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. -15- 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. -16- 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 power delivery 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 engineer and construct thermal vacuum test chambers for aerospace and defense industries and other infrastructure for industries including chemicals, petrochemical, sulfur, mining and minerals primarily in the extraction of non-ferrous metals, cement, agriculture, wastewater treatment facilities and other industrial customers. Operational Update Operating activity increased during the second quarter of fiscal 2025 as revenues showed a 13% increase from first quarter of 2025. This increase marks the beginning of a ramp in activity, and was fueled by growth primarily in the Storage and Terminal Solutions segment, as well as the Utility and Power Infrastructure segment. We believe these positive trends will continue as we progress through the remainder of the fiscal year. Combined with strong project execution, we believe the continued increase in activity will result in enhanced leverage of our cost structure, improved operating margins, and bottom-line results. Project awards during the quarter were $90.5 million. We have experienced lower levels of project awards as many customers delayed spending decisions pending the outcome of the 2024 presidential election. It is not uncommon for awards to shift from one period to another as the timing of awards is dependent on a number of factors, and while project awards in the quarter is the lowest quarterly awards in over three years, demand in the markets we serve remains strong based upon significant market trends, and recent and anticipated actions by the new administration. The market drivers for each of our segments are strong and include increased oil and gas demand, the clean energy transition, low-cost feed stock, data center energy demand, industrial reshoring/onshoring, grid reliability and electrical supply assurance. As a result, we believe we will have strong award activity in the coming quarters. -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 December 31, 2024: Storage and Terminal Solutions Utility and Power Infrastructure Process and Industrial Facilities Total (In thousands) Backlog as of September 30, 2024 $ 801,667 $ 358,150 $ 252,054 $ 1,411,871 Project awards 32,826 21,442 36,270 90,538 Other adjustment (2) — — (4,106) (4,106) Revenue recognized (95,507) (61,076) (30,586) (187,169) Backlog as of December 31, 2024 $ 738,986 $ 318,516 $ 253,632 $ 1,311,134 Book-to-bill ratio (1) 0.3 x 0.4 x 1.2 x 0.5 x (1) Calculated by dividing project awards by revenue recognized. (2) Backlog was reduced as a result of the closure of a customer's facility. This customer has historically represented less than 1% of our consolidated revenues. The following table provides a summary of changes in our backlog for the six months ended December 31, 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 114,477 55,807 68,231 238,515 Other adjustment (2) — — (4,106) (4,106) Revenue recognized (173,746) (116,988) (62,014) (352,748) Backlog as of December 31, 2024 $ 738,986 $ 318,516 $ 253,632 $ 1,311,134 Book-to-bill ratio (1) 0.7 x 0.5 x 1.1 x 0.7 x (1) Calculated by dividing project awards by revenue recognized. (2) Backlog was reduced as a result of the closure of a customer's facility. This customer has historically represented less than 1% of our consolidated revenues. -18- Table of Contents In the Storage and Terminal Solutions segment, we booked $32.8 million of project awards during the second quarter of fiscal 2025. During the six months ended December 31, 2024, we booked $114.5 million of project awards. 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 $21.4 million of project awards during the second quarter of fiscal 2025. During the six months ended December 31, 2024, we booked $55.8 million of project awards. 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 $36.3 million of project awards during the second quarter of fiscal 2025. During the six months ended December 31, 2024, we booked $68.2 million of project awards, and 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, renewables and refinery turnarounds. 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 can vary and can extend 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. -19- Table of Contents Three months ended December 31, 2024 Compared to the Three months ended December 31, 2023 The information below is an analysis of our consolidated results for the three months ended December 31, 2024, compared to the three months ended December 31, 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 December 31, 2024 v 2023 2024 2023 $ % Revenue $ 187,169 $ 175,042 $ 12,127 7 % Cost of revenue 176,277 164,453 11,824 7 % Gross profit 10,892 10,589 303 3 % Selling, general and administrative expenses 17,286 15,731 1,555 10 % Operating loss (6,394) (5,142) (1,252) 24 % Other income (expense): Interest expense (145) (319) 174 (55) % Interest income 1,578 162 1,416 874 % Other (556) 2,454 (3,010) (123) % Net loss $ (5,533) $ (2,851) $ (2,682) 94 % Revenue - The increase in consolidated revenue of $12.1 million, or 7%, was primarily attributable to increased revenue volumes in our Storage and Terminal Solutions and Utility and Power Infrastructure segments, partially offset by reduced revenue volumes in Process and Industrial Facilities. Gross profit - Gross profit in the second quarter of fiscal 2025 increased $0.3 million, or 3%, compared to the second quarter of fiscal 2024. Gross margin of 5.8% for the second quarter of fiscal 2025 decreased slightly compared with gross margin of 6.0% for the second quarter of fiscal 2024. While project execution remained strong, gross margins were negatively impacted by the under-recovery of construction overhead costs. Selling, general and administrative expenses - The increase in SG&A expenses of $1.6 million, or 10%, is due to several factors, including an increase in salaries and wages of $0.6 million and an increase in project pursuit costs of $0.6 million, all necessitated to support conversion of backlog to revenue and expected growth of the business. Interest income - The increase in interest income of $1.4 million is primarily due to an increase in our cash balance. In late fiscal 2024, as a result of increasing cash balances, we invested excess cash balances in interest-bearing cash accounts. Other income - Other income decreased $3.0 million compared to the second quarter of fiscal 2024. Other income during the three months ended December 31, 2023 included a gain of $2.0 million on the sale of a facility in Catoosa, Oklahoma. Additionally, the Company incurred a foreign currency loss of $0.7 million for the three months ended December 31, 2024 compared to a gain of $0.3 million for the three months ended December 31, 2023. Provision for income taxes - Our effective tax rates for the three months ended December 31, 2024 and December 31, 2023 were (0.3%) and zero, respectively. The effective tax rates during both periods were impacted by valuation allowances of $1.8 million and $1.2 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. Currently, we 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 as we generate taxable income. -20- Table of Contents Results of Operations by Business Segment Three Months Ended December 31, 2024 v 2023 Dollars in thousands 2024 2023 $ % Revenue Storage and Terminal Solutions $ 95,507 $ 62,360 $ 33,147 53 % Utility and Power Infrastructure 61,076 40,144 20,932 52 % Process and Industrial Facilities 30,586 71,305 (40,719) (57) % Corporate — 1,233 (1,233) (100) % Total revenue (1) $ 187,169 $ 175,042 $ 12,127 7 % (1) Total revenues are net of inter-segment revenues which are primarily Process and Industrial Facilities and were $0.8 million for the three months ended December 31, 2024. Gross profit (loss) Storage and Terminal Solutions $ 7,272 $ 1,838 $ 5,434 296 % Utility and Power Infrastructure 3,409 1,415 1,994 141 % Process and Industrial Facilities 370 6,671 (6,301) (94) % Corporate (159) 665 (824) (124) % Total gross profit $ 10,892 $ 10,589 $ 303 3 % Operating income (loss) Storage and Terminal Solutions $ 1,705 $ (2,500) $ 4,205 (168) % Utility and Power Infrastructure (152) (563) 411 (73) % Process and Industrial Facilities (1,307) 4,465 (5,772) (129) % Corporate (6,640) (6,544) (96) 1 % Total Operating Loss $ (6,394) $ (5,142) $ (1,252) 24 % Storage and Terminal Solutions Storage and Terminal Solutions revenues increased by $33.1 million, or 53%, in the three months ended December 31, 2024 compared to the same period last year, driven by an increased volume of work for specialty vessel and LNG storage. Storage and Terminal Solutions gross profit increased by $5.4 million, or 296%, in the three months ended December 31, 2024 compared to the same period last year. The segment gross margin was 7.6% for the three months ended December 31, 2024 compared to segment gross margin of 2.9% in the same period last year. The improved gross margin relative to the prior year period reflects consistent project execution and improved construction overhead cost absorption as a result of higher revenues. Utility and Power Infrastructure Utility and Power Infrastructure revenues increased by $20.9 million, or 52%, in the three months ended December 31, 2024 compared to the same period last year. The increase is primarily attributable to a higher volume of work for LNG peak shaving projects, partially offset by decreases in power delivery work. Utility and Power Infrastructure gross profit increased by $2.0 million, or 141%, in the three months ended December 31, 2024 compared to the same period last year. The segment gross margin was 5.6% for the three months ended December 31, 2024 compared to 3.5% in the same period last year, an increase of 2.1% due to an improved mix of work. Gross margins in both periods were negatively impacted by the under-recovery of construction overhead costs. -21- Table of Contents Process and Industrial Facilities Process and Industrial Facilities revenues decreased by $40.7 million, or 57%, in the three months ended December 31, 2024 compared to the same period last year. The decrease is primarily attributable to lower revenue volumes resulting from the completion of a large renewable diesel project, and to lower revenue volumes for thermal vacuum chambers. 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 $6.3 million, or 94%, in the three months ended December 31, 2024 compared to the same period last year. The segment gross margin was 1.2% for the three months ended December 31, 2024 compared to 9.4% in the same period last year. Gross margins decreased due to changes in the mix of work, as well as an increase in under-recovery of construction overhead costs due to lower revenues. Corporate Unallocated corporate expenses net to $6.6 million during the three months ended December 31, 2024 compared to $6.5 million in the same period last year. Six months ended December 31, 2024 Compared to the Six months ended December 31, 2023 The information below is an analysis of our consolidated results for the six months ended December 31, 2024, compared to the six months ended December 31, 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 Six Months Ended December 31, 2024 v 2023 2024 2023 $ % Revenue $ 352,748 $ 372,701 $ (19,953) (5) % Cost of revenue 334,043 350,253 (16,210) (5) % Gross profit 18,705 22,448 (3,743) (17) % Selling, general and administrative expenses 35,866 32,844 3,022 9 % Operating loss (17,161) (10,396) (6,765) 65 % Other income (expense): Interest expense (234) (644) 410 (64) % Interest income 3,150 312 2,838 910 % Other (495) 4,716 (5,211) (110) % Loss before income tax expense (14,740) (6,012) (8,728) 145 % Provision for federal, state and foreign income taxes 16 6 10 — % Net loss $ (14,756) $ (6,018) $ (8,738) 145 % Revenue - The decrease in overall revenue of $20.0 million, or 5%, was primarily attributable to reduced revenue volumes in our Process and Industrial Facilities segment, partially offset by increases in Storage and Terminal Solutions and Utility and Power Infrastructure. Gross profit - Gross profit in the first half of fiscal 2025 decreased $3.7 million, or 17%, compared to the first half of fiscal 2024. Gross margin decreased to 5.3% for the first half of fiscal 2025 compared to 6.0% for the first half of fiscal 2024. While project execution remained strong, gross margins were negatively impacted by the under-recovery of construction overhead costs, which increased for the first half of fiscal 2025 due to lower revenues. Selling, general and administrative expenses - The increase in SG&A expenses of $3.0 million, or 9%, is primarily due to several factors including an increase in salaries and wages of $1.6 million and an increase in pursuit costs of $0.6 million, all necessitated to support conversion of backlog to revenue and expected growth of the business. Interest income - The increase in interest income of $2.8 million is primarily due to an increase in our cash balance. In late fiscal 2024, as a result of increasing cash balances, we invested excess cash balances in interest-bearing cash accounts. -22- Table of Contents Other income - Other income decreased $5.2 million in the first half of fiscal 2025 as compared to the first half of fiscal 2024. Other income during the six months ended December 31, 2023, included a gain of $2.0 million from the sale of a facility in Catoosa, Oklahoma for $2.7 million in net proceeds. 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. Provision for income taxes - Our effective tax rates for the six months ended December 31, 2024 and December 31, 2023 were (0.1%) and zero, respectively. The effective tax rates during both periods were impacted by valuation allowances of $3.1 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 due to the existence of a cumulative loss over a three-year period. Currently, we 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 as we generate taxable income. Results of Operations by Business Segment Six Months Ended December 31, 2024 v 2023 Dollars in thousands 2024 2023 $ % Revenue Storage and Terminal Solutions $ 173,746 $ 152,504 $ 21,242 14 % Utility and Power Infrastructure 116,988 72,539 44,449 61 % Process and Industrial Facilities 62,014 146,425 (84,411) (58) % Corporate — 1,233 (1,233) (100) % Total revenue (1) $ 352,748 $ 372,701 $ (19,953) (5) % (1) Total revenues are net of inter-segment revenues which are primarily Process and Industrial Facilities and were $1.7 million for the six months ended December 31, 2024. Gross profit (loss) Storage and Terminal Solutions $ 11,969 $ 6,790 $ 5,179 76 % Utility and Power Infrastructure 4,716 5,111 (395) (8) % Process and Industrial Facilities 2,367 11,749 (9,382) (80) % Corporate (347) (1,202) 855 (71) % Total gross profit $ 18,705 $ 22,448 $ (3,743) (17) % Operating income (loss) Storage and Terminal Solutions $ 833 $ (2,177) $ 3,010 (138) % Utility and Power Infrastructure (2,821) 1,585 (4,406) (278) % Process and Industrial Facilities (1,076) 6,456 (7,532) (117) % Corporate (14,097) (16,260) 2,163 (13) % Total Operating Loss $ (17,161) $ (10,396) $ (6,765) 65 % -23- Table of Contents Storage and Terminal Solutions Storage and Terminal Solutions revenues increased by $21.2 million, or 14%, in the six months ended December 31, 2024 compared to the same period last year, driven by increased volume of work for specialty vessel and LNG storage, partially offset by decreases in tank repair and maintenance work. Storage and Terminal Solutions gross profit increased by $5.2 million, or 76%, in the six months ended December 31, 2024 compared to the same period last year. The segment gross margin was 6.9% for the six months ended December 31, 2024 compared to segment gross margin of 4.5% in the same period last year. The improved gross margin relative to the prior year period reflects consistent project execution and improved construction overhead cost absorption as a result of higher revenues. Utility and Power Infrastructure Utility and Power Infrastructure revenues increased by $44.4 million, or 61%, in the six months ended December 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 decreases in power delivery work. Utility and Power Infrastructure gross profit decreased by $0.4 million, or 8%, in the six months ended December 31, 2024 compared to the same period last year. The segment gross margin was 4.0% for the six months ended December 31, 2024 compared to 7.0% in the same period last year. The segment gross margin in the current period was impacted by higher levels of under-recovery of construction overhead costs. Process and Industrial Facilities Process and Industrial Facilities revenues decreased by $84.4 million, or 58%, in the six months ended December 31, 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, in addition to lower revenue volumes for thermal vacuum chambers. 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 gross profit decreased by $9.4 million, or 80%, in the six months ended December 31, 2024 compared to the same period last year. The segment gross margin was 3.8% for the six months ended December 31, 2024 compared to 8.0% in the same period last year. The segment gross margin in the current period was impacted by higher levels of under-recovery of construction overhead costs due to lower revenue. Corporate Unallocated corporate revenue and expenses net to $14.1 million during the six months ended December 31, 2024 compared to $16.3 million in the same period last year. The decrease of $2.2 million was primarily due to reduced legal expenses year over year. Legal expenses incurred during the first half of fiscal 2024 included costs related to a jury trial that resulted in a verdict in our favor. LIQUIDITY AND CAPITAL RESOURCES Overview We assess liquidity based on the ongoing ability to pay our liabilities as they become due, fund business operations and meet all monetary contractual obligations. Our primary sources of liquidity at December 31, 2024 were unrestricted cash and cash equivalents on hand, capacity under our ABL Facility, and cash generated from operations. Our primary operational uses of capital are expenditures required to execute our projects, fund business operations and fulfill our contractual obligations. We believe that for at least the next 12 months, anticipated cash generated by operating activities, along with our availability under the ABL Facility and cash position, is sufficient to support our operating requirements. Unrestricted cash and cash equivalents at December 31, 2024 totaled $156.8 million and availability under the ABL Facility totaled $54.9 million, resulting in total liquidity of $211.7 million. During the second quarter of fiscal 2025, liquidity increased $30.4 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): -24- Table of Contents December 31, 2024 September 30, 2024 June 30, 2024 Total cash, cash equivalents and restricted cash $ 181,777 $ 149,610 $ 140,615 Less: Restricted cash 25,000 25,000 25,000 Unrestricted cash 156,777 124,610 115,615 Availability 54,920 56,642 53,988 Total Liquidity $ 211,697 $ 181,252 $ 169,603 The following table provides a summary of changes in our liquidity for the three months ended December 31, 2024 (in thousands): Liquidity at September 30, 2024 $ 181,252 Cash provided by operating activities 33,598 Capital expenditures (915) Proceeds from asset sales 163 Decrease in availability under ABL Facility (1,722) Cash provided by financing activities 56 Effect of exchange rate changes on cash (735) Liquidity at December 31, 2024 $ 211,697 The following table provides a summary of changes in our liquidity for the six months ended December 31, 2024 (in thousands): Liquidity at June 30, 2024 $ 169,603 Cash provided by operating activities 45,516 Capital expenditures (2,859) Proceeds from asset sales 163 Increase in availability under ABL Facility 932 Cash used by financing activities (1,133) Effect of exchange rate changes on cash (525) Liquidity at December 31, 2024 $ 211,697 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 fixed-price customer contracts allow for significant upfront billings at the beginning of a project, which increases liquidity near term; ◦ some cost-plus and fixed-price customer contracts are billed based on milestones which may increase or decrease liquidity in the near term depending on the timing of when we incur significant expenditures and when we collect 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; -25- Table of Contents • 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; • release of contract retentions, 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 We have 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 borrowing base is recalculated on a monthly basis and at December 31, 2024, our borrowing base was $59.7 million. We had no borrowings outstanding and $4.8 million in letters of credit outstanding as of December 31, 2024, which resulted in availability of $54.9 million under the ABL Facility. For additional information regarding our ABL Facility, see Item I of Part I, "Financial Statements - Note 4 - Debt." -26- Table of Contents Cash Flows Provided by Operating Activities Cash provided by operating activities for the six months ended December 31, 2024 totaled $45.5 million. Major components of cash flows provided by operating activities for the six months ended December 31, 2024 are as follows: Net Cash Provided by Operating Activities (In thousands) Net loss $ (14,756) Loss on sale of property, plant and equipment (64) Depreciation and amortization 5,025 Stock-based compensation 4,568 Other non-cash expenses (19) Cash effect of changes in operating assets and liabilities 50,762 Net cash provided by operating activities $ 45,516 Cash effect of changes in operating assets and liabilities at December 31, 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 $18.9 million during the six months ended December 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") increased $0.8 million, which decreased cash flows from operating activities. Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") increased $66.2 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 increased by $14.5 million during the six months ended December 31, 2024, which increased 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 $4.4 million during the six months ended December 31, 2024, which decreased cash flows from operating activities. These operating assets can fluctuate based on business volumes; 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 $5.8 million during the six months ended December 31, 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. -27- Table of Contents Cash Flows Used by Investing Activities Investing activities used $2.7 million of cash in the six months ended December 31, 2024 due to capital expenditures associated with improvements at a fabrication facility in Bakersfield, California that we purchased in fiscal 2024, as well as the purchase of construction equipment to support our projects. Cash Flows Used by Financing Activities Financing activities used $1.1 million of cash in the six months ended December 31, 2024 primarily due to the repurchase of common stock for payment of statutory taxes due on equity-based compensation. 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 December 31, 2024 and have no current plans to repurchase stock. As of December 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 285,392 treasury shares as of December 31, 2024 and intend to utilize these treasury shares in connection with equity awards under our stock incentive plans and for sales to the Employee Stock Purchase Plan. -28- 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.