MATRIX SERVICE CO 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Form 10-Q which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements. The words “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts” and similar expressions are also intended to identify forward-looking statements. These forward-looking statements include, among others, such things as: • amounts and nature of future project awards, revenue and margins from each of our segments; • our ability to generate sufficient cash from operations, access our credit facility, or raise cash in order to meet our short and long-term capital requirements; • 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 natural gas, power, oil, petrochemical, agricultural and mining industries in particular; • the impact of inflation on our operating expenses and our business operations; • the likely impact of new or existing regulations or market forces on the demand for our services; • the impact to our business from disruptions to supply chains, inflation and availability of materials and labor; • our expectations with respect to the likelihood of a future impairment; • our expectations regarding pending litigation; and • expansion and other trends of the industries we serve. These statements are based on certain assumptions and analyses we made in light of our experience and our historical trends, current conditions and expected future developments as well as other factors we believe are appropriate. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including: • 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 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; • the under- or over-utilization of our work force; • delays in the commencement or progression of major projects, whether due to permitting issues or other factors; • reduced creditworthiness of our customer base and the higher risk of non-payment of receivables; • the inherently uncertain outcome of current and future litigation; • the adequacy of our reserves for claims and contingencies; and • changes in laws or regulations, including the imposition, cancellation or delay of tariffs on imported goods. 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 -15- Table of Contents update publicly, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise. -16- Table of Contents RESULTS OF OPERATIONS Overview We report our results of operations through three reportable segments: Storage and Terminal Solutions, Utility and Power Infrastructure, and Process and Industrial Facilities. • 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. 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 : 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. We also perform engineering, procurement, fabrication, and construction for refinery upgrades and retrofits for renewable fuels, including hydrogen processing, production, loading and distribution facilities. 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 During the third quarter of fiscal 2024, our markets and project opportunities remained strong, and during the quarter we added $186.8 million of awards to backlog, producing a book-to-bill ratio of 1.1. On a trailing twelve month basis, we generated a book-to-bill ratio of 1.9, an increase from a ratio of 1.3 in the prior twelve month period, and produced the highest backlog in company history of $1.45 billion. Many of these project awards are large construction projects that will generate revenues over a multi-year period with expected gross margins at our pre-pandemic historical gross margin range. The time to convert these awards to revenue is dependent on a variety of factors, many outside of our control. Several of those factors resulted in operating results that were below our expectations for the current quarter, and will result in a slower than expected recovery during our fourth fiscal quarter. Despite these challenges, the company generated positive cash flows from operations during the quarter, which improved our overall cash balance by $22.5 million, reflecting our ability to efficiently manage capital and maintain financial stability. Combining expected forthcoming revenues from effective project execution and conversion of our historic backlog, the company is on a trajectory of upward growth and profitability. -17- Table of Contents Backlog 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; and • 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 March 31, 2024: Storage and Terminal Solutions Utility and Power Infrastructure Process and Industrial Facilities Total (In thousands) Backlog as of December 31, 2023 $ 658,049 $ 451,442 $ 337,332 $ 1,446,823 Project awards 134,592 27,093 25,113 186,798 Other adjustment (2) — — (17,370) (17,370) Revenue recognized (54,304) (46,120) (65,589) (166,013) Backlog as of March 31, 2024 $ 738,337 $ 432,415 $ 279,486 $ 1,450,238 Book-to-bill ratio (1) 2.5 0.6 0.4 1.1 (1) Calculated by dividing project awards by revenue recognized during the period (2) Backlog was reduced by $17.4 million to account for a reduction of work available to us under an existing refinery maintenance program. The following table provides a summary of changes in our backlog for the nine months ended March 31, 2024: 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 674,486 91,556 148,949 914,991 Other adjustment (2) — — (17,370) (17,370) Revenue recognized (206,808) (118,659) (212,014) (537,481) Backlog as of March 31, 2024 $ 738,337 $ 432,415 $ 279,486 $ 1,450,238 Book-to-bill ratio (1) 3.3 0.8 0.7 1.7 (1) Calculated by dividing project awards by revenue recognized during the period (2) Backlog was reduced by $17.4 million to account for a reduction of work available to us under an existing refinery maintenance program. In the Storage and Terminal Solutions segment, we booked $134.6 million of project awards during the third quarter of fiscal 2024. Included in project awards was the award of an ethane storage tank project. During the nine months ended March 31, 2024, we booked $674.5 million of project awards, which included a significant ethane storage project. This segment includes significant opportunities for storage infrastructure projects related to LNG, NGLs, natural gas, ammonia, hydrogen, and other forms of renewable energy. We believe LNG and hydrogen projects will be key growth drivers for this segment. -18- Table of Contents In the Utility and Power Infrastructure segment, we booked $27.1 million of project awards during the third quarter of fiscal 2024. During the nine months ended March 31, 2024, we booked $91.6 million of project awards. 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, we booked $25.1 million of project awards during the third quarter of fiscal 2024. During the nine months ended March 31, 2024, we booked $148.9 million of project awards. Project awards during the quarter were driven by contract growth on a refinery retrofit project at a biodiesel facility. Additionally, during the quarter, backlog in this segment was reduced by $17.4 million to account for a reduction of work available under an existing refinery maintenance program. We continue to see increasing opportunities in mining and minerals, chemicals, hydrogen and renewables. In addition, we are pursuing further opportunities for hydrogen and carbon capture projects across a number of different markets. 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. There is an inherent lag between the time a project is awarded and when it begins to have a material impact on revenue. In some cases, this lag can be between three and six months or longer, depending on finalization of scopes, contracts, permits, and facility process requirements. Additionally, awards for larger construction projects may be recognized as revenue over a multi-year period as the projects may take a few years to complete. -19- Table of Contents Results of Operations Three months ended March 31, 2024 Compared to the Three months ended March 31, 2023 The information below is an analysis of our consolidated results for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. See Results of Operations by Business Segment below for additional information describing the performance of each of our reportable segments. Consolidated Results Three Months Ended March 31, 2024 v 2023 2024 2023 $ % Revenue $ 166,013 $ 186,895 $ (20,882) (11) % Cost of revenue 160,435 182,476 (22,041) (12) % Gross profit 5,578 4,419 1,159 26 % Selling, general and administrative expenses 19,948 16,862 3,086 18 % Restructuring costs — 316 (316) (100) % Operating loss (14,370) (12,759) (1,611) 13 % Other income (expense): Interest expense (143) (268) 125 (47) % Interest income 165 94 71 76 % Other (235) (116) (119) 103 % Loss before income tax expense (14,583) (13,049) (1,534) 12 % Provision for federal, state and foreign income taxes (2) (363) 361 (99) % Net loss $ (14,581) $ (12,686) $ (1,895) 15 % Revenue - The decrease in overall revenue of $20.9 million, or 11%, was primarily attributable to reduced revenue volumes in our Process and Industrial Facilities segment driven by lower volumes of midstream gas processing work, combined with the delay in the ramp of previously awarded construction projects. Revenue is expected to increase on a consolidated basis in the near term as work on projects currently in backlog begins to increase. Gross profit - Gross profit in the third quarter of fiscal 2024 increased $1.2 million, or 26%, compared to the third quarter of fiscal 2023. Gross margin increased to 3.4% for the third quarter of fiscal 2024 compared to 2.4% for the third quarter of fiscal 2023. While project execution remained strong, gross margins were negatively impacted by the under-recovery of construction overhead costs due to low revenue. Additionally, gross margin was impacted by reduced labor demand for turnaround and maintenance services in the final year of a three-year refinery maintenance contract which is currently up for renewal. The accounting for this change resulted in a cumulative catch-up adjustment over the life of the contract, which impacted gross margins during the period. The gross margins in the third quarter of fiscal 2023 were also negatively impacted by the under-recovery of construction overhead costs, as well as unfavorable changes in the estimated recovery of change orders, increased forecasted costs to complete certain midstream gas processing projects, and continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period. Selling, general and administrative expenses - The increase in SG&A expenses of $3.1 million, or 18%, is primarily due to an increase in our cash-settled stock-based compensation of $1.9 million, which increased due to a substantially higher stock price year over year, and increased project pursuit costs as we continue to actively pursue additional project opportunities. Provision for income taxes - Our effective tax rates for the three months ended March 31, 2024 and March 31, 2023 were zero and 2.8%, respectively. The effective tax rates during both periods were impacted by valuation allowances of $4.4 million million and $3.6 million, respectively, placed on deferred tax assets generated during the quarters. We placed a valuation allowance on our deferred tax assets 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. -20- Table of Contents Results of Operations by Business Segment Three Months Ended March 31, 2024 v 2023 Dollars in thousands 2024 2023 $ % Revenue: Storage and Terminal Solutions $ 54,304 $ 52,165 $ 2,139 4 % Utility and Power Infrastructure 46,120 35,024 11,096 32 % Process and Industrial Facilities 65,589 99,706 (34,117) (34) % Total revenue (1) $ 166,013 $ 186,895 $ (20,882) (11) % (1) Total revenues are net of inter-segment revenues which are primarily Storage and Terminal Solutions and were $1.3 million and $1.7 million for the three months ended March 31, 2024 and 2023, respectively. Gross profit (loss) Storage and Terminal Solutions $ 2,313 $ (810) $ 3,123 (386) % Utility and Power Infrastructure 1,409 2,790 (1,381) (49) % Process and Industrial Facilities 1,767 3,160 (1,393) (44) % Corporate 89 (721) 810 (112) % Total gross profit $ 5,578 $ 4,419 $ 1,159 26 % Operating Income (loss) Storage and Terminal Solutions $ (3,082) $ (6,624) $ 3,542 (53) % Utility and Power Infrastructure (1,324) 921 (2,245) (244) % Process and Industrial Facilities (823) (502) (321) 64 % Corporate (9,141) (6,554) (2,587) 39 % Total Operating Loss $ (14,370) $ (12,759) $ (1,611) 13 % Storage and Terminal Solutions Storage and Terminal Solutions revenues increased by $2.1 million, or 4%, in the three months ended March 31, 2024 compared to the same period last year. The Company expects higher revenue volume in the near term as it transitions recent large specialty storage project awards through contracting, project planning and mobilization. -21- Table of Contents Storage and Terminal Solutions gross profit increased by $3.1 million in the three months ended March 31, 2024 compared to the same period last year. The segment gross margin was 4.3% for the three months ended March 31, 2024 compared to segment gross loss of 1.6% in the same period last year. Project execution was strong for the segment in the current quarter; however, both periods were impacted by the under-recovery of construction overhead costs. Utility and Power Infrastructure Utility and Power Infrastructure revenues increased by $11.1 million, or 32%, in the three months ended March 31, 2024 compared to the same period last year. The increase is primarily attributable to higher volumes of work for LNG peak shaving projects, partially offset by lower volumes of work for power delivery and power generation. Utility and Power Infrastructure gross profit decreased by $1.4 million, or 49%, in the three months ended March 31, 2024 compared to the same period last year. The segment gross margin was 3.1% for the three months ended March 31, 2024 compared to 8.0% in the same period last year. The segment gross margin in the current period was impacted by the under-recovery of construction overhead costs as we have shifted resources to this segment to support large construction projects which are in their early stages. Process and Industrial Facilities Process and Industrial Facilities revenues decreased by $34.1 million, or 34%, in the three months ended March 31, 2024 compared to the same period last year. The decrease is primarily attributable to lower volumes of work for a mining and minerals facility, midstream gas processing projects, and refinery maintenance. These decreases were partially offset by higher volumes for a renewable energy facility. Process and Industrial Facilities gross profit decreased by $1.4 million, or 44%, in the three months ended March 31, 2024 compared to the same period last year. The segment gross margin was 2.7% for the three months ended March 31, 2024 compared to 3.2% in the same period last year. The segment gross margin in the third quarter of fiscal 2024 was impacted by reduced labor demand for turnaround and maintenance services in the final year of a three-year refinery maintenance contract which is currently up for renewal. The accounting for this change resulted in a cumulative catch-up adjustment over the life of the contract, which impacted gross margins during the period. 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. The segment gross margin was also impacted by under-recovery of construction overhead costs. Corporate Unallocated corporate expenses were $9.1 million during the three months ended March 31, 2024 compared to $6.6 million in the same period last year. The increase of $2.5 million was primarily due to higher cash-settled stock-based compensation due to an increase in the price of our stock Nine Months Ended March 31, 2024 Compared to the Nine Months Ended March 31, 2023 The information below is an analysis of our consolidated results for the nine months ended March 31, 2024, compared to the nine months ended March 31, 2023. See Results of Operations by Business Segment below for additional information describing the performance of each of our reportable segments. -22- Table of Contents Consolidated Results Nine Months Ended March 31, 2024 v 2023 Dollars in thousands 2024 2023 $ % Revenue $ 538,714 $ 589,166 $ (50,452) (9) % Cost of revenue 510,688 573,041 (62,353) (11) % Gross profit 28,026 16,125 11,901 74 % Selling, general and administrative expenses 52,792 51,218 1,574 3 % Goodwill impairment — 12,316 (12,316) (100) % Restructuring costs — 2,881 (2,881) (100) % Operating loss (24,766) (50,290) 25,524 (51) % Other income (expense): Interest expense (787) (1,556) 769 (49) % Interest income 477 164 313 191 % Other (Note 3) 4,481 (706) 5,187 (735) % Loss before income tax expense (20,595) (52,388) 31,793 (61) % Provision for federal, state and foreign income taxes 4 (363) 367 (101) % Net loss $ (20,599) $ (52,025) $ 31,426 (60) % Consolidated Revenue - The decrease in overall revenue of $50.5 million, or 9%, was primarily attributable to revenue decreases across our Process and Industrial Facilities and Utility Power and Infrastructure segments of $55.1 million and $11.8 million, respectively. These decreases were partially offset by an increase in revenue in our Storage and Terminal Solutions segment of $15.2 million. Gross profit - Gross profit increased $11.9 million, or 74%. Gross margin increased to 5.2% in the nine months ended March 31, 2024 compared to a gross margin of 2.7% in the same period last year. Gross margins in the first nine months of fiscal 2024 were impacted by under-recovery of overhead costs due to low revenue volumes. Gross margins in the first nine months of fiscal 2023 were also negatively impacted by the under-recovery of construction overhead costs, as well as unfavorable changes in the estimated recovery of change orders and increased forecasted costs to complete certain midstream gas processing projects, and continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period. Selling, general and administrative expenses - The increase in SG&A expenses of $1.6 million, or 3%, is primarily due to an increase in cash-settled stock-based compensation of $4.4 million, which increased due to a higher stock price year over year, partially offset by lower pursuit costs and lower depreciation and amortization expenses. Goodwill Impairment - The Company did not record any goodwill impairment during the nine months ended March 31, 2024. During the nine months ended March 31, 2023 we recorded a goodwill impairment of $12.3 million. See Item 1. Financial Statements, Note 4 - Goodwill, for more information about the impairment. Restructuring cost s - The Company did not incur any restructuring costs during the nine months ended March 31, 2024. During the nine months ended March 31, 2023, we incurred $2.9 million of restructuring costs, which included severance and other personnel-related costs in connection with our restructuring plan. Additionally, we closed an underperforming office and ceased its associated operations, which resulted in $0.7 million of restructuring costs. See Item 1. Financial Statements, Note 10 - Restructuring Costs, for more information about our business improvement plan. Our restructuring efforts were substantially complete as of June 30, 2023. Interest expense - The decrease in interest expense of $0.8 million, or 49%, is primarily due to lower average outstanding borrowings. -23- Table of Contents Provision for income taxes - Our effective tax rates for the nine months ended March 31, 2024 and March 31, 2023 were zero and 0.7%, respectively The effective tax rates during both periods were impacted by valuation allowances of $5.8 million and $13.3 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. 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. Other income - The increase in other income of $5.2 million, is primarily due to gains on sales of assets recorded during the period. During the second quarter of fiscal 2024, we recognized a gain of $2.0 million from the sale of a facility in Catoosa, Oklahoma for $2.7 million in net proceeds. The facility was previously utilized for our industrial cleaning business, which was sold during the fourth quarter of fiscal 2023. Additionally, in the first quarter of fiscal 2024, we recognized 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. Results of Operations by Business Segment Nine Months Ended March 31, 2024 v 2023 2024 2023 $ % Revenue Storage and Terminal Solutions $ 206,808 $ 191,614 $ 15,194 8 % Utility and Power Infrastructure 118,659 130,429 (11,770) (9) % Process and Industrial Facilities 212,014 267,123 (55,109) (21) % Corporate 1,233 — 1,233 — % Total revenue (1) $ 538,714 $ 589,166 $ (50,452) (9) % (1) Total revenues are net of inter-segment revenues which are primarily Storage and Terminal Solutions and were $3.1 million and $2.8 million for the nine months ended March 31, 2024 and 2023, respectively. Gross profit (loss) Storage and Terminal Solutions $ 9,104 $ 8,403 $ 701 8 % Utility and Power Infrastructure 6,520 6,929 (409) (6) % Process and Industrial Facilities 13,516 2,359 11,157 473 % Corporate (1,114) (1,566) 452 (29) % Total gross profit $ 28,026 $ 16,125 $ 11,901 74 % Operating Income (loss) Storage and Terminal Solutions $ (5,258) $ (7,923) $ 2,665 (34) % Utility and Power Infrastructure 261 1,498 (1,237) (83) % Process and Industrial Facilities 5,632 (22,068) 27,700 (126) % Corporate (25,401) (21,797) (3,604) 17 % Total Operating Loss $ (24,766) $ (50,290) $ 25,524 (51) % -24- Table of Contents Storage and Terminal Solutions Storage and Terminal Solutions revenues increased by $15.2 million, or 8%, in the nine months ended March 31, 2024 compared to the same period last year. The increase is primarily attributable to increases in work performed for specialty vessel projects awarded in previous fiscal years. Storage and Terminal Solutions gross profit increased slightly by $0.7 million, or 8%, in the nine months ended March 31, 2024 compared to the same period last year. The segment gross margin was 4.4% for the nine months ended March 31, 2024 compared to 4.4% in the same period last year. Project execution was strong for the segment; however, both periods were impacted by the under-recovery of construction overhead costs. Utility and Power Infrastructure Utility and Power Infrastructure revenues decreased by $11.8 million, or 9%, in the nine months ended March 31, 2024 compared to the same period last year. The decrease is primarily attributable to lower volumes of power delivery and power generation work, partially offset by revenue increases from peak shaving projects. Utility and Power Infrastructure gross profit decreased by $0.4 million, or 6%, in the nine months ended March 31, 2024 compared to the same period last year. The segment gross margin was 5.5% for the nine months ended March 31, 2024 compared to 5.3% in the same period last year. During the nine months ended March 31, 2024, project execution was strong for the segment; however, margin was impacted by the under-recovery of construction overhead costs as we have shifted resources to this segment to support large construction projects which are in their early stages. 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. Process and Industrial Facilities Process and Industrial Facilities revenues decreased by $55.1 million, or 21%, in the nine months ended March 31, 2024 compared to the same period last year. The decrease is primarily attributable to lower revenue volumes for midstream gas processing projects, mining and minerals, industrial facilities and refinery turnarounds. These decreases were offset by revenue increases for a renewable energy facility in addition to increases in revenue associated with thermal vacuum chambers. Process and Industrial Facilities gross profit increased by $11.2 million in the nine months ended March 31, 2024 compared to the same period last year. The segment gross margin was 6.4% for the nine months ended March 31, 2024 compared to 0.9% for the same period last year. The segment gross margin for the first nine months of fiscal 2024 was positively impacted by strong project execution on thermal vacuum chamber projects, partially offset by unfavorable changes in margin opportunity for an existing refinery maintenance program due to lower volumes of work, as well as under-recovery of construction overhead costs. 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. Corporate Unallocated corporate revenue and expenses net to $25.4 million during the nine months ended March 31, 2024 compared to $21.8 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, partially offset by the recognition of $1.2 million of revenue due to the favorable resolution of that dispute, see Note 7 - Commitments and Contingencies, Litigation, for more information. -25- Table of Contents Non-GAAP Financial Measures Adjusted Net Loss 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 impairments to goodwill. While impairments to intangible assets are non-cash expenses in the period recognized, cash or other consideration was still transferred in exchange for the intangible assets in the period of the acquisition. Any measure that excludes impairments to intangible assets has material limitations since these expenses represent the loss of an asset that was acquired in exchange for cash or other assets. • 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 these sales occurred outside the normal course of business, any measure that excludes this gain has inherent limitations since the sales resulted in material inflows 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, 2024 March 31, 2023 March 31, 2024 March 31, 2023 Net loss, as reported $ (14,581) $ (12,686) $ (20,599) $ (52,025) Goodwill impairment — — — 12,316 Restructuring costs — 316 — 2,881 Gain on sale of assets (2) — — (4,542) — Tax impact of adjustments (3) — — — — Adjusted net loss $ (14,581) $ (12,370) $ (25,141) $ (36,828) Loss per share, as reported $ (0.53) $ (0.47) $ (0.75) $ (1.93) Adjusted loss per share $ (0.53) $ (0.46) $ (0.92) $ (1.37) (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 in the first quarter of FY24 and the gain on the sale of our Catoosa, OK facility in the second quarter of FY24. See Item 1, Note 3 - Property, Plant and Equipment, Building Disposals, for more information. (3) Represents the tax impact of the adjustments to Net loss, calculated using the applicable effective tax rate of the adjustment. (4) Represents the tax impact of the adjustments to Net loss, calculated using the applicable effective tax rate of the adjustment, including the impacts related to our valuation allowance on deferred tax assets. -26- Table of Contents Adjusted EBITDA 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 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. In addition, this measure is not a measure of our ability to fund our cash needs. As Adjusted EBITDA 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 EBITDA, has certain material limitations as follows: • It does not include impairments to goodwill. While impairments to intangible assets are non-cash expenses in the period recognized, cash or other consideration was still transferred in exchange for the intangible assets in the period of the acquisition. Any measure that excludes impairments to intangible assets has material limitations since these expenses represent the loss of an asset that was acquired in exchange for cash or other assets. • 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. • 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 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. • It does not include interest expense. Because we have borrowed money to finance our operations and acquisitions, pay commitment fees to maintain our credit facility, and incur fees to issue letters of credit under the credit facility, interest expense is a necessary and ongoing part of our costs and has assisted us in generating revenue. Therefore, any measure that excludes interest expense has material limitations. • It does not include depreciation or amortization expense. Because we use capital and intangible assets to generate revenue, depreciation and amortization expense is a necessary element of our cost structure. Therefore, any measure that excludes depreciation or amortization expense has material limitations. -27- Table of Contents A reconciliation of Net loss to Adjusted EBITDA follows: Three Months Ended Nine Months Ended March 31, 2024 March 31, 2023 March 31, 2024 March 31, 2023 (In thousands) Net loss $ (14,581) $ (12,686) $ (20,599) $ (52,025) Goodwill impairment — — — 12,316 Restructuring costs — 316 — 2,881 Gain on sale of assets (1) — — (4,542) — Stock-based compensation (2) 1,980 1,407 5,765 5,154 Interest expense 143 268 787 1,556 Provision (benefit) for federal, state and foreign income taxes (2) (363) 4 (363) Depreciation and amortization 2,645 3,322 8,337 10,499 Adjusted EBITDA $ (9,815) $ (7,736) $ (10,248) $ (19,982) (1) Represents gain on the sale of our Burlington, ON office in the first quarter of FY24 and the gain on the sale of our Catoosa, OK facility in the second quarter of FY24. See Item 1, Note 3 - Property, Plant and Equipment, Building Disposals, 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 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. Therefore, revenue volume in the summer months is typically lower than in other periods throughout the year. Our business can also be affected, both positively and negatively, by seasonal factors such as energy demand or weather conditions including hurricanes, snowstorms, wildfires and abnormally low or high temperatures. Some of these seasonal factors may cause some of our offices and projects to close or reduce activities temporarily. In addition to the above noted factors, the general timing of project starts and completions could exhibit significant fluctuations. Accordingly, results for any interim period may not necessarily be indicative of operating results for the full year. Other factors impacting operating results in all segments come from decreased work volume during holidays, work site permitting delays or customers accelerating or postponing work. The differing types, sizes, and durations of our contracts, combined with their geographic diversity and stages of completion, often results in fluctuations in our operating results. Our overhead cost structure is generally fixed. Significant fluctuations in revenue usually leads to over or under-recovery of fixed overhead costs, which can have a material impact on our gross margin and profitability. LIQUIDITY AND CAPITAL RESOURCES Overview 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, 2024 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, 2024 totaled $69.7 million and availability under the ABL Facility totaled $65.3 million, resulting in total liquidity of $135.0 million. During the third quarter of fiscal 2024, cash and cash equivalents increased $22.5 million and total liquidity increased $28.7 million primarily as a result of cash provided by operating activities. -28- Table of Contents The following table provides cash and cash equivalents, restricted cash and total cash in the Condensed Consolidated Balance Sheets, as well as trends in liquidity (in thousands): March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 Cash and cash equivalents $ 69,658 $ 47,160 $ 27,359 $ 54,812 Restricted cash 25,000 25,000 25,000 25,000 Total cash, cash equivalents and restricted cash $ 94,658 $ 72,160 $ 52,359 $ 79,812 Total Liquidity $ 135,013 $ 106,270 $ 80,252 $ 92,554 The following table provides a summary of changes in our liquidity for the three months ended March 31, 2024 (in thousands): Liquidity at December 31, 2023 $ 106,270 Cash provided by operating activities 24,838 Proceeds from asset sales 2,729 Capital expenditures (4,830) Increase in availability under ABL Facility 6,245 Cash used by financing activities 41 Effect of exchange rate changes on cash (280) Liquidity at March 31, 2024 $ 135,013 The following table provides a summary of changes in our liquidity for the nine months ended March 31, 2024 (in thousands): Liquidity at June 30, 2023 $ 92,554 Cash provided by operating activities 25,567 Proceeds from asset sales 5,535 Capital expenditures (5,689) Increase in availability under ABL Facility 27,613 Cash used by financing activities (10,324) Effect of exchange rate changes on cash (243) Liquidity at March 31, 2024 $ 135,013 Factors that routinely impact our short-term liquidity and may impact our long-term liquidity include, but are not limited to: • changes in costs and estimated earnings in excess of billings on uncompleted contracts and billings on uncompleted contracts in excess of costs due to contract terms that determine the timing of billings to customers and the collection of those billings: ◦ some cost-plus and fixed-price customer contracts are billed based on milestones which may require us to incur significant expenditures prior to collections from our customers; ◦ some fixed-price customer contracts allow for significant upfront billings at the beginning of a project, which temporarily increases liquidity near term; ◦ time and material contracts are normally billed in arrears. Therefore, we are routinely required to carry these costs until they can be billed and collected; and ◦ some of our large construction projects may require security in the form of letters of credit or significant retentions. Retentions are normally held until certain contractual milestones are achieved; • other changes in working capital, including the timing of tax payments and refunds; and -29- Table of Contents • capital expenditures. Other factors that may impact both short and long-term liquidity include: • 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; • strategic investments in new operations or divestitures of existing operations; • borrowing constraints under our ABL Facility and maintaining compliance with all covenants contained in the ABL Facility; • acquisitions and disposals of businesses or assets; and • purchases of shares under our stock buyback program. ABL Credit Facility 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 May 3, 2024 (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. The ABL Facility matures, and any outstanding amounts become due and payable, on September 9, 2026. 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 borrowing base is recalculated on a monthly basis and at March 31, 2024, our borrowing base was $72.3 million, we had $7.0 million in letters of credit outstanding, which resulted in availability of $65.3 million under the ABL Facility. During the second quarter ended December 31, 2023, the Company repaid all outstanding borrowings under the ABL Facility. Borrowings under the ABL Facility bear interest through maturity at a variable rate based upon, at our option, an annual rate of either a base rate (“Base Rate”), an Adjusted Term Secured Overnight Financing Rate ("Adjusted Term SOFR"), or at the Canadian Prime Rate, plus an applicable margin. The Adjusted Term SOFR is defined as (i) the SOFR plus (ii) 11.448 basis points for a one-month tenor and 26.161 basis points for a three-month tenor; provided that the Adjusted Term SOFR cannot be below zero. The Base Rate is defined as a fluctuating interest rate equal to the greater of: (i) rate of interest announced by Bank of Montreal from time to time as its prime rate; (ii) the U.S. federal funds rate plus 0.50%; (iii) Adjusted Term SOFR for one month period plus 1.00%; or (iv) 1.00%. Depending on the amount of average availability, the applicable margin is between 1.00% to 1.50% for Base Rate and Canadian Prime Rate borrowings, which includes either U.S. or Canadian prime rate, and between 2.00% and 2.50% for Adjusted Term SOFR borrowings. Interest is payable either (i) monthly for Base Rate or Canadian Prime Rate borrowings or (ii) the last day of the interest period for Adjusted Term SOFR borrowings, as set forth in the ABL Facility. The fee for undrawn amounts is 0.25% per annum and is due quarterly. The 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, 2024. -30- Table of Contents Cash Flow for the Nine Months Ended March 31, 2024 Cash Flows provided by Operating Activities Cash provided by operating activities for the nine months ended March 31, 2024 totaled $25.6 million. The various components are as follows: Net Cash Provided by Operating Activities (In thousands) Net loss $ (20,599) Depreciation and amortization 8,337 Stock-based compensation 5,765 Other non-cash expenses 169 Gain on sale of property, plant and equipment (4,530) Cash effect of changes in operating assets and liabilities 36,425 Net cash provided by operating activities $ 25,567 Cash effect of changes in operating assets and liabilities at March 31, 2024 in comparison to June 30, 2023 include the following: • Accounts receivable, excluding credit losses recognized during the period, increased by $43.1 million during the nine months ended March 31, 2024, 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") decreased $10.3 million, which increased cash flows from operating activities. Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") increased $82.2 million, which increased cash flows from operating activities. CIE and BIE balances can experience significant fluctuations based on business volumes and the timing of when job costs are incurred and the timing of customer billings and payments. • Accounts payable decreased by $20.9 million during the nine months ended March 31, 2024, which decreased cash flows from operating activities. These operating liabilities can fluctuate based on the timing of vendor payments; accruals; lease commencement, lease payments, expiration, or termination of operating leases; business volumes; and other timing differences. • Inventories, income taxes receivable, prepaid expenses, other current assets, operating right-of-use lease assets and other assets, non-current, increased $11.8 million during the nine months ended March 31, 2024, 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; prepayments of certain expenses; lease commencement, passage of time, expiration, or termination of operating leases; business volumes; and other timing differences. Accrued wages and benefits, accrued insurance, operating lease liabilities, other accrued expenses, and other liabilities, non-current increased by $4.1 million during the nine months ended March 31, 2024, which increased cash flows from operating activities. These operating liabilities can fluctuate based on the timing of vendor payments; accruals; lease commencement, lease payments, expiration, or termination of operating leases; business volumes; and other timing differences. -31- Table of Contents Cash Flows Used by Investing Activities Investing activities used $0.2 million of cash in the nine months ended March 31, 2024 primarily due to capital expenditures, offset by proceeds from asset sales. In the first quarter of fiscal 2024, we sold a previously utilized facility in Burlington, Ontario for $2.7 million in net proceeds. In the second quarter of fiscal 2024, we sold a facility in Catoosa, Oklahoma. We closed these previously utilized facilities as they was no longer strategic to the future of the business. In the third quarter of fiscal 2024 we purchased a fabrication facility in Bakersfield, California for $4.1 million to replace a facility currently being leased by the Company. Cash Flows Used by Financing Activities Financing activities used $10.3 million of cash in the nine months ended March 31, 2024 primarily due to $10.0 million in advances and $20.0 million in repayments under our ABL facility. As of March 31, 2024 we have no outstanding borrowings under our ABL facility. Dividend Policy We have never paid cash dividends on our common stock and the terms of our ABL Facility limit dividends to stock dividends only. Any future dividend payments will depend on the terms of our ABL Facility, our financial condition, capital requirements and earnings as well as other relevant factors. 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 the nine months ended March 31, 2024 and have no current plans to repurchase stock. As of March 31, 2024, 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 583,483 treasury shares as of March 31, 2024 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. -32- Table of Contents CRITICAL ACCOUNTING POLICIES There have been no material changes in our critical accounting policies from those reported in our fiscal 2023 Annual Report on Form 10-K filed with the SEC. For more information on our critical accounting policies, see Part II, Item 7 of our fiscal 2023 Annual Report on Form 10-K. Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in market risk faced by us from those reported in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, filed with the Securities and Exchange Commission. For more information on market risk, see Part II, Item 7A in our fiscal 2023 Annual Report on Form 10-K.