to vest in fiscal 2024, fiscal 2025, and fiscal 2026, respectively, assuming target performance. All awards under the 2020 Plan vest upon the death or disability of the participant or upon a change of control of the Company, provided that the successor company fails to assume or replace the awards in connection with that change of control event. If the successor company does assume the awards, then vesting of the awards will be accelerated in the event of an involuntary termination or other material adverse event that occurs in connection with or following the change of control. All awards prior to the 2020 Plan vest upon the death or disability of the participant or upon a change of control of the Company. The grant date fair value of the time-based awards is determined by the market value of our common stock on the grant date. The grant date fair value of the market-based awards is calculated using a Monte Carlo model. For the fiscal 2023 grant, the model estimated the fair value of the award based on approximately 100,000 simulations of the future prices of our common stock compared to the future prices of the common stock of its peer companies based on historical volatilities. The model also took into account the expected dividends over the performance period of those peer companies which pay cash dividends. Equity-settled restricted stock unit activity for the fiscal year ended June 30, 2023 is as follows: Shares Weighted Average Grant Date Fair Value per Share Nonvested shares at June 30, 2022 1,465,788 $ 14.86 Shares granted 782,707 $ 7.04 Shares vested and released ( 259,529 ) $ 14.19 Shares canceled ( 214,017 ) $ 21.89 Nonvested shares at June 30, 2023 1,774,949 $ 10.66 There were 696,227 and 665,597 restricted stock units granted in fiscal 2022 and 2021 with average grant date fair values of $ 14.13 and $ 10.60 per share, respectively. There were 268,403 and 515,218 restricted stock units that vested and were released in fiscal 2022 and 2021 with weighted average fair values of $ 13.92 and $ 16.99 per share, respectively. There were 242,743 and 119,904 restricted stock units cancelled in fiscal 2022 and 2021 with an average grant date fair value of $ 25.50 and $ 20.67 per share, respectively. Cash-Settled Restricted Stock Units We granted 251,575 , 231,219 , and 238,848 cash-settled restricted stock units during fiscal years 2023, 2022 and 2021, respectively; with weighted average fair values of $ 1.5 million, $ 2.6 million, and $ 2.3 million respectively. There were 106,637 and 53,333 shares vested and released in fiscal 2023 and 2022, respectively; with weighted average fair values of $ 1.1 million and $ 0.5 million, respectively. There were no cash-settled restricted shares vested or released in fiscal 2021. There were 13,621 and 25,355 shares cancelled in fiscal 2023 and 2022, respectively; with weighted average fair values of $ 0.1 million and $ 0.3 million, respectively. There were no cash-settled restricted shares cancelled in fiscal 2021. The grant date fair value of these awards is based on the price of our common stock and the number of shares awarded on the date of grant. The award must be settled in cash and is accounted for as a liability-type award. The expense is recognized over the requisite service period with remeasurement at the end of each reporting period at fair value until settlement. The requisite service period is based on the vesting provisions of the awards which generally occur in four equal annual installments beginning one year after the grant date. These awards contain the same retirement provisions described for time-based awards in the equity-settled restricted stock units section above. 69 Matrix Service Company Notes to Consolidated Financial Statements (continued) We recognized $ 1.3 million, $ 0.6 million, and $ 1.0 million of expense in fiscal years 2023, 2022, and 2021, respectively, for cash-settled restricted stock units, which was included in selling, general and administrative expenses and cost of revenue in the Consolidated Statements of Income. As of June 30, 2023, the liability for cash-settled restricted stock units was $ 1.7 million and is included in accrued wages and benefits in the Consolidated Balance Sheets. Note 11—Earnings per Common Share Basic earnings per share (“EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share includes the dilutive effect of employee and director nonvested restricted stock units. Nonvested restricted stock units are considered dilutive (antidilutive) whenever the average market value of the shares during the period exceeds (is less than) the sum of the related average unamortized compensation expense during the period plus the related hypothetical estimated excess tax benefit that will be realized when the shares vest. Nonvested restricted stock units are considered antidilutive in the event we report a net loss. The computation of basic and diluted EPS is as follows: Fiscal Years Ended June 30, 2023 June 30, 2022 June 30, 2021 (In thousands, except per share data) Basic EPS: Net loss $ ( 52,361 ) $ ( 63,900 ) $ ( 31,224 ) Weighted average shares outstanding 26,988 26,733 26,451 Basic loss per share $ ( 1.94 ) $ ( 2.39 ) $ ( 1.18 ) Diluted EPS: Weighted average shares outstanding—basic 26,988 26,733 26,451 Diluted weighted average shares 26,988 26,733 26,451 Diluted loss per share $ ( 1.94 ) $ ( 2.39 ) $ ( 1.18 ) The following securities are considered antidilutive and have been excluded from the calculation of Diluted EPS: Fiscal Years Ended June 30, 2023 June 30, 2022 June 30, 2021 (In thousands) Nonvested restricted stock units 97 110 227 Note 12— Employee Benefit Plans Defined Contribution Plans We sponsor defined contribution savings plans for all eligible employees meeting length of service requirements. Under the primary plan, participants may contribute an amount up to 25 % of pretax annual compensation subject to certain limitations. We match 100 % of the first 3 % of employee contributions and 50 % of the next 2 % of employee contributions. Our matching contributions vest immediately. Our matching contributions were $ 5.3 million in each of the fiscal years ended June 30, 2023 and 2022, and $ 5.4 million in the fiscal year ended June 30, 2021. 70 Matrix Service Company Notes to Consolidated Financial Statements (continued) Multiemployer Pension Plans We contribute to a number of multiemployer defined benefit pension plans in the U.S. and Canada under the terms of collective-bargaining agreements that cover our union-represented employees, who are represented by more than 100 local unions. The related collective-bargaining agreements between those organizations and us, which specify the rate at which we must contribute to the multi-employer defined pension plan, expire at different times between 2023 and 2026. Benefits under these plans are generally based on compensation levels and years of service. For us, the financial risks of participating in multiemployer plans are different from single-employer plans in the following respects: • Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. • If a participating employer discontinues contributions to a plan, the unfunded obligations of the plan may be borne by the remaining participating employers. • If a participating employer chooses to stop participating in a plan, a withdrawal liability may be created based on the unfunded vested benefits for all employees in the plan. Under federal legislation regarding multiemployer pension plans, in the event of a withdrawal from a plan or plan termination, companies are required to continue funding their proportionate share of such plan’s unfunded vested benefits. We are a participant in multiple union sponsored multiemployer plans, and, as a plan participant, our potential obligation could be significant. The amount of the potential obligation is not currently ascertainable because the information required to determine such amount is not identifiable or readily available. Our participation in significant plans for the fiscal year ended June 30, 2023 is outlined in the table below. The “EIN/Pension Plan Number” column provides the Employer Identification Number (“EIN”) and the three digit plan number. The zone status is based on the latest information that the Company received from the plan and is certified by the plan’s actuary. Plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are generally less than 80 percent funded, and plans in the green zone are generally at least 80 percent funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. The “Surcharge Imposed” column includes plans in a red zone status that require a payment of a surcharge in excess of regular contributions. The last column lists the expiration date of the collective-bargaining agreement to which the plan is subject. 71 Matrix Service Company Notes to Consolidated Financial Statements (continued) Pension Fund EIN/Pension Plan Number Pension Protection Act Zone Status FIP/RP Status Pending or Implemented Company Contributions Fiscal Year Surcharge Imposed 2023 2022 2023 2022 2021 (In thousands) Boilermaker-Blacksmith National Pension Trust 48-6168020/001 Red Yellow Implemented $ 5,284 $ 5,208 $ 4,003 Yes National Electrical Benefit Fund, IBEW locals 71, 126, 488, and 1319 53-0181657/001 Described below (1) Green NA 3,437 2,973 1,865 No Pipefitters Local 460 Pension Plan 51-6108443/001 Described below (1) Green NA 2,479 111 — No Joint Pension Fund Local Union 164 IBEW 22-6031199/001 Green Green NA 1,724 1,514 1,958 No IBEW Local 654 Pension Plan 23-6538183/001 Green Green NA 1,242 857 818 No Joint Pension Fund of Local Union No 102 IBEW 22-1615726/001 Green Green NA 1,143 906 1,341 No IBEW Local 456 Pension Plan 22-6238995/001 Green Green NA 1,180 734 595 No Local 351 IBEW Pension Plan 22-3417366/001 Described below (1) Green NA 1,033 395 479 No Steamfitters Local Union No 420 Pension Plan 23-2004424/001 Red Yellow Implemented 656 498 442 Yes Pipefitters Local 342 Pension Plan 94-3190386/001 Green Green NA 498 345 101 No IBEW Local 98 Pension Plan 23-6583334/001 Yellow Red Implemented 484 143 318 No Laborers Local 220 Pension Plan 43-6159056/001 Described below (1) Green NA 427 24 — No Contributions to other multiemployer plans 3,969 3,110 3,449 Total contributions made $ 23,556 $ 16,818 $ 15,369 (1) For the National Electrical Benefit Fund for Locals 71/126/488/1319, Pipefitters Local 460 Pension Plan, Local 351 IBEW Pension Plan, and Laborers Local 220 Pension Plan, we have not received a funding notification that covers our fiscal year 2023 during the preparation of this Form 10-K. Under Federal pension law, if a multiemployer pension plan is determined to be in critical or endangered status, the plan must provide notice of this status to participants, beneficiaries, the bargaining parties, the Pension Benefit Guaranty Corporation, and the Department of Labor. We also observed that these plans have not submitted any Critical or Endangered Status Notices to the Department of Labor for calendar years that we have not received notification. The Critical or Endangered Status Notices can be accessed at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/public-disclosure/2023-funding-status-notices#2023-c-and-d. Employee Stock Purchase Plan The Matrix Service Company 2011 Employee Stock Purchase Plan (“ESPP”) was effective January 1, 2011. The ESPP allows employees to purchase shares through payroll deductions and members of the Board of Directors to purchase shares from amounts withheld from their cash retainers. Share purchases are limited to an aggregate market value of no greater than $ 60,000 per calendar year per participant and are purchased from us at the current market value with no discount to the participant. Contributions are with after tax earnings and are accumulated in non-interest bearing accounts for quarterly purchases of company stock. Upon the purchase of shares, the participants receive all stockholder rights including dividend and voting rights and are permitted to sell their shares at any time. We have made 1,000,000 shares available under the ESPP. The ESPP can be terminated at any time at the discretion of the Board of Directors and will automatically terminate once the plan shares are exhausted. Shares are issued from Treasury Stock under the ESPP. There were 50,139 shares issued in fiscal 2023, 29,826 shares in fiscal 2022, and 29,171 shares in fiscal 2021. 72 Matrix Service Company Notes to Consolidated Financial Statements (continued) Note 13— Segment Information In fiscal 2023, we operated our business through three reportable segments: • Storage and Terminal Solutions : primarily consists of engineering, procurement, fabrication, and construction services related to cryogenic and other specialty tanks and terminals for LNG, NGLs, hydrogen, ammonia, propane, butane, liquid nitrogen/liquid oxygen, and liquid petroleum. Also includes work related to traditional aboveground crude oil and refined product storage tanks and terminals. This segment also includes terminal balance of plant work, truck and rail loading/offloading facilities, and marine structures as well as storage tank and terminal maintenance and repair. Finally, we manufacture and sell precision engineered specialty tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals. • Utility and Power Infrastructure : primarily consists of engineering, procurement, fabrication, and construction services to support growing demand for LNG utility peak shaving facilities. We also perform traditional electrical work for public and private utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, and upgrades and maintenance including live wire work. Work may also include emergency and storm restoration services. We also provide construction services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configurations. • Process and Industrial Facilities : primarily consists of plant maintenance, repair, and turnarounds in the downstream and midstream markets for energy clients including refining and processing of crude oil, fractionating, and marketing of natural gas and natural gas liquids. Also includes engineering, procurement, fabrication, and construction for refinery upgrades and retrofits for renewable fuels. We also construct thermal vacuum test chambers for aerospace and defense industries and other infrastructure for industries including petrochemical, sulfur, mining and minerals primarily in the extraction of non-ferrous metals, cement, agriculture, wastewater treatment facilities and other industrial customers. 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, including corporate salaries and facilities costs, are excluded from our three reportable segments in order to better align controllable costs with the responsibility of segment management, and to be consistent with how our chief operating decision-maker assesses segment performance and allocates resources. Segment assets consist primarily of accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, property, plant and equipment, right-of-use lease assets, goodwill and other intangible assets. 73 Matrix Service Company Notes to Consolidated Financial Statements (continued) Results of Operations (In thousands) Storage and Terminal Solutions Utility and Power Infrastructure Process and Industrial Facilities Corporate Total Fiscal year ended June 30, 2023 Gross revenue $ 261,244 $ 169,558 $ 370,076 $ — $ 800,878 Less: inter-segment revenue 5,551 54 253 — 5,858 Consolidated revenue 255,693 169,504 369,823 — 795,020 Gross profit (loss) 10,470 10,699 10,756 ( 1,105 ) 30,820 Selling, general and administrative expenses 20,054 7,045 14,909 26,241 68,249 Goodwill impairment and restructuring costs 969 37 13,288 1,164 15,458 Operating income (loss) ( 10,553 ) 3,617 ( 17,441 ) ( 28,510 ) ( 52,887 ) Segment assets 139,333 67,630 90,514 103,027 400,504 Capital expenditures 1,406 4,501 2,775 327 9,009 Depreciation and amortization 3,281 3,465 4,783 2,165 13,694 Fiscal year ended June 30, 2022 Gross revenue $ 236,260 $ 220,093 $ 258,497 $ — $ 714,850 Less: inter-segment revenue 3,421 — 3,649 — 7,070 Consolidated revenue 232,839 220,093 254,848 — 707,780 Gross profit (loss) 262 ( 8,586 ) 9,270 ( 2,152 ) ( 1,206 ) Selling, general and administrative expenses 17,284 11,771 12,506 26,129 67,690 Goodwill impairment and restructuring costs 7,330 2,746 6,867 2,015 18,958 Operating loss ( 24,352 ) ( 23,103 ) ( 10,103 ) ( 30,296 ) ( 87,854 ) Segment assets 141,084 94,059 104,078 101,572 440,793 Capital expenditures 338 29 254 2,724 3,345 Depreciation and amortization 5,540 3,812 5,659 243 15,254 Fiscal year ended June 30, 2021 Gross revenue $ 267,982 $ 210,052 $ 201,472 $ — $ 679,506 Less: inter-segment revenue 4,553 — 1,555 — 6,108 Consolidated revenue 263,429 210,052 199,917 — 673,398 Gross profit 13,617 1,506 17,642 — 32,765 Selling, general and administrative expenses 18,644 9,882 14,756 26,474 69,756 Restructuring costs 1,391 1,312 3,807 246 6,756 Operating loss ( 6,418 ) ( 9,688 ) ( 921 ) ( 26,720 ) ( 43,747 ) Segment assets 160,782 81,717 106,619 118,438 467,556 Capital expenditures 1,136 1,183 834 1,201 4,354 Depreciation and amortization 7,456 4,127 6,018 257 17,858 74 Matrix Service Company Notes to Consolidated Financial Statements (continued) Information about Significant Customers: Significant Customers as a Percentage of Segment Revenue Consolidated Storage and Terminal Solutions Utility and Power Infrastructure Process and Industrial Facilities Fiscal Year ended June 30, 2023 Customer one 10.7 % — % — % 22.9 % Customer two 6.4 % — % — % 13.8 % Customer three 5.8 % — % — % 12.4 % Customer four 4.0 % 12.3 % — % — % Customer five 3.8 % — % 17.7 % — % Customer six 3.6 % — % 16.7 % — % Customer seven 2.9 % — % 13.5 % — % Fiscal Year ended June 30, 2022 Customer one 12.3 % 0.8 % — % 33.5 % Customer two 11.0 % — % 35.5 % — % Customer three 4.7 % — % 15.1 % — % Fiscal Year ended June 30, 2021 Customer one 12.9 % — % 41.3 % — % Customer two 9.9 % 0.1 % — % 33.3 % Customer three 7.0 % 0.1 % 22.5 % — % Customer four 4.4 % 11.2 % — % — % Note 14— Restructuring Costs In fiscal 2020, we initiated a business improvement plan to increase profitability and reduce our cost structure in order to help us become more competitive and deliver higher quality service. As a result of specific events, including the effects of the COVID-19 pandemic and related market disruptions, the Company expanded its business improvement plan. The business improvement plan consists of an initial phase of discretionary cost reductions, workforce reductions, reduction of capital expenditures and the reduction in size or closure of certain offices in order to increase the utilization of our staff and bring the cost structure of the business in line with revenue volumes. In fiscal 2022, we commenced a second phase of our plan to focus on centralization of support functions, including business development, accounting, human resources, procurement and project services into shared service centers. The restructuring costs consist primarily of severance costs, facility closure costs, consulting fees and other liabilities. Our restructuring efforts were substantially complete as of June 30, 2023. 75 Matrix Service Company Notes to Consolidated Financial Statements (continued) Restructuring costs incurred are classified as follows: Fiscal Year Ended June 30, 2023 Fiscal Year Ended June 30, 2022 Fiscal Year Ended June 30, 2021 Since Inception of Business Improvement Plan (in thousands) Restructuring Costs by Type: Severance and other personnel-related costs $ 2,787 $ 596 $ 5,545 $ 17,701 Total facility costs 216 33 785 4,746 Total other intangible asset impairments — — — 1,525 Other costs 139 17 426 582 Total restructuring costs $ 3,142 $ 646 $ 6,756 $ 24,554 76 Matrix Service Company Schedule II—Valuation and Qualifying Accounts June 30, 2023, June 30, 2022, and June 30, 2021 (In thousands) COL. A COL. B COL. C ADDITIONS COL. D COL. E Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts—Describe Deductions—Describe Balance at End of Period Fiscal Year 2023 Deducted from asset accounts: Allowance for doubtful accounts $ 1,320 $ ( 88 ) $ — $ ( 171 ) (A) $ 1,061 Valuation reserve for deferred tax assets 28,615 12,595 — ( 150 ) (B) 41,060 Total $ 29,935 $ 12,507 $ — $ ( 321 ) $ 42,121 Fiscal Year 2022 Deducted from asset accounts: Allowance for doubtful accounts $ 898 $ 738 $ — $ ( 316 ) (C) $ 1,320 Valuation reserve for deferred tax assets 11,104 17,943 — ( 432 ) (B) 28,615 Total $ 12,002 $ 18,681 $ — $ ( 748 ) $ 29,935 Fiscal Year 2021 Deducted from asset accounts: Allowance for doubtful accounts $ 905 $ 85 $ — $ ( 92 ) (D) $ 898 Valuation reserve for deferred tax assets 7,763 2,797 — 544 (E) 11,104 Total $ 8,668 $ 2,882 $ — $ 452 $ 12,002 (A) Relates to various write-offs and cash receipts of previously reserved accounts from prior periods. (B) Relates to foreign currency translation for the portion of the valuation allowance on net operating loss and tax credit carryforwards in foreign jurisdictions. (C) Relates to the write off of a $0.3 million account receivable that was fully reserved in a prior period. (D) Primarily relates to a $0.1 million reserve that was recognized as a credit loss and ultimately written off within fiscal 2021. (E) Relates to $ 1.1 million of foreign currency translation for the portion of the valuation allowance on net operating loss and tax credit carryforwards in foreign jurisdictions, partially offset by $ 0.6 million of fully reserved tax credits that expired in fiscal 2021. 77 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.