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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-05-09 · 179 added, 342 removed, 165 unchanged (76% of the section changed)

8 unchanged sentences

• our ability to comply with the covenants in our credit agreement;

• the impact to our business from economic, market or business conditions in general and in the oil, natural gas, power, petrochemical, agricultural and mining industries in particular;

• the impact to our business from economic, market or business conditions in general and in the natural gas, power, oil, petrochemical, agricultural and mining industries in particular;

• the impact of inflation on our operating expenses and our business operations;

2 unchanged sentences

• our expectations with respect to the likelihood of a future impairment;

• our expectations regarding pending litigation;

• expansion and other trends of the industries we serve.

2 unchanged sentences

• any risk factors discussed in this Form 10-Q, Form 10-K for the fiscal year ended June 30, 2023, and in our other filings with the Securities and Exchange Commission;

• economic, market or business conditions in general and in the oil, natural gas, power, petrochemical, agricultural and mining industries in particular;

• economic, market or business conditions in general and in the natural gas, power, oil, petrochemical, agricultural and mining industries in particular;

• the transition to renewable energy sources and its impact on our current customer base;

6 unchanged sentences

Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences or effects on our business operations.

We assume no obligation to update publicly, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise.

We assume no obligation to

update publicly, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise.

RESULTS OF OPERATIONS

We report our results of operations through three reportable segments:

Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions.

• Utility and Power Infrastructure :

consists of power delivery services provided to investor-owned utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, upgrades and maintenance, as well as emergency and storm restoration services.

We also provide engineering, fabrication, and construction services for LNG utility peak shaving facilities, and provide construction and maintenance services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configuration.

• Process and Industrial Facilities :

primarily serves customers in the downstream and midstream petroleum industries who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids.

We also serve customers in various other industries such as petrochemical, sulfur, mining and minerals companies engaged primarily in the extraction of non-ferrous metals, aerospace and defense, cement, agriculture, and other industrial customers.

Our services include plant maintenance, turnarounds, industrial cleaning services, engineering, fabrication, and capital construction.

Storage and Terminal Solutions, Utility and Power Infrastructure, and Process and Industrial Facilities.

• Storage and Terminal Solutions :

consists of work related to aboveground crude oil and refined product storage tanks and terminals.

We also include work related to cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum, hydrogen and other specialty vessels such as spheres in this segment, as well as work related to marine structures and truck and rail loading/offloading facilities.

Our services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals.

Finally, we offer tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.

Operational Update

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

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

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

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

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

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

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

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

Consolidated revenue was $186.9 million for the three months ended March 31, 2023, compared to $177.0 million in the same period last year.

On a segment basis, revenue increased in the Process and Industrial Facilities and Storage and Terminal Solutions segments by $30.7 million and $3.5 million, respectively.

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

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

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

Gross margins in the third quarter of fiscal 2023 were negatively impacted by the under recovery of construction overhead costs, continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period, unfavorable changes in the estimated recovery of change orders and increased forecasted costs to complete certain midstream gas processing projects, and other increases in forecasted costs to complete a limited number of projects.

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

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

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

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

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

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

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

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

Interest expense in the three months ended March 31, 2023 consisted primarily of interest on debt outstanding, unused capacity fees, amortization of deferred debt issuance costs, letter of credit fees and other interest.

Our effective tax rates for the three months ended March 31, 2023 and March 31, 2022 were 2.8% and 0.4%, respectively.

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

We placed a valuation allowance on all of our deferred tax assets in the second quarter of fiscal 2022 due to the existence of a cumulative loss over a three-year period.

We will continue to place valuation allowances on newly generated deferred tax assets and will realize the benefit associated with the deferred tax assets for which the valuation allowance has been provided to the extent we generate taxable income in the future, or cumulative losses are no longer present and our future projections for growth or tax planning strategies are demonstrated.

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

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.

We also perform 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 :

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

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

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

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

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

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 :

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

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

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

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

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

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

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

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

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

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

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

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

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.

We also perform 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.

Operational Update

We received $497.4 million of project awards during the first quarter of fiscal 2024, which resulted in a book-to-bill ratio of 2.5 for the quarter.

Backlog was $1.4 billion as of September 30, 2023, which is at the highest level since the fourth quarter of fiscal 2015.

We continued to build on the momentum from project awards in fiscal 2023 and our bidding activity continues to be strong, especially in LNG and specialty vessel storage projects.

We expect recent project awards and backlog growth to return revenue volumes to pre-pandemic levels;

however, we are not expecting a meaningful uplift to revenue volumes until the third quarter of fiscal 2024 due to the timing of project starts of many of our recently awarded large capital projects.

These awards are expected to generate increased revenue over a multi-year period.

Additionally, many of the projects booked in recent quarters are large capital projects with expected gross margins at our pre-pandemic historical gross margin range.

We expect growing revenue volume combined with cost reductions implemented in recent years to allow us to better leverage our cost structure, further enhancing gross margins and operating income in the second half of fiscal 2024 and beyond.

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

The following arrangements are considered firm:

• fixed-price awards;

• minimum customer commitments on cost plus arrangements;

• certain time and material arrangements in which the estimated value is firm or can be estimated with a reasonable amount of certainty in both timing and amounts.

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

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

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

The following table provides a summary of changes in our backlog for the three months ended September 30, 2023:

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

(In thousands)

Backlog as of June 30, 2023 $ 270,659 $ 459,518 $ 359,921 $ 1,090,098

Project awards 414,645 23,089 59,660 497,394

Revenue recognized (90,144) (32,395) (75,120) (197,659)

Backlog as of September 30, 2023 $ 595,160 $ 450,212 $ 344,461 $ 1,389,833

Book-to-bill ratio (1)

4.6 0.7 0.8 2.5

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

Backlog increased $299.7 million or 27.5% in the first quarter of fiscal 2024 on project awards of $497.4 million and a book-to-bill ratio of 2.5.

In the Storage and Terminal Solutions segment, backlog increased by 119.9% as we booked $414.6 million of project awards during the first quarter of fiscal 2024.

Included in project awards was a significant LNG storage capital project.

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

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

Bidding activity on LNG projects has been strong.

In the Utility and Power Infrastructure segment, backlog decreased by 2.0% as we booked $23.1 million of project awards during the first quarter of fiscal 2024.

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

In the Process and Industrial Facilities segment, backlog decreased by 4.3% as we booked $59.7 million of project awards during the first quarter of fiscal 2024.

Project awards during the quarter were driven by contract growth on a refinery retrofit project at a biodiesel facility and spending related to refinery maintenance and turnaround operations.

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

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

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

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

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

Awards for significant capital projects may be recognized as revenue over a multi-year period as the projects may take a few years to complete.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Consolidated revenue was $197.7 million for the three months ended September 30, 2023, compared to $208.4 million in the same period last year.

On a segment basis, revenue decreased in the Utility and Power Infrastructure and Process and Industrial Facilities segments by $12.5 million and $11.5 million, respectively.

These decreases were partially offset by a $13.2 million increase in revenue in the Storage and Terminal Solutions segment.

Consolidated gross profit decreased to $11.9 million in the three months ended September 30, 2023 compared to a gross profit of $13.0 million in the same period last year.

Gross margin of 6.0% in the three months ended September 30, 2023 was consistent with the gross margin of 6.2% in the same period last year.

Gross margins in the first quarter of fiscal 2024 were negatively impacted by the under-recovery of construction overhead costs.

We expect this under-recovery to be temporary as

we have maintained overhead resources at levels needed to support significantly higher revenue volumes in the second half of fiscal 2024.

Gross margins in the first quarter of fiscal 2023 were also negatively impacted by the under-recovery of construction overhead costs.

Consolidated SG&A expenses were $17.1 million in the three months ended September 30, 2023 compared to $16.8 million in the same period last year.

We incurred an additional $1.8 million of expense associated with the variable accounting for cash-settled stock-based compensation, which increased due to a higher stock price.

This increase was offset by various other lower costs, which includes continued streamlining of the business as well as delaying certain costs based on the timing of revenue.

Interest expense was $0.3 million in the three months ended September 30, 2023 compared to $0.4 million in the three months ended September 30, 2022.

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

Other income during the three months ended September 30, 2023 included a gain of $2.5 million on the sale of a previously utilized facility in Burlington, Ontario.

We received $2.7 million in net proceeds from the sale.

We closed this previously utilized facility during the second quarter of fiscal 2023 because it was no longer strategic to the future of the business.

Our effective tax rates for the three months ended September 30, 2023 and September 30, 2022 were zero.

The effective tax rates during both periods were impacted by valuation allowances of $0.2 million and $1.4 million, respectively, placed on deferred tax assets generated during the quarters.

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.

For the three months ended September 30, 2023, we had a net loss of $3.2 million or $0.12 per fully diluted share, compared to a net loss of $6.5 million, or $0.24 per fully diluted share, in the three months ended September 30, 2022.

Storage and Terminal Solutions

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

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

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

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

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

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

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

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

Consolidated revenue was $589.2 million for the nine months ended March 31, 2023, compared to $507.1 million in the same period last year.

On a segment basis, revenue increased in the Process and Industrial Facilities and Storage and Terminal Solutions segments by $103.9 million and $19.0 million, respectively.

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

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

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

Gross margins in the first nine months of fiscal 2023 were negatively impacted by unfavorable changes in the estimated recovery of change orders and increased forecasted costs to complete certain midstream gas processing projects, the under recovery of construction overhead costs, continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period, and other increases in forecasted costs to complete a limited number of projects.

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

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

Consolidated SG&A expenses were $51.2 million in the nine months ended March 31, 2023 compared to $49.6 million in the same period last year.

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

We recorded a goodwill impairment of $12.3 million in the second quarter of fiscal 2023.

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

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

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

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

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

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

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

Our effective tax rates for the nine months ended March 31, 2023 and March 31, 2022 were 0.7% and (7.8%), respectively.

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

We placed a valuation allowance on all of our deferred tax assets in the second quarter of fiscal 2022 due to the existence of a cumulative loss over a three-year period.

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

Revenue for the Storage and Terminal Solutions segment was $90.1 million in the three months ended September 30, 2023 compared to $76.9 million in the same period last year.

The increase in segment revenue is primarily a result of higher volumes of specialty vessel capital projects.

The segment gross margin was 5.5% for the three months ended September 30, 2023 compared to a gross margin of 9.8% in the same period last year.

The first quarter fiscal 2024 segment gross margin was negatively impacted by the under-recovery of construction overhead costs.

We have allocated additional resources to this segment to support recent awards and additional revenue in the second half of fiscal 2024.

As these revenues increase, we expect to reach full recovery of construction overhead costs in the second half of fiscal 2024.

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

Utility and Power Infrastructure

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

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

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

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

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

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

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

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

Revenue for the Utility and Power Infrastructure segment was $32.4 million in the three months ended September 30, 2023 compared to $44.9 million in the same period last year.

The decrease is primarily due to a net decrease in natural gas peak shaving capital work and lower volumes of power delivery work.

The decrease related to natural gas peak shaving capital work is temporary as we expect recently awarded large peak shaving projects to ramp up in the first half of fiscal 2024 driving higher revenue in the second half of the fiscal year.

The segment gross margin was 11.4% for the three months ended September 30, 2023 compared to a gross margin of 3.8% in the same period last year.

The segment gross margin for the first quarter of fiscal 2024 was positively impacted by strong project execution which led to favorable project closeouts.

This was partially offset by the under-recovery of construction overhead costs due low revenue volumes.

The segment gross margin for first quarter ended September 30, 2022 was negatively impacted by low revenue volume, which led to the under-recovery of construction overhead costs, and work on a large capital project with a previously reduced gross margin.

Process and Industrial Facilities

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

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

The segment gross margin was 0.9% for the nine months ended March 31, 2023 compared to 4.1% in the same period last year.

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

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

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

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

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

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

Storage and Terminal Solutions

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

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

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

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

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

The segment gross margin for the nine months ended March 31, 2022 was negatively impacted by low revenue volume, which led to under recovery of construction overhead costs and a lower than previously forecasted margin on a thermal energy storage tank repair and maintenance project due to changes in repair scope, expanded client weld testing and associated schedule delays, which reduced segment gross profit by $5.5 million.

In addition, segment gross margin was negatively impacted by smaller competitively priced capital projects.

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

Revenue for the Process and Industrial Facilities segment was $75.1 million in the three months ended September 30, 2023 compared to $86.6 million in the same period last year.

The decrease was primarily due to lower volumes of midstream gas processing capital work and the sale of the industrial cleaning business during the fourth quarter of fiscal 2023.

The segment gross margin was 6.8% for the three months ended September 30, 2023 compared to 5.0% in the same period last year.

The segment gross margin in the first quarter of fiscal 2024 was negatively impacted by the under-recovery of construction overhead costs due to low revenue volume.

Otherwise, project execution was generally strong in this segment including the completion of a midstream gas processing project in line with our previous forecast.

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

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

Unallocated corporate expenses were $9.7 million during the three months ended September 30, 2023 compared to $7.9 million in the same period last year.

The increase was primarily due to higher cash-settled stock-based compensation due to an increase in the price of our stock and legal costs related to a jury trial that resulted in a verdict in our favor, see Note 6 - Commitments and Contingencies, Litigation, for more information.

Non-GAAP Financial Measures

Adjusted Net Loss

In order to more clearly depict our core profitability, the following tables present our operating results after certain adjustments:

We have presented Adjusted net loss, which we define as Net loss before restructuring costs, gain on sale of assets, and the tax impact of these adjustments because we believe it better depicts our core operating results.

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

Since Adjusted net loss is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, Net loss as an indicator of operating performance.

Adjusted net loss, as we calculate it, may not be comparable to similarly titled measures employed by other companies.

In addition, this measure is not a measure of our ability to fund our cash needs.

As Adjusted net loss excludes certain financial information compared with Net loss, the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions that are excluded.

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

• It does not include restructuring costs.

Restructuring costs represent material costs that were incurred and are oftentimes cash expenses.

Therefore, any measure that excludes restructuring costs has material limitations.

• It does not include gain on the sale of assets.

While this sale occurred outside the normal course of business, any measure that excludes this gain has inherent limitations since the sale resulted in a material inflow of cash.

A reconciliation of Net loss to Adjusted net loss follows:

Reconciliation of Net Loss to Adjusted Net Loss (1)

(In thousands, except per share data)

Three Months Ended Nine Months Ended

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

Three Months Ended

September 30, 2023 September 30, 2022

Net loss, as reported $ (3,167) $ (6,512)

Goodwill impairment — 18,312 12,316 18,312

Restructuring costs — 1,287

Accelerated amortization of deferred debt amendment fees (2)

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

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

Deferred tax asset valuation allowance (4)

3,583 7,671 13,347 21,869

Gain on sale of assets (2)

Tax impact of adjustments (3)

Adjusted net loss $ (5,703) $ (5,225)

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Adjusted loss per share $ (0.21) $ (0.19)

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

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

We have presented these non-GAAP financial measures because we believe they more clearly depict our core operating results during the periods presented and provide a more comparable measure of our operating results to other companies considered to be in similar businesses.

Since adjusted net loss and adjusted loss per share are not measures of performance calculated in accordance with GAAP, they should be considered in addition to, rather than as a substitute for, the most directly comparable GAAP financial measures.

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

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

(4) See Item 1.

Financial Statements, Note 6 - Income Taxes, for more information about the deferred tax asset valuation allowance.

(1) Beginning with the first quarter of fiscal 2024, the definition of Adjusted net loss and Adjusted loss per share was updated to no longer include changes in the valuation allowance of deferred tax assets.

Prior period information has been adjusted to conform to the updated definition of Adjusted net loss and Adjusted loss per share.

(2) Represents gain on the sale of our Burlington, ON office.

See Item 1, Note 3 - Property, Plant and Equipment, Burlington Office Disposal, for more information.

(3) Represents the tax impact of the adjustments to Net loss, calculated using the applicable effective tax rate of the adjustment.

Adjusted EBITDA

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

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

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

Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance.

Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, Net loss as an indicator of operating performance.

Adjusted EBITDA, as we calculate it, may not be comparable to similarly titled measures employed by other companies.

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

• It does not include impairment to goodwill.

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

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

• It does not include restructuring costs.

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Therefore, any measure that excludes restructuring costs has material limitations.

• It does not include stock-based compensation.

• It does not include gain on the sale of assets.

While this sale occurred outside the normal course of business, any measure that excludes this gain has inherent limitations since the sale resulted in a material inflow of cash.

• It does not include equity-settled stock-based compensation expense.

Stock-based compensation represents material amounts of equity that are awarded to our employees and directors for services rendered.

While the expense is non-cash, we release vested shares out of our treasury stock, which has historically been replenished by using cash to periodically repurchase our stock.

While the expense is non-cash, we historically release vested shares out of our treasury stock, which has been replenished by using cash to periodically repurchase our stock.

Therefore, any measure that excludes stock-based compensation has material limitations.

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Therefore, any measure that excludes interest expense has material limitations.

• It does not include income taxes.

Because the payment of income taxes is a necessary and ongoing part of our operations, any measure that excludes income taxes has material limitations.

• It does not include depreciation or amortization expense.

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Therefore, any measure that excludes depreciation or amortization expense has material limitations.

A reconciliation of Adjusted EBITDA to net loss follows:

Three Months Ended Nine Months Ended

2023 March 31,

2022 March 31,

2023 March 31,

A reconciliation of Net loss to Adjusted EBITDA follows:

Three Months Ended

September 30,

2023 September 30,

(In thousands)

Net loss $ (3,167) $ (6,512)

Goodwill impairment — 18,312 12,316 18,312

Restructuring costs — 1,287

Gain on sale of assets (1)

Stock-based compensation (2)

Interest expense 325 372

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

Depreciation and amortization 2,911 3,642

Adjusted EBITDA $ (712) $ 844

The following arrangements are considered firm:

• fixed-price awards;

• minimum customer commitments on cost plus arrangements;

• certain time and material arrangements in which the estimated value is firm or can be estimated with a reasonable amount of certainty in both timing and amounts.

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

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

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

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

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

(In thousands)

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

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

Other adjustment (1)

— (6,691) (23,272) (29,963)

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

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

Book-to-bill ratio (2)

0.7 2.2 1.3 1.7

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

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

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

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

(In thousands)

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

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

Other adjustment (1)

— (6,691) (23,272) (29,963)

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

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

Book-to-bill ratio (2)

1.3 1.4 1.6 1.5

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bidding activity on LNG projects has been strong.

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

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

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

The level of awards presented above only represents an interim period and may not be indicative of full year awards.

(1) Represents gain on the sale of our Burlington, ON office.

See Item 1, Note 3 - Property, Plant and Equipment, Burlington Office Disposal, for more information.

(2) Represents only the equity-settled portion of our stock-based compensation expense.

Seasonality and Other Factors

Our operating results can exhibit seasonal fluctuations, especially in our Process and Industrial Facilities segment, for a variety of reasons.

Turnarounds and planned outages at customer facilities are typically scheduled in the spring and the fall when the demand for energy is lower.

Our operating results can exhibit seasonal fluctuations, especially in our Process and Industrial Facilities and Utility and Power Infrastructure segments, for a variety of reasons.

Turnarounds and planned outages at customer facilities are typically scheduled in the spring or fall, when the demand for energy is lower.

Within the Utility and Power Infrastructure segment, transmission and distribution work is generally scheduled by the public utilities when the demand for electricity is at its lowest.

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

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

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

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

2023 December 31,

Our primary sources of liquidity at September 30, 2023 were unrestricted cash and cash equivalents on hand, capacity under our ABL Facility, and cash generated from operations.

Unrestricted cash and cash equivalents at September 30, 2023 totaled $27.4 million and availability under the ABL Facility totaled $52.9 million, resulting in total liquidity of $80.3 million.

The following table provides cash and cash equivalents, restricted cash and total cash in the Condensed Consolidated Balance Sheets (in thousands):

September 30,

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Total cash, cash equivalents and restricted cash $ 52,359 $ 79,812

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

Liquidity at December 31, 2022 $ 80,469

Cash provided by operating activities 19,988

Capital expenditures (3,369)

Decrease in availability under ABL Facility (4,774)

Cash provided by financing activities 64

Liquidity at March 31, 2023 $ 92,435

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

The following table provides a summary of changes in our liquidity for the three months ended September 30, 2023 (in thousands):

Liquidity at June 30, 2023 $ 92,554

Cash provided by operating activities 2,403

Cash used by operating activities (28,875)

Proceeds from asset sales 2,618

Capital expenditures (478)

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Cash used by financing activities (411)

Liquidity at March 31, 2023 $ 92,435

Effect of exchange rate changes on cash (307)

Liquidity at September 30, 2023 $ 80,252

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

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Other factors that may impact both short and long-term liquidity include:

• contract disputes, which can be significant;

• contract disputes;

• collection issues, including those caused by weak commodity prices, economic slowdowns or other factors which can lead to credit deterioration of our customers;

• issuances of letters of credit;

• strategic investments in new operations or divestitures of existing operations;

Other factors that may impact long-term liquidity include:

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

• changes to our capital structure;

• acquisitions and disposals of businesses or assets;

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The ABL Facility matures, and any outstanding amounts become due and payable, on September 9, 2026.

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

At September 30, 2023, our borrowing base was $72.9 million, we had $10.0 million of outstanding borrowings, and we had $10.0 million in letters of credit outstanding, which resulted in availability of $52.9 million under the ABL Facility.

We repaid all outstanding borrowings in November 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.

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The fee for undrawn amounts is 0.25% per annum and is due quarterly.

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

The interest rate in effect for borrowings outstanding at September 30, 2023, including applicable margin, was approximately 7.68%.

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 March 31, 2023.

Cash Flow for the Nine Months Ended March 31, 2023

Cash Flows Provided by Operating Activities

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

We were in compliance with all covenants of the ABL Facility as of September 30, 2023.

Cash Flow for the Three Months Ended September 30, 2023

Cash Flows used by Operating Activities

Cash used by operating activities for the three months ended September 30, 2023 totaled $28.9 million.

The various components are as follows:

Net Cash Provided by Operating Activities

Net Cash Used by Operating Activities

(In thousands)

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Depreciation and amortization 2,911

Goodwill impairment 12,316

Stock-based compensation 1,755

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Cash effect of changes in operating assets and liabilities (28,080)

Net cash provided by operating activities $ 2,403

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

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

Net cash used by operating activities $ (28,875)

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

• Accounts receivable, excluding credit losses recognized during the period, increased by $6.5 million during the three months ended September 30, 2023, which decreased cash flows from operating activities.

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

• Costs and estimated earnings in excess of billings on uncompleted contracts ("CIE") increased $8.6 million, which decreased cash flows from operating activities.

Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") increased $49.6 million, which increased cash flows from operating activities.

• Costs and estimated earnings in excess of billings on uncompleted contracts ("CIE") decreased $2.5 million, which increased cash flows from operating activities.

Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") decreased $12.3 million, which decreased cash flows from operating activities.

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

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

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

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

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

• Inventories, income taxes receivable, prepaid expenses, other current assets, operating right-of-use lease assets and other assets, non-current, increased $8.2 million during the three months ended September 30, 2023, which decreased cash flows from operating activities.

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

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and other timing differences.

• Accounts payable, accrued wages and benefits, accrued insurance, operating lease liabilities, other accrued expenses, and other liabilities, non-current decreased by $16.8 million during the nine months ended March 31, 2023, which decreased cash flows from operating activities.

The increase was primarily due to the payment of annual insurance premiums as well as inventory purchases associated with projects in our growing backlog.

• Accounts payable, accrued wages and benefits, accrued insurance, operating lease liabilities, other accrued expenses, and other liabilities, non-current decreased by $3.6 million during the three months ended September 30, 2023, which decreased cash flows from operating activities.

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

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and other timing differences.

Cash Flows Used by Investing Activities

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

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

Cash Flows Provided by Investing Activities

Investing activities provided $2.1 million of cash in the three months ended September 30, 2023 primarily due to proceeds from asset sales, partially offset by capital expenditures.

During the first quarter of fiscal 2024, we sold a previously utilized facility in Burlington, Ontario for $2.7 million in net proceeds, which resulted in a gain of $2.5 million.

We closed this previously utilized facility during the second quarter of fiscal 2023 because it was no longer strategic to the future of the business.

Capital expenditures of $0.5 million during the first quarter of fiscal 2024 primarily consisted of transportation equipment.

Cash Flows Used by Financing Activities

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

Financing activities used $0.4 million of cash in the three months ended September 30, 2023 primarily due to $0.5 million paid to repurchase our stock for payment of withholding taxes due on equity-based compensation.

Dividend Policy

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

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

As of March 31, 2023, there were 1,349,037 shares available for repurchase under the Stock Buyback Program.

We made no repurchases under the program in the three months ended September 30, 2023 and have no current plans to repurchase stock.

As of September 30, 2023, there were 1,349,037 shares available for repurchase under the Stock Buyback Program.

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

Treasury Shares

We had 850,661 treasury shares as of March 31, 2023 and intend to utilize these treasury shares in connection with equity awards under the our stock incentive plans and for sales to the Employee Stock Purchase Plan.

We had 678,379 treasury shares as of September 30, 2023 and intend to utilize these treasury shares in connection with equity awards under the our stock incentive plans and for sales to the Employee Stock Purchase Plan.

CRITICAL ACCOUNTING POLICIES

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For more information on our critical accounting policies, see Part II, Item 7 of our fiscal 2023 Annual Report on Form 10-K.

The following section provides certain information with respect to our critical accounting policies as of the close of our most recent quarterly period.

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 materials-based contracts and are billed monthly or, for projects of short duration, at the conclusion of the project.

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

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.

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.

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.

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.

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.

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 7 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.

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 7 - Commitments and Contingencies of the Notes to Financial Statements.

Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $14.7 million at March 31, 2023 and $8.9 million at June 30, 2022.

The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings.

Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net identifiable tangible and intangible assets acquired at the acquisition date.

In accordance with current accounting guidance, goodwill is not amortized, but 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 as of May 31st of each fiscal year, or in between annual tests if impairment indicators are present, 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 compared to our market capitalization.

Financial Statements, Note 4 - Goodwill and Other Intangible Assets, Goodwill, for disclosure information about our goodwill balances the results of impairment tests.

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

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.

We believe that realization of deferred tax assets in excess of the valuation allowance is more likely than not.

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.

Loss Contingencies

Various legal actions, claims, and other contingencies arise in the normal course of our business.

Contingencies are recorded in the condensed consolidated financial statements, or are otherwise disclosed, in accordance with Accounting Standard Codification ("ASC") Topic 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.

Quantitative and Qualitative Disclosures about Market Risk

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Item 2. Management’s Discussion and Analysis