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. Although we believe that our expectations regarding future events are based on reasonable assumptions, we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2024. 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, oil, petrochemical, industrial and power industries in particular; • the impact of interest rates and 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, 2024, 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, industrial and power 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. -14- Table of Contents 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, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise. -15- Table of Contents RESULTS OF OPERATIONS Overview We operate our business through three reportable segments: • Storage and Terminal Solutions : primarily consists of engineering, procurement, fabrication, and construction services related to cryogenic and other specialty tanks and terminals for LNG, NGLs, hydrogen, ammonia, propane, butane, liquid nitrogen/liquid oxygen, and liquid petroleum. 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 Our backlog has remained steady at a near-record level of $1.4 billion, and a trailing twelve-month book-to-bill ratio of 1.1x, reflecting a robust pipeline of projects and sustained demand for our services. We have demonstrated strong project execution across our portfolio. Our liquidity has grown to $181 million, and our debt position remains at zero. Although we experienced a decline in revenue year over year, the decline was primarily due to the completion of a large renewable diesel project. As we progress through the year, our business remains poised for significant growth, particularly in the Storage and Terminal Solutions segment, driven by the increasing demand for specialty storage solutions for LNG and NGLs. We expect this growth will result in improved fixed cost absorption, operating leverage, and margin improvement in the coming periods. -16- 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 September 30, 2024: Storage and Terminal Solutions Utility and Power Infrastructure Process and Industrial Facilities Total (In thousands) Backlog as of June 30, 2024 $ 798,255 $ 379,697 $ 251,521 $ 1,429,473 Project awards 81,651 34,365 31,961 147,977 Revenue recognized (78,239) (55,912) (31,428) (165,579) Backlog as of September 30, 2024 $ 801,667 $ 358,150 $ 252,054 $ 1,411,871 Book-to-bill ratio (1) 1.0 x 0.6 x 1.0 x 0.9 x (1) Calculated by dividing project awards by revenue recognized. In the Storage and Terminal Solutions segment, we booked $81.7 million of project awards during the first quarter of fiscal 2025. This segment includes significant opportunities for storage infrastructure projects related to natural gas, LNG, ammonia, NGLs and other forms of renewable energy. We believe LNG and ammonia projects in particular will be key growth drivers for this segment. Bidding activity on LNG and ammonia projects has been strong and we expect that to continue. In the Utility and Power Infrastructure segment, we booked $34.4 million of project awards during the first quarter of fiscal 2025. Our opportunity pipeline for LNG peak shaving projects continues to be promising; however those awards, while significant, can be less frequent. Power delivery opportunities are expected to be driven over the long-term by increasing electrical demand and the related electrical grid requirements. 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 $32.0 million of project awards during the first quarter of fiscal 2025. During the quarter, we were notified of a five-year renewal of a refinery maintenance contract. 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. 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. This lag normally extends up to six months or longer in unique circumstances, 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. -17- Table of Contents Three months ended September 30, 2024 Compared to the Three months ended September 30, 2023 The information below is an analysis of our consolidated results for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. See Results of Operations by Business Segment below for additional information describing the performance of each of our reportable segments. Consolidated Results of Operations Three Months Ended September 30, 2024 v 2023 2024 2023 $ % Revenue $ 165,579 $ 197,659 $ (32,080) (16) % Cost of revenue 157,766 185,800 (28,034) (15) % Gross profit 7,813 11,859 (4,046) (34) % Selling, general and administrative expenses 18,580 17,113 1,467 9 % Operating loss (10,767) (5,254) (5,513) 105 % Other income (expense): Interest expense (89) (325) 236 (73) % Interest income 1,572 150 1,422 948 % Other 61 2,262 (2,201) (97) % Net loss $ (9,223) $ (3,167) $ (6,056) 191 % Revenue - The decrease in overall revenue of $32.1 million, or 16%, was primarily attributable to reduced revenue volumes in our Storage and Terminal Solutions and Process and Industrial Facilities segments, partially offset by an increase in Utility and Power Infrastructure. Gross profit - Gross profit in the first quarter of fiscal 2025 decreased $4.0 million, or 34%, compared to the first quarter of fiscal 2024. Gross margin decreased to 4.7% for the first quarter of fiscal 2025 compared to 6.0% for the first quarter of fiscal 2024. While project execution remained strong, gross margins were negatively impacted by the under-recovery of construction overhead costs on the lower revenues. Selling, general and administrative expenses - The increase in SG&A expenses of $1.5 million, or 9%, is primarily due to an increase in operations headcount required to support the strong market demand and growth in our business. Interest income - The increase in interest income of $1.4 million is primarily due to an increase in our cash balance. In fiscal 2024 we invested excess cash balances in interest-bearing cash accounts. Other income - The decrease in other income of $2.2 million is primarily due to the sale of our Burlington, Ontario facility in the first quarter of fiscal 2024. We received $2.5 million in net proceeds from the sale of the facility. Provision for income taxes - Our effective tax rates for the three months ended September 30, 2024 and September 30, 2023 were zero. The effective tax rates during both periods were impacted by valuation allowances of $1.3 million and $0.2 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. -18- Table of Contents Results of Operations by Business Segment Three Months Ended September 30, 2024 v 2023 Dollars in thousands 2024 2023 $ % Revenue: Storage and Terminal Solutions $ 78,239 $ 90,144 $ (11,905) (13) % Utility and Power Infrastructure 55,912 32,395 23,517 73 % Process and Industrial Facilities 31,428 75,120 (43,692) (58) % Total revenue (1) $ 165,579 $ 197,659 $ (32,080) (16) % (1) Total revenues are net of inter-segment revenues which are primarily Process and Industrial Facilities and Storage and Terminal Solutions and were $0.9 million for the three months ended September 30, 2024. Gross profit (loss) Storage and Terminal Solutions $ 4,697 $ 4,953 $ (256) (5) % Utility and Power Infrastructure 1,307 3,697 (2,390) (65) % Process and Industrial Facilities 1,997 5,078 (3,081) (61) % Corporate (188) (1,869) 1,681 (90) % Total gross profit $ 7,813 $ 11,859 $ (4,046) (34) % Operating Income (loss) Storage and Terminal Solutions $ (872) $ 324 $ (1,196) (369) % Utility and Power Infrastructure (2,669) 2,149 (4,818) (224) % Process and Industrial Facilities 231 1,991 (1,760) (88) % Corporate (7,457) (9,718) 2,261 (23) % Total Operating Loss $ (10,767) $ (5,254) $ (5,513) 105 % Storage and Terminal Solutions Storage and Terminal Solutions revenues decreased by $11.9 million, or 13%, in the three months ended September 30, 2024 compared to the same period last year, driven by reduced volume of work for flat bottom tank new build, repair and maintenance work, partially offset by increases in LNG storage and specialty vessel projects. Storage and Terminal Solutions gross profit decreased by $0.3 million, or 5%, in the three months ended September 30, 2024 compared to the same period last year. The segment gross margin was 6.0% for the three months ended September 30, 2024 compared to segment gross margin of 5.5% 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 $23.5 million, or 73%, in the three months ended September 30, 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 decreases in power delivery work. Utility and Power Infrastructure gross profit decreased by $2.4 million, or 65%, in the three months ended September 30, 2024 compared to the same period last year. The segment gross margin was 2.3% for the three months ended September 30, 2024 compared to 11.4% in the same period last year. The segment gross margin in the current period was impacted by the under-recovery of construction overhead costs, primarily in our power delivery service line. Additionally, segment gross margin in the first quarter of fiscal 2024 benefited from favorable project closeouts. -19- Table of Contents Process and Industrial Facilities Process and Industrial Facilities revenues decreased by $43.7 million, or 58%, in the three months ended September 30, 2024 compared to the same period last year. The decrease is primarily attributable to lower revenue volumes for a now completed large renewable diesel project. We believe this reduction in revenue is temporary given our strong backlog, including a significant gas processing construction project that is expected to commence in late fiscal 2025. Process and Industrial Facilities gross profit decreased by $3.1 million, or 61%, in the three months ended September 30, 2024 compared to the same period last year. The segment gross margin was 6.4% for the three months ended September 30, 2024 compared to 6.8% in the same period last year. Gross margins in both periods were negatively impacted by under-recovery of construction overhead costs. Corporate Unallocated corporate expenses net to $7.5 million during the three months ended September 30, 2024 compared to $9.7 million in the same period last year. The decrease of $2.3 million was primarily due to reduced legal expenses in the first quarter of fiscal 2025. Legal expenses incurred during the first quarter of fiscal 2024 included costs related to a jury trial that resulted in a verdict in our favor. 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 September 30, 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 September 30, 2024 totaled $124.6 million and availability under the ABL Facility totaled $56.6 million, resulting in total liquidity of $181.2 million. During the first quarter of fiscal 2025, liquidity increased $11.6 million primarily as a result of cash provided by operating activities. The following table provides a reconciliation of restricted cash and unrestricted cash in the Consolidated Balance Sheets to the total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows, as well as availability and total liquidity (in thousands): September 30, 2024 June 30, 2024 Total cash, cash equivalents and restricted cash $ 149,610 $ 140,615 Less: Restricted cash 25,000 25,000 Unrestricted cash 124,610 115,615 Availability 56,642 53,988 Total Liquidity $ 181,252 $ 169,603 The following table provides a summary of changes in our liquidity for the three months ended September 30, 2024 (in thousands): Liquidity at June 30, 2024 $ 169,603 Cash provided by operating activities 11,918 Capital expenditures (1,944) Increase in availability under ABL Facility 2,654 Cash used by financing activities (1,189) Effect of exchange rate changes on cash 210 Liquidity at September 30, 2024 $ 181,252 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: -20- Table of Contents ◦ some fixed-price customer contracts allow for significant upfront billings at the beginning of a project, which temporarily increases liquidity near term; ◦ 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; ◦ 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 significant retentions. Retentions are normally held until certain contractual milestones are achieved; therefore, collection may extend beyond one year; • the mix of work can impact liquidity. In periods where fixed-price contracts comprise a larger portion of revenue, liquidity may increase. In periods where time and material contracts comprise a larger portion of revenue, liquidity may decrease; • other changes in working capital, including the timing of tax payments and refunds; and • 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; • borrowing constraints under our ABL Facility and maintaining compliance with all covenants contained in the ABL Facility; • letters of credit. We have certain contracts with customers, and may have future contracts, that permit the customer to obtain, at the customer's expense, letters of credit as a form of security under the contract. Letters of credit reduce our borrowing availability under the Company's 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 most recently 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. The maximum amount of loans under the ABL Facility is limited to $90.0 million. 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 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 September 30, 2024, our borrowing base was $61.4 million. During fiscal 2024, the Company repaid all outstanding borrowings under the ABL Facility. The Company had $4.8 million in letters of credit outstanding as of September 30, 2024, which resulted in availability of $56.6 million under the ABL Facility. -21- Table of Contents 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 limit 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 September 30, 2024. -22- Table of Contents Cash Flows Provided by Operating Activities Cash provided by operating activities for the three months ended September 30, 2024 totaled $11.9 million. Major components of cash flows provided by operating activities for the three months ended September 30, 2024 are as follows: Net Cash Provided by Operating Activities (In thousands) Net loss $ (9,223) Loss on sale of property, plant and equipment 68 Depreciation and amortization 2,515 Stock-based compensation 2,311 Other non-cash expenses 38 Cash effect of changes in operating assets and liabilities 16,209 Net cash provided by operating activities $ 11,918 Cash effect of changes in operating assets and liabilities at September 30, 2024 in comparison to June 30, 2024 include the following: • Accounts receivable, excluding credit losses recognized during the period and including retention amounts classified as non-current, increased by $5.1 million during the three months ended September 30, 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 $2.1 million, which increased cash flows from operating activities. Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") increased $33.3 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 $3.9 million during the three months ended September 30, 2024, which decreased cash flows from operating activities. These operating liabilities can fluctuate based on business volumes; the timing of vendor payments; accruals; lease commencement, lease payments, expiration, or termination of operating leases; 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 $7.3 million during the three months ended September 30, 2024, which decreased cash flows from operating activities. These operating assets can fluctuate based on business volumes; the amount of long-term retention receivables; 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; and other timing differences. • Accrued wages and benefits, accrued insurance, operating lease liabilities, other accrued expenses, and other liabilities, non-current decreased by $2.9 million during the three months ended September 30, 2024, which decreased cash flows from operating activities. These operating liabilities can fluctuate based on the timing of payroll, distributions, business volumes; vendor payments; accruals; lease commencement, lease payments, expiration, or termination of operating leases; and other timing differences. Cash Flows Used by Investing Activities Investing activities used $1.9 million of cash in the three months ended September 30, 2024 due to capital expenditures. Cash Flows Used by Financing Activities Financing activities used $1.2 million of cash in the three months ended September 30, 2024 primarily due to the repurchase of common stock for payment of statutory taxes due on equity-based compensation. -23- Table of Contents 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 three months ended September 30, 2024 and have no current plans to repurchase stock. As of September 30, 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 338,015 treasury shares as of September 30, 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. -24- Table of Contents CRITICAL ACCOUNTING POLICIES There have been no material changes in our critical accounting policies from those reported in our fiscal 2024 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 2024 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, 2024, filed with the Securities and Exchange Commission. For more information on market risk, see Part II, Item 7A in our fiscal 2024 Annual Report on Form 10-K.