MATRIX SERVICE CO [MTRX] Filings

10-Q 1 mtrx-20221231.htm 10-Q mtrx-20221231

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


☐			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

__________________________________________

MATRIX SERVICE COMPANY

(Exact name of registrant as specified in its charter)

__________________________________________


Delaware						73-1352174
(State of incorporation)						(I.R.S. Employer Identification No.)

15 East 5th Street, Suite 1100, Tulsa, Oklahoma 74103

(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
Common Stock, par value $0.01 per share	MTRX	NASDAQ Global Select Market

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

☐

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

TABLE OF CONTENTS


		PAGE
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Income for the Three and Six Months Ended December 31, 2022 and 2021	1

	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2022 and 2021	2

	Condensed Consolidated Balance Sheets as of December 31, 2022 and June 30, 2022	3

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2022 and 2021	5

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended December 31, 2022 and 2021	7

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	36

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3.	Defaults Upon Senior Securities	37

Item 4.	Mine Safety Disclosures	38

Item 5.	Other Information	38

Item 6.	Exhibits	38

Signature		39

Table of Contents

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
	December 31, 2022		December 31, 2021		December 31, 2022		December 31, 2021
Revenue	$	193,840	$	161,965	$	402,271	$	330,058
Cost of revenue	195,142		158,758		390,565		330,359
Gross profit (loss)	(1,302)		3,207		11,706		(301)
Selling, general and administrative expenses	17,545		15,922		34,356		32,551
Goodwill impairment	12,316		—		12,316		—
Restructuring costs	1,278		695		2,565		1,300
Operating loss	(32,441)		(13,410)		(37,531)		(34,152)
Other income (expense):
Interest expense	(916)		(502)		(1,288)		(2,501)
Interest income	46		29		70		50
Other	484		(60)		(590)		(143)
Loss before income tax expense	(32,827)		(13,943)		(39,339)		(36,746)
Provision for federal, state and foreign income taxes	—		10,976		—		5,711
Net loss	$	(32,827)	$	(24,919)	$	(39,339)	$	(42,457)

Basic loss per common share	$	(1.22)	$	(0.93)	$	(1.46)	$	(1.59)
Diluted loss per common share	$	(1.22)	$	(0.93)	$	(1.46)	$	(1.59)
Weighted average common shares outstanding:
Basic	26,999		26,749		26,916		26,680
Diluted	26,999		26,749		26,916		26,680

See accompanying notes.

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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	$	(32,827)	$	(24,919)	$	(39,339)	$	(42,457)
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)	1,265		99		(488)		(696)
Comprehensive loss	$	(31,562)	$	(24,820)	$	(39,827)	$	(43,153)

See accompanying notes.

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Matrix Service Company

Condensed Consolidated Balance Sheets

(In thousands)

(unaudited)


	December 31, 2022		June 30, 2022
Assets
Current assets:
Cash and cash equivalents	$	31,464	$	52,371
Accounts receivable, less allowances (December 31, 2022—$1,112 and June 30, 2022—$1,320)	182,054		153,879
Costs and estimated earnings in excess of billings on uncompleted contracts	46,588		44,752
Inventories	7,981		9,974
Income taxes receivable	13,546		13,547
Prepaid expenses	8,104		4,024
Other current assets	4,745		8,865
Total current assets	294,482		287,412
Restricted cash	25,000		25,000
Property, plant and equipment - net	50,684		53,869
Operating lease right-of-use assets	23,938		22,067
Goodwill	29,733		42,135
Other intangible assets, net of accumulated amortization	3,931		4,796

Other assets, non-current	10,350		5,514
Total assets	$	438,118	$	440,793

See accompanying notes.

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Matrix Service Company

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)


	December 31, 2022		June 30, 2022
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	80,561	$	74,886
Billings on uncompleted contracts in excess of costs and estimated earnings	99,762		65,106
Accrued wages and benefits	12,352		21,526

Accrued insurance	5,818		6,125
Operating lease liabilities	4,534		5,715

Other accrued expenses	5,525		4,427
Total current liabilities	208,552		177,785
Deferred income taxes	27		26
Operating lease liabilities	22,713		19,904
Borrowings under asset-backed credit facility	15,000		15,000
Other liabilities, non-current	374		372
Total liabilities	246,666		213,087
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	279		279
Additional paid-in capital	137,989		139,854
Retained earnings	71,939		111,278
Accumulated other comprehensive loss	(8,663)		(8,175)
	201,544		243,236
Treasury stock, at cost — 860,894 shares as of December 31, 2022, and 1,097,703 shares as of June 30, 2022	(10,092)		(15,530)
Total stockholders' equity	191,452		227,706
Total liabilities and stockholders’ equity	$	438,118	$	440,793

See accompanying notes.

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Matrix Service Company

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)


	Six Months Ended
	December 31, 2022		December 31, 2021
Operating activities:
Net loss	$	(39,339)	$	(42,457)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and amortization	7,177		7,841
Goodwill impairment	12,316		—
Stock-based compensation expense	3,747		3,735

Deferred income tax	—		5,340

Loss (gain) on sale of property, plant and equipment	42		(102)
Provision for uncollectible accounts	(50)		(35)
Accelerated amortization of deferred debt amendment fees	—		1,518
Other	132		45
Changes in operating assets and liabilities increasing (decreasing) cash:
Accounts receivable	(28,125)		26,464
Costs and estimated earnings in excess of billings on uncompleted contracts	(1,836)		(3,729)
Inventories	1,993		1,045
Other assets and liabilities	(5,170)		(3,784)
Accounts payable	5,253		(4,866)
Billings on uncompleted contracts in excess of costs and estimated earnings	34,656		31,027
Accrued expenses	(8,381)		(10,657)
Net cash provided (used) by operating activities	(17,585)		11,385
Investing activities:
Capital expenditures	(2,843)		(569)


Proceeds from asset sales	31		108
Net cash used by investing activities	$	(2,812)	$	(461)

See accompanying notes.

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Matrix Service Company

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)


	Six Months Ended
	December 31, 2022		December 31, 2021
Financing activities:
Advances under asset-backed credit facility	$	10,000	$	—
Repayments of advances under asset-backed credit facility	(10,000)		—
Payment of debt amendment fees	—		(1,010)

Issuances of common stock	—		199

Proceeds from issuance of common stock under employee stock purchase plan	136		143
Repurchase of common stock for payment of statutory taxes due on equity-based compensation	(310)		(853)
Other Treasury Share Purchases	—		(236)



Net cash used by financing activities	(174)		(1,757)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(336)		(405)
Net increase (decrease) in cash, cash equivalents and restricted cash	(20,907)		8,762
Cash, cash equivalents and restricted cash, beginning of period	77,371		83,878
Cash, cash equivalents and restricted cash, end of period	$	56,464	$	92,640
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Income taxes	$	—	$	(341)
Interest, including payment of debt amendment fees	$	1,056	$	1,798

Non-cash investing and financing activities:
Purchases of property, plant and equipment on account	$	476	$	5

See accompanying notes.

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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	$	279	$	137,651	$	104,766	$	(9,928)	$	(11,517)	$	221,251
Net loss	—		—		(32,827)		—		—		(32,827)
Other comprehensive income	—		—		—		1,265		—		1,265


Issuance of deferred shares (54,702 shares)	—		(1,085)		—		—		1,085		—
Treasury shares sold to Employee Stock Purchase Plan (17,111 shares)	—		(269)		—		—		340		71


Stock-based compensation expense	—		1,692		—		—		—		1,692
Balances, December 31, 2022	$	279	$	137,989	$	71,939	$	(8,663)	$	(10,092)	$	191,452

Balances, September 30, 2021	$	279	$	135,308	$	157,640	$	(7,544)	$	(17,385)	$	268,298
Net loss	—		—		(24,919)		—		—		(24,919)
Other comprehensive income	—		—		—		99		—		99
Exercise of stock options (19,550 shares)	—		(189)		—		—		388		199

Issuance of deferred shares (51,319 shares)	—		(1,018)		—		—		1,018		—
Treasury shares sold to Employee Stock Purchase Plan (6,078 shares)	—		(54)		—		—		121		67


Stock-based compensation expense	—		1,866		—		—		—		1,866
Balances, December 31, 2021	$	279	$	135,913	$	132,721	$	(7,445)	$	(15,858)	$	245,610

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	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
Balances, June 30, 2022	$	279	$	139,854	$	111,278	$	(8,175)	$	(15,530)	$	227,706
Net loss	—		—		(39,339)		—		—		(39,339)
Other comprehensive loss	—		—		—		(488)		—		(488)


Issuance of deferred shares (259,529 shares)	—		(5,149)		—		—		5,149		—
Treasury shares sold to Employee Stock Purchase Plan (30,144 shares)	—		(463)		—		—		599		136

Treasury shares purchased to satisfy tax withholding obligations (52,864 shares)	—		—		—		—		(310)		(310)
Stock-based compensation expense	—		3,747		—		—		—		3,747
Balances, December 31, 2022	$	279	$	137,989	$	71,939	$	(8,663)	$	(10,092)	$	191,452

Balances, June 30, 2021	$	279	$	137,575	$	175,178	$	(6,749)	$	(20,744)	$	285,539
Net loss	—		—		(42,457)		—		—		(42,457)
Other comprehensive income loss	—		—		—		(696)		—		(696)
Exercise of stock options (19,550 shares)	—		(189)		—		—		388		199

Issuance of deferred shares (268,403 shares)	—		(5,102)		—		—		5,102		—
Treasury shares sold to Employee Stock Purchase Plan (13,287 shares)	—		(106)		—		—		249		143

Treasury shares purchased to satisfy tax withholding obligations (76,703 shares)	—		—		—		—		(853)		(853)
Stock-based compensation expense	—		3,735		—		—		—		3,735
Balances, December 31, 2021	$	279	$	135,913	$	132,721	$	(7,445)	$	(15,858)	$	245,610

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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:


	December 31, 2022		June 30, 2022		Change
	(in thousands)
Costs and estimated earnings in excess of billings on uncompleted contracts	$	46,588	$	44,752	$	1,836
Billings on uncompleted contracts in excess of costs and estimated earnings	(99,762)		(65,106)		(34,656)
Net contract liabilities	$	(53,174)	$	(20,354)	$	(32,820)

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.

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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
	December 31, 2022		December 31, 2021		December 31, 2022		December 31, 2021
	(In thousands)
United States	$	170,290	$	145,917	$	346,470	$	299,201
Canada	20,885		15,260		45,810		28,770
Other international	2,665		788		9,991		2,087
Total Revenue	$	193,840	$	161,965	$	402,271	$	330,058

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	$	105,283	$	100,841	$	214,756	$	202,906
Time and materials and other cost reimbursable contracts	88,557		61,124		187,515		127,152
Total Revenue	$	193,840	$	161,965	$	402,271	$	330,058

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.

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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:


	December 31, 2022		June 30, 2022
	(In thousands)
Property, plant and equipment - at cost:
Land and buildings	$	36,391	$	34,788
Construction equipment	91,954		93,036
Transportation equipment	48,908		48,999
Office equipment and software	41,984		43,823
Construction in progress	828		1,646
Total property, plant and equipment - at cost	220,065		222,292
Accumulated depreciation	(169,381)		(168,423)
Property, plant and equipment - net	$	50,684	$	53,869

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, 2022		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	$	1,788	$	1,878	$	3,551	$	3,970
Short-term lease expense(1)	Cost of revenue	7,534		5,292		14,817		10,863
Total lease expense		$	9,322	$	7,170	$	18,368	$	14,833

(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.

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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:


	December 31, 2022
Maturity Analysis:	(in thousands)
Remainder of Fiscal 2023	$	2,863
Fiscal 2024	5,634
Fiscal 2025	4,269
Fiscal 2026	4,246
Fiscal 2027	4,161
Thereafter	12,843
Total future operating lease payments	34,016
Imputed interest	(6,769)
Net present value of future lease payments	27,247
Less: current portion of operating lease liabilities	4,534
Non-current operating lease liabilities	$	22,713

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)	6.8 years
Weighted-average discount rate	6.1	%

Supplemental cash flow information related to leases is as follows:


	Six Months Ended
	December 31, 2022
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating lease payments	$	3,617
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	$	5,219

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	$	4,263	$	18,427	$	19,445	$	42,135


Goodwill impairment	—		(12,316)		—		(12,316)
Translation adjustment(1)	(29)		—		(57)		(86)
Net balance at December 31, 2022	$	4,234	$	6,111	$	19,388	$	29,733

(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.

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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	$	2,483	$	(2,286)	$	197
Customer-based(1)	6 to 15	13,144		(9,410)		3,734


Total amortizing intangible assets		$	15,627	$	(11,696)	$	3,931

(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	$	2,558	$	(2,276)	$	282
Customer-based	6 to 15	17,331		(12,817)		4,514


Total amortizing intangible assets		$	19,889	$	(15,093)	$	4,796

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	$	864
Fiscal 2024	1,416
Fiscal 2025	1,096
Fiscal 2026	555

Total estimated remaining amortization expense at December 31, 2022	$	3,931

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Table of Contents

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.

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Table of Contents

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

Basic earnings per share (“Basic EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share (“Diluted EPS”) includes the dilutive effect of stock options and nonvested deferred shares. In the event we report a loss, stock options and nonvested deferred shares are not included since they are anti-dilutive.

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Table of Contents

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
	December 31, 2022		December 31, 2021		December 31, 2022		December 31, 2021
	(In thousands, except per share data)
Basic EPS:
Net loss	$	(32,827)	$	(24,919)	$	(39,339)	$	(42,457)
Weighted average shares outstanding	26,999		26,749		26,916		26,680
Basic loss per share	$	(1.22)	$	(0.93)	$	(1.46)	$	(1.59)
Diluted EPS:
Net loss	$	(32,827)	$	(24,919)	$	(39,339)	$	(42,457)



Diluted weighted average shares outstanding	26,999		26,749		26,916		26,680
Diluted loss per share	$	(1.22)	$	(0.93)	$	(1.46)	$	(1.59)

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.

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Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

Results of Operations

(In thousands)


	Three Months Ended				Six Months Ended
	December 31, 2022		December 31, 2021		December 31, 2022		December 31, 2021
Gross revenue
Utility and Power Infrastructure	$	50,589	$	54,752	$	95,459	$	111,956
Process and Industrial Facilities	80,789		52,037		167,526		97,247
Storage and Terminal Solutions	63,130		57,607		140,420		125,919

Total gross revenue	$	194,508	$	164,396	$	403,405	$	335,122
Less: Inter-segment revenue
Utility and Power Infrastructure	$	54	$	—	$	54	$	—
Process and Industrial Facilities	—		1,721		109		3,026
Storage and Terminal Solutions	614		710		971		2,038

Total inter-segment revenue	$	668	$	2,431	$