Matrix Service Co 10-Q for FY2023 Q2
Matrix Service Co (MTRX)
10-Q
2023-02-09
For: 2022-12-31
View Original
Added on
April 10, 2026
About this 10-Q
Matrix Service Co filed this 10-Q on February 9, 2023, covering the quarter ended December 31, 2022 (FY2023 Q2).
Headline figures
Quarter ended December 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $193.84M
- up 19.7% from $161.97M a year earlier
- Net loss
- $32.83M
- compared with a net loss of $24.92M a year earlier
- Diluted EPS
- -$1.22
- compared with -$0.93 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-Q
_______________________________________
(Mark One)
| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||
For the quarterly period ended December 31, 2022
or
| Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 | |||||
For the transition period from to
Commission File No. 1-15461
__________________________________________
(Exact name of registrant as specified in its charter)
__________________________________________
| (State of incorporation) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (918 ) 838-8822
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
___________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | ☒ | |||||||||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting Company | |||||||||||||||
| Emerging Growth Company | |||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of February 7, 2023 there were 27,037,556 shares of the Company's common stock, $0.01 par value per share, outstanding.
TABLE OF CONTENTS
| PAGE | ||||||||
| FINANCIAL INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Matrix Service Company
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit (loss) | ( | ( | |||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Goodwill impairment | |||||||||||||||||||||||
| Restructuring costs | |||||||||||||||||||||||
| Operating loss | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Other | ( | ( | ( | ||||||||||||||||||||
| Loss before income tax expense | ( | ( | ( | ( | |||||||||||||||||||
| Provision for federal, state and foreign income taxes | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Basic loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes.
-1-
Matrix Service Company
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive loss, net of tax: | |||||||||||||||||||||||
| Foreign currency translation gain (loss) (net of tax expense (benefit) of $0 for the three and six months ended December 31, 2022 and $(8) and $46 for the three and six months ended December 31, 2021, respectively) | ( | ( | |||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
See accompanying notes.
-2-
Matrix Service Company
Condensed Consolidated Balance Sheets
(In thousands)
(unaudited)
2022 | June 30, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, less allowances (December 31, 2022—$1,112 and June 30, 2022—$1,320) | |||||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | |||||||||||
| Inventories | |||||||||||
| Income taxes receivable | |||||||||||
| Prepaid expenses | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Restricted cash | |||||||||||
| Property, plant and equipment - net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net of accumulated amortization | |||||||||||
| Other assets, non-current | |||||||||||
| Total assets | $ | $ | |||||||||
See accompanying notes.
-3-
Matrix Service Company
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
2022 | June 30, 2022 | ||||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Billings on uncompleted contracts in excess of costs and estimated earnings | |||||||||||
| Accrued wages and benefits | |||||||||||
| Accrued insurance | |||||||||||
| Operating lease liabilities | |||||||||||
| Other accrued expenses | |||||||||||
| Total current liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Operating lease liabilities | |||||||||||
| Borrowings under asset-backed credit facility | |||||||||||
| Other liabilities, non-current | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
| Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of December 31, 2022 and June 30, 2022; 27,027,323 and 26,790,514 shares outstanding as of December 31, 2022 and June 30, 2022, respectively | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Treasury stock, at cost — 860,894 shares as of December 31, 2022, and 1,097,703 shares as of June 30, 2022 | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes.
-4-
Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
| Six Months Ended | |||||||||||
2022 | December 31, 2021 | ||||||||||
| Operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided (used) by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Goodwill impairment | |||||||||||
| Stock-based compensation expense | |||||||||||
| Deferred income tax | |||||||||||
| Loss (gain) on sale of property, plant and equipment | ( | ||||||||||
| Provision for uncollectible accounts | ( | ( | |||||||||
| Accelerated amortization of deferred debt amendment fees | |||||||||||
| Other | |||||||||||
| Changes in operating assets and liabilities increasing (decreasing) cash: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | ( | ( | |||||||||
| Inventories | |||||||||||
| Other assets and liabilities | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Billings on uncompleted contracts in excess of costs and estimated earnings | |||||||||||
| Accrued expenses | ( | ( | |||||||||
| Net cash provided (used) by operating activities | ( | ||||||||||
| Investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from asset sales | |||||||||||
| Net cash used by investing activities | $ | ( | $ | ( | |||||||
See accompanying notes.
-5-
Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
| Six Months Ended | |||||||||||
2022 | December 31, 2021 | ||||||||||
| Financing activities: | |||||||||||
| Advances under asset-backed credit facility | $ | $ | |||||||||
| Repayments of advances under asset-backed credit facility | ( | ||||||||||
| Payment of debt amendment fees | ( | ||||||||||
| Issuances of common stock | |||||||||||
| Proceeds from issuance of common stock under employee stock purchase plan | |||||||||||
| Repurchase of common stock for payment of statutory taxes due on equity-based compensation | ( | ( | |||||||||
| Other Treasury Share Purchases | ( | ||||||||||
| Net cash used by financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid (received) during the period for: | |||||||||||
| Income taxes | $ | $ | ( | ||||||||
| Interest, including payment of debt amendment fees | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Purchases of property, plant and equipment on account | $ | $ | |||||||||
See accompanying notes.
-6-
Matrix Service Company
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share data)
(unaudited)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | ||||||||||||||||||||||||||||||
| Balances, September 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||
| Issuance of deferred shares (54,702 shares) | ( | ||||||||||||||||||||||||||||||||||
| Treasury shares sold to Employee Stock Purchase Plan (17,111 shares) | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||
| Balances, December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Balances, September 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||
| Exercise of stock options (19,550 shares) | ( | ||||||||||||||||||||||||||||||||||
| Issuance of deferred shares (51,319 shares) | ( | ||||||||||||||||||||||||||||||||||
| Treasury shares sold to Employee Stock Purchase Plan (6,078 shares) | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||
| Balances, December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
-7-
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | ||||||||||||||||||||||||||||||
| Balances, June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
| Issuance of deferred shares (259,529 shares) | ( | ||||||||||||||||||||||||||||||||||
| Treasury shares sold to Employee Stock Purchase Plan (30,144 shares) | ( | ||||||||||||||||||||||||||||||||||
| Treasury shares purchased to satisfy tax withholding obligations (52,864 shares) | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||
| Balances, December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Balances, June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive income loss | ( | ( | |||||||||||||||||||||||||||||||||
| Exercise of stock options (19,550 shares) | ( | ||||||||||||||||||||||||||||||||||
| Issuance of deferred shares (268,403 shares) | ( | ||||||||||||||||||||||||||||||||||
| Treasury shares sold to Employee Stock Purchase Plan (13,287 shares) | ( | ||||||||||||||||||||||||||||||||||
| Treasury shares purchased to satisfy tax withholding obligations (76,703 shares) | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||
| Balances, December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
-8-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1 – Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of Matrix Service Company and its subsidiaries (“Matrix”, “we”, “our”, “us”, “its” or the “Company”), unless otherwise indicated. Intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. The information furnished reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations, cash flows and financial position for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2022, included in our Annual Report on Form 10-K for the year then ended. The results of operations for the three and six month periods ended December 31, 2022 may not necessarily be indicative of the results of operations for the full year ending June 30, 2023.
Significant Accounting Policies
Our significant accounting policies are detailed in “Note 1 - Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended June 30, 2022.
Note 2 – Revenue
Remaining Performance Obligations
We had $574.6 million of remaining performance obligations yet to be satisfied as of December 31, 2022 . We expect to recognize $432.8 million of our remaining performance obligations as revenue within the next twelve months.
Contract Balances
Contract terms with customers include the timing of billing and payments, which usually differs from the timing of revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets and liabilities are calculated on a contract-by-contract basis and reported on a net basis at the end of each period and are classified as current. We present our contract assets in the balance sheet as Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts ("CIE"). CIE consists of revenue recognized in excess of billings. We present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and Estimated Earnings ("BIE"). BIE consists of billings in excess of revenue recognized. The following table provides information about CIE and BIE:
2022 | June 30, 2022 | Change | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | $ | $ | $ | ||||||||||||||
| Billings on uncompleted contracts in excess of costs and estimated earnings | ( | ( | ( | ||||||||||||||
| Net contract liabilities | $ | ( | $ | ( | $ | ( | |||||||||||
The difference between the beginning and ending balances of our CIE and BIE primarily results from the timing of revenue recognized relative to its billings. The amount of revenue recognized during the six months ended December 31, 2022 that was included in the June 30, 2022 BIE balance was $52.3 million. This revenue consists primarily of work performed during the period on contracts with customers that had advance billings.
-9-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Progress billings in accounts receivable at December 31, 2022 and June 30, 2022 included retentions to be collected within one year of $19.7 million and $16.1 million, respectively. Contract retentions collectible beyond one year are included in other assets, non-current in the Condensed Consolidated Balance Sheets and totaled $9.0 million as of December 31, 2022 and $4.0 million as of June 30, 2022.
Disaggregated Revenue
Revenue disaggregated by reportable segment is presented in Note 10 - Segment Information. The following tables presents revenue disaggregated by geographic area where the work was performed and by contract type:
Geographic Disaggregation:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
2022 | December 31, 2021 | 2022 | December 31, 2021 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||||||||||||
| Canada | ||||||||||||||||||||||||||
| Other international | ||||||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Contract Type Disaggregation:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Fixed-price contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Time and materials and other cost reimbursable contracts | ||||||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Typically, we assume more risk with fixed-price contracts since increases in costs to perform the work may not be recoverable. However, these types of contracts typically offer higher profits than time and materials and other cost reimbursable contracts when completed at or below the costs originally estimated. The profitability of time and materials and other cost reimbursable contracts is typically lower than fixed-price contracts and is usually less volatile than fixed-price contracts since the profit component is factored into the rates charged for labor, equipment and materials, or is expressed in the contract as a percentage of the reimbursable costs incurred.
Revisions in Estimates
Subsequent to the end of the second quarter of fiscal 2023, we received notice from a client that they would not approve adequate compensation to us for the impact that excessive scope changes had on our ability to progress work on a midstream gas processing project according to forecast, as well as for the impact that global supply chain issues and inflation had on the project. The project is included in the Process and Industrial Facilities segment and reduced gross profit by $9.6 million and $9.4 million during the three and six months ended December 31, 2022, respectively. We have accrued the full expected loss for the project, which we expect to be mechanically complete in the fourth quarter of fiscal 2023.
-10-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 3 – Property, Plant and Equipment
The following table presents the components of our property, plant and equipment - net at December 31, 2022 and June 30, 2022:
2022 | June 30, 2022 | |||||||||||||
| (In thousands) | ||||||||||||||
| Property, plant and equipment - at cost: | ||||||||||||||
| Land and buildings | $ | $ | ||||||||||||
| Construction equipment | ||||||||||||||
| Transportation equipment | ||||||||||||||
| Office equipment and software | ||||||||||||||
| Construction in progress | ||||||||||||||
| Total property, plant and equipment - at cost | ||||||||||||||
| Accumulated depreciation | ( | ( | ||||||||||||
| Property, plant and equipment - net | $ | $ | ||||||||||||
Note 4 – Leases
We enter into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. Real estate leases accounted for approximately 98 % of all right-of-use assets as of December 31, 2022 . Most real estate and information technology equipment leases generally have fixed payments that follow an agreed upon payment schedule and have remaining lease terms ranging from less than one year to 13 years. Construction equipment leases generally have "month-to-month" lease terms that automatically renew as long as the equipment remains in use.
The components of lease expense in the Condensed Consolidated Statements of Income are as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||
| Lease expense | Location of Expense | (in thousands) | ||||||||||||||||||||||||||||||
| Operating lease expense | Cost of revenue and Selling, general and administrative expenses | $ | $ | $ | $ | |||||||||||||||||||||||||||
Short-term lease expense(1) | Cost of revenue | |||||||||||||||||||||||||||||||
| Total lease expense | $ | $ | $ | $ | ||||||||||||||||||||||||||||
(1)Primarily represents the lease expense of construction equipment that is subject to month-to-month rental agreements with expected rental durations of less than one year.
-11-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in our Condensed Consolidated Balance Sheets, were as follows:
| Maturity Analysis: | (in thousands) | |||||||
| Remainder of Fiscal 2023 | $ | |||||||
| Fiscal 2024 | ||||||||
| Fiscal 2025 | ||||||||
| Fiscal 2026 | ||||||||
| Fiscal 2027 | ||||||||
| Thereafter | ||||||||
| Total future operating lease payments | ||||||||
| Imputed interest | ( | |||||||
| Net present value of future lease payments | ||||||||
| Less: current portion of operating lease liabilities | ||||||||
| Non-current operating lease liabilities | $ | |||||||
The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of December 31, 2022 :
| Weighted-average remaining lease term (in years) | ||||||||
| Weighted-average discount rate | % | |||||||
Supplemental cash flow information related to leases is as follows:
| Six Months Ended | ||||||||
| (in thousands) | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating lease payments | $ | |||||||
| Right-of-use assets obtained in exchange for lease liabilities: | ||||||||
| Operating leases | $ | |||||||
Note 5 – Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying value of goodwill by segment are as follows:
| Utility and Power Infrastructure | Process and Industrial Facilities | Storage and Terminal Solutions | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net balance at June 30, 2022 | $ | $ | $ | $ | |||||||||||||||||||
| Goodwill impairment | ( | ( | |||||||||||||||||||||
Translation adjustment(1) | ( | ( | ( | ||||||||||||||||||||
| Net balance at December 31, 2022 | $ | $ | $ | $ | |||||||||||||||||||
(1)The translation adjustments relate to the periodic translation of Canadian Dollar and South Korean Won denominated goodwill recorded as a part of prior acquisitions in Canada and South Korea, in which the local currency was determined to be the functional currency.
-12-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
We performed our annual goodwill impairment test as of May 31, 2022, which resulted in no impairment. The fiscal 2022 test indicated that four reporting units with a combined total of $33.8 million of goodwill as of June 30, 2022 were at higher risk of future impairment. Recent negative operating results of one of our reporting units at higher risk of impairment indicated that it was more likely than not that its goodwill was impaired. This reporting unit is in the Process and Industrial Facilities segment and includes the midstream gas processing project referenced in Note 2 - Revenue, Revisions in Estimates, which experienced a material adverse change in gross profit during the second quarter of fiscal 2023. Based on the indicated outcome of this project and our near-term outlook for the reporting unit, we performed an interim impairment test for the unit and concluded that its $12.3 million of goodwill was fully impaired. The impairment was recognized in operating income during the three and six months ended December 31, 2022.
Based on the totality of both positive and negative factors, no impairment indicators related to the other reporting units existed at December 31, 2022. However, if our view of project opportunities or gross margins deteriorates, particularly for the remaining higher risk reporting units, then we may need to perform an interim goodwill impairment test, which could result in an impairment.
Other Intangible Assets
Information on the carrying value of other intangible assets is as follows:
| At December 31, 2022 | |||||||||||||||||||||||
| Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| (Years) | (In thousands) | ||||||||||||||||||||||
| Intellectual property | 10 to 15 | $ | $ | ( | $ | ||||||||||||||||||
Customer-based(1) | 6 to 15 | ( | |||||||||||||||||||||
| Total amortizing intangible assets | $ | $ | ( | $ | |||||||||||||||||||
(1)Customer-based intangible assets have been adjusted in fiscal 2023 to remove $4.2 million of customer relationships that have been fully amortized.
| At June 30, 2022 | |||||||||||||||||||||||
| Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| (Years) | (In thousands) | ||||||||||||||||||||||
| Intellectual property | 10 to 15 | $ | $ | ( | $ | ||||||||||||||||||
| Customer-based | 6 to 15 | ( | |||||||||||||||||||||
| Total amortizing intangible assets | $ | $ | ( | $ | |||||||||||||||||||
Amortization expense totaled $0.4 million and $0.9 million during the three and six months ended December 31, 2022 and $0.4 million and $1.0 million during the three and six months ended December 31, 2021, respectively.
We estimate that the remaining amortization expense related to December 31, 2022 amortizing intangible assets will be as follows (in thousands):
| Period ending: | |||||
| Remainder of Fiscal 2023 | $ | ||||
| Fiscal 2024 | |||||
| Fiscal 2025 | |||||
| Fiscal 2026 | |||||
| Total estimated remaining amortization expense at December 31, 2022 | $ | ||||
-13-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 6 – Debt
On September 9, 2021 , the Company and our primary U.S. and Canada operating subsidiaries entered into an asset-based credit agreement, which was amended on October 5, 2022 (as amended, the "ABL Facility"), with Bank of Montreal, as Administrative Agent, Swing Line Lender and a Letter of Credit Issuer, and the lenders named therein. The maximum amount of loans under the ABL Facility is limited to $90.0 million. The ABL Facility 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 us and 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 maximum amount that we may borrow under the ABL Facility is subject to a borrowing base, which is based on restricted cash plus a percentage of the value of certain accounts receivable, inventory and equipment, reduced for certain reserves. We are required to maintain a minimum of $25.0 million of restricted cash at all times, but such amounts are also included in the borrowing base. The ABL Facility matures, and any outstanding amounts become due and payable, on September 9, 2026 . At December 31, 2022, our borrowing base was $83.2 million, we had $15.0 million of outstanding borrowings, and we had $19.2 million in letters of credit outstanding, which resulted in availability of $49.0 million 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 interest rate in effect for borrowings outstanding at December 31, 2022, including applicable margin, was 8.75 %.
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 December 31, 2022.
Note 7 – Income Taxes
Effective Tax Rate
Our effective tax rates were zero percent for the three and six months ended December 31, 2022 , compared to (78.7 )% and (15.5 )% during the three and six months ended December 31, 2021, respectively. The effective tax rates during fiscal 2023 were impacted by valuation allowances of $8.4 million and $9.8 million placed on deferred tax assets during the three and six months ended December 31, 2022, respectively.
Full Valuation Allowance
We placed a full valuation allowance on our deferred tax assets in the second quarter of fiscal 2022 due to the existence of a cumulative loss over a three-year period. We will continue to place valuation allowances on newly generated deferred tax assets and will realize the benefit associated with the deferred tax assets for which the valuation allowance has been provided to the extent we generate taxable income in the future, or cumulative losses are no longer present and our future projections for growth or tax planning strategies are demonstrated.
-14-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Net Operating Loss Carryback Refund
Through provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the "CARES Act"), we had an income tax benefit from the ability to carryback the fiscal 2021 federal net operating loss to a period with a higher statutory federal income tax rate. We estimate that we will receive a $12.6 million tax refund in connection with this carryback, which is included in income taxes receivable in the Condensed Consolidated Balance Sheets.
Deferred Payroll Taxes
During the second quarter of fiscal 2023, we repaid the remaining $5.6 million of U.S. payroll taxes we deferred through provisions of the CARES Act. The balance of deferred payroll taxes was included within accrued wages and benefits in the Condensed Consolidated Balance Sheets.
Note 8 – Commitments and Contingencies
Insurance Reserves
We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses through the use of deductibles, self-insured retentions and coverage limits.
Typically, our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of our services and provide warranties for materials and workmanship. We may also be required to name the customer as an additional insured up to the limits of insurance available, or we may be required to purchase special insurance policies or surety bonds for specific customers or provide letters of credit in lieu of bonds to satisfy performance and financial guarantees on some projects. We maintain a performance and payment bonding line sufficient to support the business. We generally require our subcontractors to indemnify us and our customer and name us as an additional insured for activities arising out of the subcontractors’ work. We also require certain subcontractors to provide additional insurance policies, including surety bonds in favor of us, to secure the subcontractors’ work or as required by the subcontract.
There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against a valid claim or loss under the contracts with our customers.
Unpriced Change Orders and Claims
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $18.2 million at December 31, 2022 and $8.9 million at June 30, 2022. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings. The determination of our legal basis for a claim requires significant judgment. Generally, collection of amounts related to unpriced change orders and claims is expected within twelve months. However, since customers may not pay these amounts until final resolution of related claims, collection of these amounts may extend beyond one year.
Other
During the third quarter of fiscal 2020, we commenced litigation in an effort to collect accounts receivable from an iron and steel customer following the deterioration of the relationship in the second quarter of fiscal 2020. The unpaid account receivable balance at December 31, 2022 was $17.0 million. Litigation is unpredictable, however, based on the terms of the contract with this customer, we believe we are entitled to collect the full amount owed under the contract.
We are participants in various legal actions. It is the opinion of management that none of the other known legal actions will have a material impact on our financial position, results of operations or liquidity.
Note 9 – Earnings per Common Share
-15-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
The computation of basic and diluted earnings per share is as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||
| Basic EPS: | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Basic loss per share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted EPS: | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted weighted average shares outstanding | |||||||||||||||||||||||
| Diluted loss per share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Note 10 – Segment Information
We report our results of operations through three reportable segments: Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions.
•Utility and Power Infrastructure: consists of power delivery services provided to investor-owned utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, upgrades and maintenance, as well as emergency and storm restoration services. We also provide engineering, fabrication, and construction services for LNG utility peak shaving facilities, and provide construction and maintenance services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configuration.
•Process and Industrial Facilities: primarily serves customers in the downstream and midstream petroleum industries who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. We also serve customers in various other industries such as petrochemical, sulfur, mining and minerals companies engaged primarily in the extraction of non-ferrous metals, aerospace and defense, cement, agriculture, and other industrial customers. Our services include plant maintenance, turnarounds, industrial cleaning services, engineering, fabrication, and capital construction.
•Storage and Terminal Solutions: consists of work related to aboveground crude oil and refined product storage tanks and terminals. We also include work related to cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum, hydrogen and other specialty vessels such as spheres in this segment, as well as work related to marine structures and truck and rail loading/offloading facilities. Our services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, we offer tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.
We evaluate performance and allocate resources based on operating income. We eliminate intersegment sales; therefore, no intercompany profit or loss is recognized. Corporate selling, general and administrative expenses are excluded from our three reportable segments in order to better align controllable costs with the responsibility of segment management, and to be consistent with how our chief operating decision-maker assesses segment performance and allocates resources. In fiscal year 2022, we commenced a project to centralize and standardize certain support functions including accounting, human resources and project support. These centralized support functions are now included in corporate selling, general and administrative expense, but were previously included in our operating segment selling, general and administrative expense. Segment assets consist primarily of accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, property, plant and equipment, right-of-use lease assets, goodwill and other intangible assets.
-16-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Results of Operations
(In thousands)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
2022 | December 31, 2021 | 2022 | December 31, 2021 | ||||||||||||||||||||
| Gross revenue | |||||||||||||||||||||||
| Utility and Power Infrastructure | $ | $ | $ | $ | |||||||||||||||||||
| Process and Industrial Facilities | |||||||||||||||||||||||
| Storage and Terminal Solutions | |||||||||||||||||||||||
| Total gross revenue | $ | $ | $ | $ | |||||||||||||||||||
| Less: Inter-segment revenue | |||||||||||||||||||||||
| Utility and Power Infrastructure | $ | $ | $ | $ | |||||||||||||||||||
| Process and Industrial Facilities | |||||||||||||||||||||||
| Storage and Terminal Solutions | |||||||||||||||||||||||
| Total inter-segment revenue | $ | $ | $ | $ | |||||||||||||||||||
| Consolidated revenue | |||||||||||||||||||||||
| Utility and Power Infrastructure | $ | $ | $ | $ | |||||||||||||||||||
| Process and Industrial Facilities | |||||||||||||||||||||||
| Storage and Terminal Solutions | |||||||||||||||||||||||
| Total consolidated revenue | $ | $ | $ | $ | |||||||||||||||||||
| Gross profit (loss) | |||||||||||||||||||||||
| Utility and Power Infrastructure | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Process and Industrial Facilities | ( | ( | |||||||||||||||||||||
| Storage and Terminal Solutions | ( | ||||||||||||||||||||||
| Corporate | ( | ( | ( | ( | |||||||||||||||||||
| Total gross profit (loss) | $ | ( | $ | $ | $ | ( | |||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Utility and Power Infrastructure | $ | $ | $ | $ | |||||||||||||||||||
| Process and Industrial Facilities | |||||||||||||||||||||||
| Storage and Terminal Solutions | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| Total selling, general and administrative expenses | $ | $ | $ | $ | |||||||||||||||||||
| Goodwill impairment and restructuring costs | |||||||||||||||||||||||
| Utility and Power Infrastructure | $ | $ | $ | $ | |||||||||||||||||||
| Process and Industrial Facilities | ( | ( | |||||||||||||||||||||
| Storage and Terminal Solutions | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| Total goodwill impairment and restructuring costs | $ | $ | $ | $ | |||||||||||||||||||
| Operating income (loss) | |||||||||||||||||||||||
| Utility and Power Infrastructure | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Process and Industrial Facilities | ( | ( | |||||||||||||||||||||
| Storage and Terminal Solutions | ( | ( | ( | ( | |||||||||||||||||||
| Corporate | ( | ( | ( | ( | |||||||||||||||||||
| Total operating loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
-17-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Total assets by segment were as follows:
2022 | June 30, 2022 | |||||||||||||
| Utility and Power Infrastructure | $ | $ | ||||||||||||
| Process and Industrial Facilities | ||||||||||||||
| Storage and Terminal Solutions | ||||||||||||||
| Corporate | ||||||||||||||
| Total segment assets | $ | $ | ||||||||||||
Note 11 – Restructuring Costs
In fiscal 2020, we initiated a business improvement plan to increase profitability and reduce our cost structure in order to help us become more competitive and deliver higher quality service. As a result of specific events, including the effects of the COVID-19 pandemic and related market disruptions, the Company expanded its business improvement plan.
The business improvement plan consists of an initial phase of discretionary cost reductions, workforce reductions, reduction of capital expenditures and the reduction in size or closure of certain offices in order to increase the utilization of our staff and bring the cost structure of the business in line with revenue volumes. In fiscal 2022, we commenced a second phase of our plan to focus on centralization of support functions, including business development, accounting, human resources, procurement and project services into shared service centers. During the second quarter of fiscal 2023, we closed an underperforming office and ceased its associated operations, which resulted in $0.7 million of restructuring costs. We expect to complete these restructuring efforts in fiscal 2023 or early fiscal 2024. The restructuring costs consist primarily of severance costs, facility closure costs, consulting fees and other liabilities.
-18-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Restructuring costs under our business improvement plan are classified as follows:
| Three Months Ended | Six Months Ended | Since Inception of Business Improvement Plan | ||||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Utility and Power Infrastructure | ||||||||||||||||||||||||||||||||
| Severance and other personnel-related costs | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Facility costs | ||||||||||||||||||||||||||||||||
| Other intangible asset impairments | ||||||||||||||||||||||||||||||||
| Other costs | ||||||||||||||||||||||||||||||||
| Total Utility and Power Infrastructure | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Process and Industrial Facilities | ||||||||||||||||||||||||||||||||
| Severance and other personnel-related costs | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||
| Facility costs | ||||||||||||||||||||||||||||||||
| Other intangible asset impairments | ||||||||||||||||||||||||||||||||
| Other costs | ( | |||||||||||||||||||||||||||||||
| Total Process and Industrial Facilities | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||
| Storage and Terminal Solutions | ||||||||||||||||||||||||||||||||
| Severance and other personnel-related costs | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Facility costs | ||||||||||||||||||||||||||||||||
| Other costs | ||||||||||||||||||||||||||||||||
| Total Storage and Terminal Solutions | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||
| Severance and other personnel-related costs | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Facility costs | ||||||||||||||||||||||||||||||||
| Other costs | ||||||||||||||||||||||||||||||||
| Total Corporate | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Restructuring Costs by Type: | ||||||||||||||||||||||||||||||||
| Severance and other personnel-related costs | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Facility costs | ||||||||||||||||||||||||||||||||
| Other intangible asset impairments | ||||||||||||||||||||||||||||||||
| Other costs | ||||||||||||||||||||||||||||||||
| Total restructuring costs | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
-19-
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 oil, natural gas, power, 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; 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, 2022, and in our other filings with the Securities and Exchange Commission;
•economic, market or business conditions in general and in the oil, natural gas, power, petrochemical, agricultural and mining industries in particular;
•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 update publicly, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise.
-20-
RESULTS OF OPERATIONS
Overview
We report our results of operations through three reportable segments: Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions.
•Utility and Power Infrastructure: consists of power delivery services provided to investor-owned utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, upgrades and maintenance, as well as emergency and storm restoration services. We also provide engineering, fabrication, and construction services for LNG utility peak shaving facilities, and provide construction and maintenance services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configuration.
•Process and Industrial Facilities: primarily serves customers in the downstream and midstream petroleum industries who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. We also serve customers in various other industries such as petrochemical, sulfur, mining and minerals companies engaged primarily in the extraction of non-ferrous metals, aerospace and defense, cement, agriculture, and other industrial customers. Our services include plant maintenance, turnarounds, industrial cleaning services, engineering, fabrication, and capital construction.
•Storage and Terminal Solutions: consists of work related to aboveground crude oil and refined product storage tanks and terminals. We also include work related to cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum, hydrogen and other specialty vessels such as spheres in this segment, as well as work related to marine structures and truck and rail loading/offloading facilities. Our services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, we offer tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.
Operational Update
Project award volumes continued to improve from the two-year period impacted by the pandemic. We received $318.7 million of project awards during the second quarter of fiscal 2023, which is the highest quarterly award amount since the first quarter of fiscal 2020. However, subsequent to the end of the second quarter of fiscal 2023, we received notice from a client that they would not approve adequate compensation to us for the impact that excessive scope changes had on our ability to progress work on a midstream gas processing project according to forecast, as well as for the impact that global supply chain issues and inflation had on the project. The project is included in the Process and Industrial Facilities segment and reduced gross profit by $9.6 million during the quarter. We have accrued the full expected loss for the project, which we expect to be mechanically complete in the fourth quarter of fiscal 2023.
Revenue of $193.8 million during the second quarter of fiscal 2023 was lower than revenue of $208.4 million during the first quarter of fiscal 2023 as certain projects awarded in prior periods are working off while the newly awarded projects' contribution to revenue is limited as they progress through contract finalization, engineering, and planning stages. Revenue levels were also lower than expected as a large LNG project that was expected to be awarded in the first half of fiscal 2023 has not been awarded and award timing is unknown. Lastly, normal seasonality resulted in lower volumes of work as we moved through the quarter. We are anticipating revenue volumes in the third quarter of fiscal 2023 to be relatively unchanged from the second quarter of fiscal 2023 and to increase meaningfully in the fourth quarter of fiscal 2023 as newly awarded projects enter the revenue stream.
Gross margin (loss) was (0.7%) in the second quarter of fiscal 2023 compared to 6.2% in the first quarter of fiscal 2023. Our results of operations were materially impacted by the $9.6 million project adjustment referenced above. Gross margins during the second quarter of fiscal 2023 were also negatively impacted by the under recovery of construction overhead costs due to lower revenue and continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period.
-21-
Adjusted Net Loss
In order to more clearly depict our core profitability, the following tables present our operating results after certain adjustments:
Reconciliation of Net Loss to Adjusted Net Loss(1)
(In thousands, except per share data)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Net loss, as reported | $ | (32,827) | $ | (24,919) | $ | (39,339) | $ | (42,457) | ||||||||||||||||||
| Goodwill impairment | 12,316 | — | 12,316 | — | ||||||||||||||||||||||
| Restructuring costs | 1,278 | 695 | 2,565 | 1,300 | ||||||||||||||||||||||
Accelerated amortization of deferred debt amendment fees(2) | — | — | — | 1,518 | ||||||||||||||||||||||
| Tax impact of goodwill impairment, restructuring costs and accelerated amortization of debt amendment fees | (3,499) | (179) | (3,830) | (725) | ||||||||||||||||||||||
Deferred tax asset valuation allowance(3) | 8,370 | 14,198 | 9,764 | 14,198 | ||||||||||||||||||||||
| Adjusted net loss | $ | (14,362) | $ | (10,205) | $ | (18,524) | $ | (26,166) | ||||||||||||||||||
| Loss per share, as reported | $ | (1.22) | $ | (0.93) | $ | (1.46) | $ | (1.59) | ||||||||||||||||||
| Adjusted loss per share | $ | (0.53) | $ | (0.38) | $ | (0.69) | $ | (0.98) | ||||||||||||||||||
(1)This table presents non-GAAP financial measures of our adjusted net loss and adjusted loss per share for the three and six months ended December 31, 2022 and 2021. The most directly comparable financial measures are net loss and loss per share, respectively, presented in the Condensed Consolidated Statements of Income. We have presented these non-GAAP financial measures because we believe they more clearly depict our core operating results during the periods presented and provide a more comparable measure of our operating results to other companies considered to be in similar businesses. Since adjusted net loss and adjusted loss per share are not measures of performance calculated in accordance with GAAP, they should be considered in addition to, rather than as a substitute for, the most directly comparable GAAP financial measures.
(2)Interest expense in fiscal 2022 included $1.5 million of accelerated amortization of deferred debt amendment fees.
(3)See Item 1. Financial Statements, Note 7 - Income Taxes, for more information about the deferred tax asset valuation allowance.
Adjusted EBITDA
We have presented Adjusted EBITDA, which we define as net loss before goodwill impairment, restructuring costs, stock-based compensation, interest expense, income taxes, and depreciation and amortization, because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses. We believe that the line item on our Condensed Consolidated Statements of Income entitled “Net loss” is the most directly comparable GAAP measure to Adjusted EBITDA. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. 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 impairment to goodwill. While impairment to goodwill is a non-cash expense in the period recognized, cash or other consideration was still transferred in exchange for goodwill in the period of the acquisition. Any measure that excludes impairment to goodwill has material limitations since this expense represents the loss of an asset that was acquired in exchange for cash or other assets.
•It does not include restructuring costs. 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 stock-based compensation. Stock-based compensation represents material amounts of equity that are awarded to our employees and directors for services rendered. While the expense is non-cash, we release vested shares out of our treasury stock, which has historically been replenished by using cash to periodically repurchase our stock. Therefore, any measure that excludes stock-based compensation has material limitations.
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•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 income taxes. Because the payment of income taxes is a necessary and ongoing part of our operations, any measure that excludes income taxes has material limitations.
•It does not include depreciation or amortization expense. 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.
A reconciliation of Adjusted EBITDA to net loss follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net loss | $ | (32,827) | $ | (24,919) | $ | (39,339) | $ | (42,457) | |||||||||||||||
| Goodwill impairment | 12,316 | — | 12,316 | — | |||||||||||||||||||
| Restructuring costs | 1,278 | 695 | 2,565 | 1,300 | |||||||||||||||||||
| Stock-based compensation | 1,692 | 1,866 | 3,747 | 3,735 | |||||||||||||||||||
| Interest expense | 916 | 502 | 1,288 | 2,501 | |||||||||||||||||||
| Provision for federal, state and foreign income taxes | — | 10,976 | — | 5,711 | |||||||||||||||||||
| Depreciation and amortization | 3,535 | 3,789 | 7,177 | 7,841 | |||||||||||||||||||
| Adjusted EBITDA | $ | (13,090) | $ | (7,091) | $ | (12,246) | $ | (21,369) | |||||||||||||||
Three Months Ended December 31, 2022 Compared to the Three Months Ended December 31, 2021
Consolidated
Consolidated revenue was $193.8 million for the three months ended December 31, 2022, compared to $162.0 million in the same period last year. On a segment basis, revenue increased in the Process and Industrial Facilities and Storage and Terminal Solutions segments by $30.5 million and $5.6 million, respectively. The increases were partially offset by a decrease in revenue of $4.2 million in the Utility and Power Infrastructure segment.
Consolidated gross profit decreased to a loss of $1.3 million in the three months ended December 31, 2022 compared to a gross profit of $3.2 million in the same period last year. Gross margin (loss) decreased to (0.7%) in the three months ended December 31, 2022 compared to 2.0% in the same period last year. Gross margins in the second quarter of fiscal 2023 were negatively impacted by a client not approving adequate compensation to us for the impact that excessive scope changes had on our ability to progress work on a midstream gas processing project according to forecast, as well as for the impact that global supply chain issues and inflation had on the project. The project reduced gross profit by $9.6 million during the three months ended December 31, 2022. We have accrued the full expected loss for the project, which we expect to be mechanically complete in the fourth quarter of fiscal 2023. In addition, gross margins during the second quarter of fiscal 2023 were negatively impacted by the under recovery of construction overhead costs, continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period, and increased forecasted costs to complete a smaller capital storage project. While we are still not fully recovering construction overhead costs, higher revenue volumes in fiscal 2023 have resulted in improved overhead cost recovery. Gross margins in the second quarter of fiscal 2022 were negatively impacted by low revenue volumes, which led to the under recovery of construction overhead costs, and by a lower than previously forecasted margin on a tank repair and maintenance project in the Storage and Terminal Solutions segment.
Consolidated SG&A expenses were $17.5 million in the three months ended December 31, 2022 compared to $15.9 million in the same period last year. The increase was primarily attributable to higher project pursuit costs and other costs to support higher revenue volumes.
We recorded a goodwill impairment of $12.3 million in the three months ended December 31, 2022. See Item 1. Financial Statements, Note 5 - Goodwill and Other Intangible Assets, Goodwill, for more information about the impairment.
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We recorded restructuring costs of $1.3 million in the three months ended December 31, 2022 compared to $0.7 million in the same period last year. During the second quarter of fiscal 2023, 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 11 - Restructuring Costs, for more information about our business improvement plan.
Interest expense was $0.9 million in the three months ended December 31, 2022 compared to $0.5 million in the three months ended December 31, 2021. Interest expense in the three months ended December 31, 2022 consisted primarily of interest on debt outstanding, unused capacity fees, amortization of deferred debt issuance costs, letter of credit fees and other interest.
Our effective tax rates for the three months ended December 31, 2022 and December 31, 2021 were zero and (78.7)%, respectively. The effective tax rate during the three months ended December 31, 2022 was impacted by a $8.4 million valuation allowance placed on deferred tax assets. We placed a full valuation allowance on our deferred tax assets in the second quarter of fiscal 2022 due to the existence of a cumulative loss over a three-year period. We will continue to place valuation allowances on newly generated deferred tax assets and will realize the benefit associated with the deferred tax assets for which the valuation allowance has been provided to the extent we generate taxable income in the future, or cumulative losses are no longer present and our future projections for growth or tax planning strategies are demonstrated.
For the three months ended December 31, 2022, we had a net loss of $32.8 million, or $1.22 per fully diluted share, compared to a net loss of $24.9 million, or $0.93 per fully diluted share, in the three months ended December 31, 2021.
Utility and Power Infrastructure
Revenue for the Utility and Power Infrastructure segment was $50.5 million in the three months ended December 31, 2022 compared to $54.8 million in the same period last year. The decrease is primarily due to lower volumes of LNG peak shaving work, partially offset by higher volumes of power delivery work.
The segment gross margin was 4.8% in the second quarter of fiscal 2023 compared to a loss of (0.9%) in the same period last year. While this was an improvement compared to the prior quarter, gross margin was negatively impacted by previously-booked projects with reduced gross margins awarded in a highly competitive time period. This was partially offset by better than expected outcomes on other recently awarded projects in the segment.
The segment gross margin (loss) for the three months ended December 31, 2021 was negatively impacted by lower margins on power delivery work bid competitively and revenue recognized on a large capital project at a margin reduced in prior periods. In addition, segment gross margin in the second quarter of fiscal 2022 was also negatively impacted by low volumes, which led to the under recovery of construction overhead costs.
Process and Industrial Facilities
Revenue for the Process and Industrial Facilities segment was $80.8 million in the three months ended December 31, 2022 compared to $50.3 million in the same period last year. The increase was primarily due to higher volumes of midstream gas processing capital work, higher volumes of refinery maintenance and turnaround activity, work on a capital project at a biodiesel facility, and work on a capital project at a small-scale boron facility.
The segment gross margin (loss) was (6.4%) for the three months ended December 31, 2022 compared to 8.4% in the same period last year. The segment gross margin (loss) in the second quarter of fiscal 2023 was negatively impacted by a client not approving adequate compensation to us for the impact that excessive scope changes had on our ability to progress work on a midstream gas processing project according to forecast, as well as for the impact that global supply chain issues and inflation had on the project. The project reduced gross profit by $9.6 million during the three months ended December 31, 2022. We have accrued the full expected loss for the project, which we expect to be mechanically complete in the fourth quarter of fiscal 2023. The segment gross margin (loss) in the second quarter of fiscal 2023 was also negatively impacted by the under recovery of construction overhead costs and continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period. This was partially offset by better than expected outcomes on other projects in the segment.
Despite generally strong project execution, the lower segment gross margin for the three months ended December 31, 2021 was the result of low volumes, which lead to under recovery of construction overhead costs.
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Storage and Terminal Solutions
Revenue for the Storage and Terminal Solutions segment was $62.5 million in the three months ended December 31, 2022 compared to $56.9 million in the same period last year. The increase in segment revenue is primarily a result of higher volumes of specialty vessel capital projects along with higher volumes of tank repair and maintenance work. However, revenue levels were still lower than expected as a large LNG project that was expected to be awarded in the first half of fiscal 2023 has not been awarded and award timing is unknown. Other storage project awards have been strong and are expected to significantly improve revenue in the latter part of the fiscal year.
The segment gross margin was 2.6% for the three months ended December 31, 2022 compared to a loss of (0.3)% in the same period last year. The fiscal 2023 segment gross margin was negatively impacted by the under recovery of construction overhead costs and increased forecasted costs to complete a smaller capital storage project.
The segment gross margin (loss) for the three months ended December 31, 2021 was negatively impacted by a lower than previously forecasted margin on a thermal energy storage tank repair and maintenance project due to changes in repair scope, expanded client weld testing and associated schedule delays, which reduced segment gross profit by $2.8 million. The segment gross margin (loss) in the second quarter of fiscal 2022 was also negatively impacted by low volumes, which led to the under recovery of construction overhead costs.
Corporate
Unallocated corporate expenses were $7.4 million during the three months ended December 31, 2022 compared to $6.6 million in the same period last year. The increase in fiscal 2023 is primarily due to a project that commenced in fiscal 2022 to centralize certain support functions to corporate including accounting, human resources and project support that were previously included in operating segment expenses.
Six Months Ended December 31, 2022 Compared to the Six Months Ended December 31, 2021
Consolidated
Consolidated revenue was $402.3 million for the six months ended December 31, 2022, compared to $330.1 million in the same period last year. On a segment basis, revenue increased in the Process and Industrial Facilities and Storage and Terminal Solutions segments by $73.2 million and $15.6 million, respectively. The increases were partially offset by a decrease in revenue of $16.6 million in the Utility and Power Infrastructure segment.
Consolidated gross profit increased to $11.7 million in the six months ended December 31, 2022 compared to a gross loss of $0.3 million in the same period last year. Gross margin increased to 2.9% in the six months ended December 31, 2022 compared to a loss of (0.1)% in the same period last year. Gross margins in the first six months of fiscal 2023 were negatively impacted by a client not approving adequate compensation to us for the impact that excessive scope changes had on our ability to progress work on a midstream gas processing project according to forecast, as well as for the impact that global supply chain issues and inflation had on the project. The project reduced gross profit by $9.4 million during the six months ended December 31, 2022. We have accrued the full expected loss for the project, which we expect to be mechanically complete in the fourth quarter of fiscal 2023. In addition, gross margins during the first six months of fiscal 2023 were negatively impacted by the under recovery of construction overhead costs, continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period, and increased forecasted costs to complete a smaller capital storage project. While we are still not fully recovering construction overhead costs, higher revenue volumes in fiscal 2023 have resulted in improved overhead cost recovery. Gross margins in the first six months of fiscal 2022 were negatively impacted by a lower than previously forecasted margin on a large capital project and an unfavorable settlement of a claim with a customer, both in the Utility and Power Infrastructure segment, and a lower than previously forecasted margin on a tank repair and maintenance project in the Storage and Terminal Solutions segment. In addition, gross margins were also negatively impacted by lower than forecasted volumes, which led to the under recovery of construction overhead costs.
Consolidated SG&A expenses were $34.4 million in the six months ended December 31, 2022 compared to $32.6 million in the same period last year. The increase was primarily attributable to higher project pursuit costs and other costs to support higher revenue volumes.
We recorded a goodwill impairment of $12.3 million in the three months ended December 31, 2022. See Item 1. Financial Statements, Note 5 - Goodwill and Other Intangible Assets, Goodwill, for more information about the impairment.
We recorded restructuring costs of $2.6 million in the six months ended December 31, 2022 compared to $1.3 million in the same period last year. During the second quarter of fiscal 2023, we closed an underperforming office and ceased its associated
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operations, which resulted in $0.7 million of restructuring costs. See Item 1. Financial Statements, Note 11 - Restructuring Costs, for more information about our business improvement plan.
Interest expense was $1.3 million in the six months ended December 31, 2022 compared to $2.5 million in the six months ended December 31, 2021. Interest expense in fiscal 2023 consisted primarily of interest on debt outstanding, unused capacity fees, amortization of deferred debt issuance costs, letter of credit fees and other interest. Interest expense in fiscal 2022 included $1.5 million of accelerated amortization of deferred debt amendment fees associated with terminating our prior credit facility along with a similar level of other interest costs.
Our effective tax rates for the six months ended December 31, 2022 and December 31, 2021 were zero and (15.5)%, respectively. The effective tax rate during the six months ended December 31, 2022 was impacted by a $9.8 million valuation allowance placed on deferred tax assets. We placed a full valuation allowance on our deferred tax assets in the second quarter of fiscal 2022 due to the existence of a cumulative loss over a three-year period. We will continue to place valuation allowances on newly generated deferred tax assets and will realize the benefit associated with the deferred tax assets for which the valuation allowance has been provided to the extent we generate taxable income in the future, or cumulative losses are no longer present and our future projections for growth or tax planning strategies are demonstrated.
For the six months ended December 31, 2022, we had a net loss of $39.3 million or $1.46 per fully diluted share, compared to a net loss of $42.5 million, or $1.59 per fully diluted share, in the six months ended December 31, 2021.
Utility and Power Infrastructure
Revenue for the Utility and Power Infrastructure segment was $95.4 million in the six months ended December 31, 2022 compared to $112.0 million in the same period last year. The decrease is primarily due to lower volumes of LNG peak shaving and storm work, partially offset by higher volumes of power delivery work.
The segment gross margin was 4.3% for the six months ended December 31, 2022 compared to a loss of (5.9)% in the same period last year. The segment gross margin for the first six months of fiscal 2023 was negatively impacted by continued work on projects with previously reduced gross margins and projects that were bid competitively.
The segment gross margin for the six months ended December 31, 2021 was negatively impacted by an increase in the forecasted costs to complete a large capital project in the first quarter, which resulted in a decrease in gross profit of $5.9 million. The change in forecasted costs was principally due to unexpected equipment repairs during commissioning that delayed the scheduled completion and increased the estimated costs to complete. In addition, segment gross margin was negatively impacted by an unfavorable settlement of a claim with a customer, and low volumes, which led to the under recovery of construction overhead costs.
Process and Industrial Facilities
Revenue for the Process and Industrial Facilities segment was $167.4 million in the six months ended December 31, 2022 compared to $94.2 million in the same period last year. The increase was primarily due to higher volumes of midstream gas processing capital work, work on a capital project at a biodiesel facility, higher volumes of refinery maintenance and turnaround activity, and work on a capital project at a small-scale boron facility.
The segment gross margin was (0.5)% for the six months ended December 31, 2022 compared to 7.5% in the same period last year. The segment gross margin in the first six months of fiscal 2023 was negatively impacted by a client not approving adequate compensation to us for the impact that excessive scope changes had on our ability to progress work on a midstream gas processing project according to forecast, as well as for the impact that global supply chain issues and inflation had on the project. The project reduced gross profit by $9.4 million during the six months ended December 31, 2022. We have accrued the full expected loss for the project, which we expect to be mechanically complete in the fourth quarter of fiscal 2023. The segment gross margin (loss) in the first six months of fiscal 2023 was also negatively impacted by the under recovery of construction overhead costs and continued work on previously-booked projects with reduced gross margins awarded in a highly competitive time period. This was partially offset by better than expected outcomes on other projects in the segment.
Despite generally strong project execution, the low segment gross margin in the first six months of fiscal 2022 was the result of low volumes, which led to the under recovery of construction overhead costs.
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Storage and Terminal Solutions
Revenue for the Storage and Terminal Solutions segment was $139.4 million in the six months ended December 31, 2022 compared to $123.9 million in the same period last year. The increase in segment revenue is primarily a result of higher volumes of specialty vessel and tank and terminal capital projects along with higher volumes of tank repair and maintenance work. However, revenue levels were still lower than expected as a large LNG project that was expected to be awarded in the first half of fiscal 2023 has not been awarded and award timing is unknown. Other storage project awards have been strong and are expected to significantly improve revenue in the latter part of the fiscal year.
The segment gross margin was 6.6% for the six months ended December 31, 2022 compared to 0.2% in the same period last year. The segment gross margin for the six months ended December 31, 2022 was negatively impacted by the under recovery of construction overhead costs and increased forecasted costs to complete a smaller capital storage project.
The segment gross margin for the six months ended December 31, 2021 was negatively impacted by a lower than previously forecasted margin on a thermal energy storage tank repair and maintenance project due to changes in repair scope, expanded client weld testing and associated schedule delays, which reduced segment gross profit by $5.5 million. In addition, the fiscal 2022 segment gross margin was also negatively impacted by low volumes, which led to the under recovery of construction overhead costs.
Corporate
Unallocated corporate expenses were $15.2 million during the six months ended December 31, 2022 compared to $14.3 million in the same period last year. The increase in fiscal 2023 is primarily due to a project that commenced in fiscal 2022 to centralize certain support functions to corporate including accounting, human resources and project support that were previously included in operating segment expenses.
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 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 limited notice to proceed ("LNTP"), we include the entire scope of work in our backlog if we conclude that the likelihood of the full project proceeding as high. For all other arrangements, we calculate backlog as the estimated contract amount less revenue recognized as of the reporting date.
The following table provides a summary of changes in our backlog for the three months ended December 31, 2022:
| Utility and Power Infrastructure | Process and Industrial Facilities | Storage and Terminal Solutions | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Backlog as of September 30, 2022 | $ | 99,807 | $ | 265,641 | $ | 250,209 | $ | 615,657 | |||||||||||||||
| Project awards | 98,033 | 105,153 | 115,466 | 318,652 | |||||||||||||||||||
| Revenue recognized | (50,535) | (80,789) | (62,516) | (193,840) | |||||||||||||||||||
| Backlog as of December 31, 2022 | $ | 147,305 | $ | 290,005 | $ | 303,159 | $ | 740,469 | |||||||||||||||
Book-to-bill ratio(1) | 1.9 | 1.3 | 1.8 | 1.6 | |||||||||||||||||||
(1)Calculated by dividing project awards by revenue recognized during the period.
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The following table provides a summary of changes in our backlog for the six months ended December 31, 2022:
| Utility and Power Infrastructure | Process and Industrial Facilities | Storage and Terminal Solutions | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Backlog as of June 30, 2022 | $ | 102,059 | $ | 292,287 | $ | 195,114 | $ | 589,460 | |||||||||||||||
| Project awards | 140,651 | 165,135 | 247,494 | 553,280 | |||||||||||||||||||
| Revenue recognized | (95,405) | (167,417) | (139,449) | (402,271) | |||||||||||||||||||
| Backlog as of December 31, 2022 | $ | 147,305 | $ | 290,005 | $ | 303,159 | $ | 740,469 | |||||||||||||||
Book-to-bill ratio(1) | 1.5 | 1.0 | 1.8 | 1.4 | |||||||||||||||||||
(1)Calculated by dividing project awards by revenue recognized during the period
Backlog increased $124.8 million or 20.3% in the second quarter of fiscal 2023 on project awards of $318.7 million and a book-to-bill ratio of 1.6.
In the Utility and Power Infrastructure segment, backlog increased by 47.6% as we booked $98.0 million of project awards during the second quarter of fiscal 2023. Project awards are primarily comprised of a project for the engineering, procurement, and construction of upgrades being made to an existing LNG peak shaving facility and power delivery work. Our opportunity pipeline for LNG peak shaving projects continues to be promising, however those awards, while significant, can be less frequent. Project opportunities and bidding activity are strong for both the power delivery portion of the business and LNG peak shaving.
In the Process and Industrial Facilities segment, backlog increased by 9.2% as we booked $105.2 million of project awards during the second quarter of fiscal 2023. Client spending related to refinery maintenance and turnaround operations has continued to be strong. We continue to see demand for thermal vacuum chambers in the coming quarters, as well as increasing opportunities in mining and minerals, chemicals, and renewables. In addition, we are continuing to pursue opportunities for midstream gas work, including some larger scale projects.
In the Storage and Terminal Solutions segment, backlog increased by 21.2% as we booked $115.5 million of project awards during the second quarter of fiscal 2023. We were awarded a large-scale specialty vessel project in the second quarter following a similar award in the first quarter. This segment includes significant opportunities for storage infrastructure projects related to natural gas, LNG, ammonia, hydrogen, NGLs and other forms of renewable energy. We believe LNG and hydrogen projects in particular will be key growth drivers for this segment. Bidding activity on LNG projects has been strong and we have been positioning ourselves for growth in hydrogen by entering into key relationships, such as the signing of a memorandum of understanding ("MOU") with Korea Gas Corporation in August 2022 to support South Korea’s development of a hydrogen economy as it transforms itself from natural gas and the signing of a MOU with Chart Industries, Inc. in January of 2021 to support the development of hydrogen solutions.
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. These same factors also impact the timing of project starts and the associated revenue recognized. Backlog volatility may increase for some segments from time to time when individual project awards are less frequent, but more significant. The level of awards presented above only represents an interim period and may not be indicative of full year awards.
Seasonality and Other Factors
Our operating results can exhibit seasonal fluctuations, especially in our Process and Industrial Facilities segment, for a variety of reasons. Turnarounds and planned outages at customer facilities are typically scheduled in the spring and the fall when the demand for energy is lower. 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.
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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 December 31, 2022 were unrestricted cash and cash equivalents on hand, capacity under our ABL Facility, and cash generated from operations. Unrestricted cash and cash equivalents at December 31, 2022 totaled $31.5 million and availability under the ABL Facility totaled $49.0 million, resulting in total liquidity of $80.5 million.
The following table provides a trend of cash, cash equivalents and restricted cash in the Condensed Consolidated Balance Sheets during fiscal 2023:
| December 31, 2022 | September 30, 2022 | June 30, 2022 | ||||||||||||||||||
| Cash and cash equivalents | $ | 31,464 | $ | 14,342 | $ | 52,371 | ||||||||||||||
| Restricted cash | 25,000 | 25,000 | 25,000 | |||||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 56,464 | $ | 39,342 | $ | 77,371 | ||||||||||||||
The following table provides a summary of changes in our liquidity for the three months ended December 31, 2022 (in thousands):
| Liquidity at September 30, 2022 | $ | 56,616 | |||
| Cash provided by operating activities | 17,644 | ||||
| Capital expenditures | (1,265) | ||||
| Increase in availability under ABL Facility | 6,731 | ||||
| Cash provided by financing activities | 71 | ||||
| Other | 672 | ||||
| Liquidity at December 31, 2022 | $ | 80,469 | |||
The following table provides a summary of changes in our liquidity for the six months ended December 31, 2022 (in thousands):
| Liquidity at June 30, 2022 | $ | 94,831 | |||
| Cash used by operating activities | (17,585) | ||||
| Capital expenditures | (2,843) | ||||
| Increase in availability under ABL Facility | 6,545 | ||||
| Cash used by financing activities | (174) | ||||
| Other | (305) | ||||
| Liquidity at December 31, 2022 | $ | 80,469 | |||
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As a result of rising revenue volumes, especially for cost-reimbursable and maintenance-type work, we invested heavily into working capital during the first quarter of fiscal 2023, which led to a significant decrease in liquidity in that quarter. However, advanced billings on newly awarded capital projects in the second quarter of fiscal 2023 and a larger credit facility borrowing base driven by higher accounts receivable balances have led to an improvement of liquidity since the first quarter. We expect our liquidity position to continue to improve for several reasons, including expected improved operating results in our fourth fiscal quarter, the receipt of approximately $13 million of tax refunds in the third fiscal quarter, and positive cash flow from newly-awarded capital projects.
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
•capital expenditures.
Other factors that may impact both short and long-term liquidity include:
•contract disputes, which can be significant;
•collection issues, including those caused by weak commodity prices, economic slowdowns or other factors which can lead to credit deterioration of our customers;
•issuances of letters of credit; and
•strategic investments in new operations or divestitures of existing operations.
Other factors that may impact long-term liquidity include:
•borrowing constraints under our ABL Facility and maintaining compliance with all covenants contained in the ABL Facility;
•changes to our capital structure;
•acquisitions and disposals of businesses; and
•purchases of shares under our stock buyback program.
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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 October 5, 2022 (as amended, the "ABL Facility"), with Bank of Montreal, as Administrative Agent, Swing Line Lender and a Letter of Credit Issuer, and the lenders named therein. The maximum amount of loans under the ABL Facility is limited to $90.0 million. The ABL Facility 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 us and 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 maximum amount that we may borrow under the ABL Facility is subject to a borrowing base, which is based on restricted cash plus a percentage of the value of certain accounts receivable, inventory and equipment, reduced for certain reserves. We are required to maintain a minimum of $25.0 million of restricted cash at all times, but such amounts are also included in the borrowing base. The ABL Facility matures, and any outstanding amounts become due and payable, on September 9, 2026. At December 31, 2022, our borrowing base was $83.2 million, we had $15.0 million of outstanding borrowings, and we had $19.2 million in letters of credit outstanding, which resulted in availability of $49.0 million 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 interest rate in effect for borrowings outstanding at December 31, 2022, including applicable margin, was 8.75%.
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 December 31, 2022.
Cash Flow for the Six Months Ended December 31, 2022
Cash Flows Used by Operating Activities
Cash used by operating activities for the six months ended December 31, 2022 totaled $17.6 million. The various components are as follows:
Net Cash Used by Operating Activities
(In thousands)
| Net loss | $ | (39,339) | |||
| Depreciation and amortization | 7,177 | ||||
| Goodwill impairment | 12,316 | ||||
| Stock-based compensation | 3,747 | ||||
| Other non-cash expenses | 124 | ||||
| Cash effect of changes in operating assets and liabilities | (1,610) | ||||
| Net cash used by operating activities | $ | (17,585) | |||
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Cash effect of changes in operating assets and liabilities at December 31, 2022 in comparison to June 30, 2022 include the following:
•Accounts receivable, excluding credit losses recognized during the period, increased by $28.1 million during the six months ended December 31, 2022, 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 $1.8 million, which decreased cash flows from operating activities. Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") increased $34.7 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.
•Inventories, income taxes receivable, prepaid expenses, other current assets, operating right-of-use lease assets and other assets, non-current, increased $4.7 million during the six months ended December 31, 2022, 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.
•Accounts payable, accrued wages and benefits, accrued insurance, operating lease liabilities, other accrued expenses, and other liabilities, non-current decreased by $1.1 million during the six months ended December 31, 2022, 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.
Cash Flows Used by Investing Activities
Investing activities used $2.8 million of cash in the six months ended December 31, 2022 primarily due to capital expenditures.
Cash Flows Used by Financing Activities
Financing activities used $0.2 million of cash in the six months ended December 31, 2022 primarily due to $0.3 million paid to repurchase our stock for payment of withholding 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 six months ended December 31, 2022 and have no current plans to repurchase stock. As of December 31, 2022, 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 860,894 treasury shares as of December 31, 2022 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.
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CRITICAL ACCOUNTING POLICIES
There have been no material changes in our critical accounting policies from those reported in our fiscal 2022 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 2022 Annual Report on Form 10-K. The following section provides certain information with respect to our critical accounting policies as of the close of our most recent quarterly period.
Revenue Recognition
General Information about our Contracts with Customers
Our revenue comes from contracts to provide engineering, procurement, fabrication and construction, repair and maintenance and other services. Our engineering, procurement and fabrication and construction services are usually provided in association with capital projects, which are commonly fixed-price contracts that are billed based on project milestones. Our repair and maintenance services typically are cost reimbursable or time and material-based contracts and are billed monthly or, for projects of short duration, at the conclusion of the project. The elapsed time from award to completion of performance may exceed one year for capital projects.
Step 1: Contract Identification
We do not recognize revenue unless we have identified a contract with a customer. A contract with a customer exists when it has approval and commitment from both parties, the rights and obligations of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability is probable. We also evaluate whether a contract should be combined with other contracts and accounted for as a single contract. This evaluation requires judgment and could change the timing of the amount of revenue and profit recorded for a given period.
Step 2: Identify Performance Obligations
Next, we identify each performance obligation in the contract. A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services to the customer. Revenue is recognized separately for each performance obligation in the contract. Many of our contracts have one clearly identifiable performance obligation. However, many of our contracts provide the customer an integrated service that includes two or more of the following services: engineering, procurement, fabrication, construction, repair and maintenance services. For these contracts, we do not consider the integrated services to be distinct within the context of the contract when the separate scopes of work combine into a single commercial objective or capability for the customer. Accordingly, we generally identify one performance obligation in our contracts. The determination of the number of performance obligations in a contract requires significant judgment and could change the timing of the amount of revenue recorded for a given period.
Step 3: Determine Contract Price
After determining the performance obligations in the contract, we determine the contract price. The contract price is the amount of consideration we expect to receive from the customer for completing the performance obligation(s). In a fixed-price contract, the contract price is a single lump-sum amount. In reimbursable and time and materials-based contracts, the contract price is determined by the agreed upon rates or reimbursements for time and materials expended in completing the performance obligation(s) in the contract.
A number of our contracts contain various cost and performance incentives and penalties that can either increase or decrease the contract price. These variable consideration amounts are generally earned or incurred based on certain performance metrics, most commonly related to project schedule or cost targets. We estimate variable consideration at the most likely amount of additional consideration to be received (or paid in the case of penalties), provided that meeting the variable condition is probable. We include estimated amounts of variable consideration in the contract price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the contract price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We reassess the amount of variable consideration each accounting period until the uncertainty associated with the variable consideration is resolved. Changes in the assessed amount of variable consideration are accounted for prospectively as a cumulative adjustment to revenue recognized in the current period.
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Step 4: Assign Contract Price to Performance Obligations
After determining the contract price, we assign such price to the performance obligation(s) in the contract. If a contract has multiple performance obligations, we assign the contract price to each performance obligation based on the stand-alone selling prices of the distinct services that comprise each performance obligation.
Step 5: Recognize Revenue as Performance Obligations are Satisfied
We record revenue for contracts with our customers as we satisfy the contracts' performance obligations. We recognize revenue on performance obligations associated with fixed-price contracts for engineering, procurement, fabrication and construction services over time since these services create or enhance assets the customer controls as they are being created or enhanced. We measure progress of satisfying these performance obligations by using the percentage-of-completion method, which is based on costs incurred to date compared to the total estimated costs at completion, since it best depicts the transfer of control of assets being created or enhanced to the customer.
We recognize revenue over time for reimbursable and time and material-based repair and maintenance contracts since the customer simultaneously receives and consumes the benefit of those services as we perform work under the contract. As a practical expedient allowed under the revenue accounting standards, we record revenue for these contracts in the amount to which we have a right to invoice for the services performed provided that we have a right to consideration from the customer in an amount that corresponds directly with the value of the performance completed to date.
Costs incurred may include direct labor, direct materials, subcontractor costs and indirect costs, such as salaries and benefits, supplies and tools, equipment costs and insurance costs. Indirect costs are charged to projects based upon direct costs and overhead allocation rates per dollar of direct costs incurred or direct labor hours worked. Typically, customer contracts will include standard warranties that provide assurance that products and services will function as expected. We do not sell separate warranties.
We have numerous contracts that are in various stages of completion which require estimates to determine the forecasted costs at completion. Due to the nature of the work left to be performed on many of our contracts, the estimation of total cost at completion for fixed-price contracts is complex, subject to many variables and requires significant judgment. Estimates of total cost at completion are made each period and changes in these estimates are accounted for prospectively as cumulative adjustments to revenue recognized in the current period. If estimates of costs to complete fixed-price contracts indicate a loss, a provision is made through a contract write-down for the total loss anticipated.
Change Orders
Contracts are often modified through change orders, which are changes to the agreed upon scope of work. Most of our change orders, which may be priced or unpriced, are for goods or services that are not distinct from the existing contract due to the significant integration of services provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a change order on the contract price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. For unpriced change orders, we estimate the increase or decrease to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Unpriced change orders are more fully discussed in Note 8 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.
Claims
Sometimes we seek claims for amounts in excess of the contract price for delays, errors in specifications and designs, contract terminations, change orders in dispute or other causes of additional costs incurred by us. Recognition of amounts as additional contract price related to claims is appropriate only if there is a legal basis for the claim. The determination of our legal basis for a claim requires significant judgment. We estimate the change to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Claims are more fully discussed in Note 8 - Commitments and Contingencies of the Notes to Financial Statements.
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $18.2 million at December 31, 2022 and $8.9 million at June 30, 2022. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings.
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Goodwill
Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net identifiable tangible and intangible assets acquired at the acquisition date. In accordance with current accounting guidance, goodwill is not amortized, but is tested at least annually for impairment at the reporting unit level, which is a level below our reportable segments.
We perform our annual impairment test as of May 31st of each fiscal year, or in between annual tests if impairment indicators are present, to determine whether an impairment exists and to determine the amount of headroom. We define "headroom" as the percentage difference between the fair value of a reporting unit and its carrying value. The goodwill impairment test involves comparing management’s estimate of the fair value of a reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, then goodwill is not impaired. If the fair value of a reporting unit is less than its carrying value, then goodwill is impaired to the extent of the difference, but the impairment may not exceed the balance of goodwill assigned to that reporting unit.
We utilize a discounted cash flow analysis, referred to as an income approach, and market multiples, referred to as a market approach, to determine the estimated fair value of our reporting units. For the income approach, significant judgments and assumptions including forecasted project awards, discount rate, anticipated revenue growth rate, gross margins, operating expenses, working capital needs and capital expenditures are inherent in the fair value estimates, which are based on our operating and capital budgets and on our strategic plan. As a result, actual results may differ from the estimates utilized in our income approach. For the market approach, significant judgments and assumptions include the selection of guideline companies, forecasted guideline company EBITDA and our forecasted EBITDA. The use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate and could result in the recognition of additional impairment charges in the financial statements. As a test for reasonableness, we also consider the combined fair values of our reporting units compared to our market capitalization.
See Item 1. Financial Statements, Note 5 - Goodwill and Other Intangible Assets, Goodwill, for disclosure information about our goodwill balances the results of impairment tests.
Income Taxes
We use the asset and liability approach for financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances based on our judgments and estimates are established when necessary to reduce deferred tax assets to the amount expected to be realized in future operating results. We believe that realization of deferred tax assets in excess of the valuation allowance is more likely than not. Our estimates are based on facts and circumstances in existence as well as interpretations of existing tax regulations and laws applied to the facts and circumstances, with the help of professional tax advisors. Therefore, we estimate and provide for amounts of additional income taxes that may be assessed by the various taxing authorities.
Loss Contingencies
Various legal actions, claims, and other contingencies arise in the normal course of our business. Contingencies are recorded in the condensed consolidated financial statements, or are otherwise disclosed, in accordance with Accounting Standard Codification ("ASC") Topic 450-20, “Loss Contingencies”. Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and estimable. We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes known. We believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results of operations or liquidity. However, the results of litigation are inherently unpredictable and the possibility exists that the ultimate resolution of one or more of these matters could result in a material effect on our financial position, results of operations or liquidity.
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, 2022, filed with the Securities and Exchange Commission. For more information on market risk, see Part II, Item 7A in our fiscal 2022 Annual Report on Form 10-K.
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Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e).
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2022. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level at December 31, 2022.
There have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting during the quarter ended December 31, 2022.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to a number of legal proceedings. We believe that the nature and number of these proceedings are typical for a company of our size engaged in our type of business and that none of these proceedings will result in a material effect on our business, results of operations, financial condition, cash flows or liquidity.
Item 1A. Risk Factors
There were no material changes in our Risk Factors from those reported in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The table below sets forth information with respect to purchases we made of our common stock during the second quarter of fiscal year 2023.
| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (C) | ||||||||||||||||||||
| October 1 to October 31, 2022 | |||||||||||||||||||||||
| Stock Buyback Program (A) | — | $ | — | — | 1,349,037 | ||||||||||||||||||
| Employee Transactions (B) | — | $ | — | — | — | ||||||||||||||||||
| November 1 to November 30, 2022 | |||||||||||||||||||||||
| Stock Buyback Program (A) | — | $ | — | — | 1,349,037 | ||||||||||||||||||
| Employee Transactions (B) | — | $ | — | — | — | ||||||||||||||||||
| December 1 to December 31, 2022 | |||||||||||||||||||||||
| Stock Buyback Program (A) | — | $ | — | — | 1,349,037 | ||||||||||||||||||
| Employee Transactions (B) | — | $ | — | — | — | ||||||||||||||||||
(A)Represents shares purchased under our Stock Buyback Program.
(B)Represents shares withheld to satisfy the employee’s tax withholding obligation that is incurred upon the vesting of deferred shares granted under our stock incentive plans.
(C)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. The terms of our ABL Facility also limit share repurchases to $2.5 million per fiscal year provided that we meet certain availability thresholds and we do not violate our Fixed Charge Coverage Ratio financial covenant. We made no repurchases under the program in the second quarter of fiscal 2023 and have no current plans to repurchase stock.
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.
Item 3. Defaults Upon Senior Securities
None
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Item 4. Mine Safety Disclosures
Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires domestic mine operators to disclose violations and orders issued under the Federal Mine Safety and Health Act of 1977 (the "Mine Act") by the Federal Mine Safety and Health Administration. We do not act as the owner of any mines, but as a result of our performing services or construction at mine sites as an independent contractor, we are considered an "operator" within the meaning of the Mine Act.
Information concerning mine safety violations or other regulatory matters required to be disclosed in this quarterly report under Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K is included in Exhibit 95.
Item 5. Other Information
None
Item 6. Exhibits:
The following documents are included as exhibits to this Quarterly Report on Form 10-Q. Any exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical hereafter.
| Exhibit No. | Description | |||||||
| Exhibit 3.1 | ||||||||
| Exhibit 10.1 | ||||||||
| Exhibit 31.1: | ||||||||
| Exhibit 31.2: | ||||||||
| Exhibit 32.1: | ||||||||
| Exhibit 32.2: | ||||||||
| Exhibit 95: | ||||||||
| Exhibit 101.INS: | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| Exhibit 101.SCH: | XBRL Taxonomy Schema Document. | |||||||
| Exhibit 101.CAL: | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| Exhibit 101.DEF: | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| Exhibit 101.LAB: | XBRL Taxonomy Extension Labels Linkbase Document. | |||||||
| Exhibit 101.PRE: | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MATRIX SERVICE COMPANY | ||||||||
| Date: | February 9, 2023 | By: /s/ Kevin S. Cavanah | ||||||
| Kevin S. Cavanah Vice President and Chief Financial Officer signing on behalf of the registrant and as the registrant’s principal financial officer | ||||||||
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EXHIBIT 31.1
CERTIFICATIONS
I, John R. Hewitt, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Matrix Service Company;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | February 9, 2023 | |||||||
| /s/ John R. Hewitt | ||||||||
| John R. Hewitt | ||||||||
| President and Chief Executive Officer | ||||||||
EXHIBIT 31.2
CERTIFICATIONS
I, Kevin S. Cavanah, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Matrix Service Company;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | February 9, 2023 | |||||||
| /s/ Kevin S. Cavanah | ||||||||
| Kevin S. Cavanah | ||||||||
| Vice President and Chief Financial Officer | ||||||||
EXHIBIT 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant
Section 906 of Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Matrix Service Company (the “Company”) on Form 10-Q for the period ending December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John R. Hewitt, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | February 9, 2023 | |||||||
| /s/ John R. Hewitt | ||||||||
| John R. Hewitt | ||||||||
| President and Chief Executive Officer | ||||||||
EXHIBIT 32.2
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant
Section 906 of Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Matrix Service Company (the “Company”) on Form 10-Q for the period ending December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kevin S. Cavanah, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | February 9, 2023 | |||||||
| /s/ Kevin S. Cavanah | ||||||||
| Kevin S. Cavanah | ||||||||
| Vice President and Chief Financial Officer | ||||||||
Exhibit 95
Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires domestic mine operators to disclose violations and orders issued under the Federal Mine Safety and Health Act of 1977 (the "Mine Act") by the federal Mine Safety and Health Administration ("MSHA"). We do not act as the owner of any mines, but as a result of our performing services or construction at mine sites as an independent contractor, we are considered an "operator" within the meaning of the Mine Act. The mine data retrieval system maintained by MSHA may show information that is different than what is provided herein. Any such difference may be attributed to the need to update that information on MSHA’s system and/or other factors.
The following table provides information for the three months ended December 31, 2022:
Mine or Operating Name/MSHA Identification Number | Section 104 S&S Citations(1) | Section 104(b) Orders(2) | Section 104(d) Citations and Orders(3) | Section 110(b)(2) Violations(4) | Section 107(a) Orders(5) | Total Dollar Value of MSHA Assessments Proposed ($) | Total Number of Mining Related Fatalities | Received Notice of Pattern of Violations Under Section 104(e)(6) (yes/no) | Received Notice of Potential to Have Pattern of Violations Under Section 104(e)(7) (yes/no) | Total Number of Legal Actions Pending as of Last Day of Period | Total Number of Legal Actions Initiated During Period | Total Number of Legal Actions Resolved During Period | ||||||||||||||||||||||||||
Freeport-McMoran Safford Mine, 02-03131 | — | — | — | — | — | — | — | No | No | — | — | — | ||||||||||||||||||||||||||
Freeport-McMoran Bagdad Mine, 02-00137 | — | — | — | — | — | — | — | No | No | — | — | — | ||||||||||||||||||||||||||
(1) The total number of citations issued under section 104 of the Mine Act for violations of mandatory health or safety standards that could significantly and substantially contribute to a serious injury if left unabated.
(2) The total number of orders issued under section 104(b) of the Mine Act, which represents a failure to abate a citation under section 104(a) within the period of time prescribed by MSHA.
(3) The total number of citations and orders issued by MSHA under section 104(d) of the Mine Act for unwarrantable failure to comply with mandatory health or safety standards.
(4) The total number of flagrant violations identified under section 110(b)(2) of the Mine Act.
(5) The total number of orders issued under section 107(a) of the Mine Act for situations in which MSHA determined an imminent danger existed.
(6) A written notice from the MSHA regarding a pattern of violations under section 104(e) of the Mine Act.
(7) A written notice from the MSHA regarding a potential to have a pattern of violations under section 104(e) of the Mine Act.