mtrx-20210331

Table of Contents

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 March 31, 2021


☐			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.)

5100 East Skelly Drive, Suite 500, Tulsa, Oklahoma 74135

(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 May 6, 2021 there were 27,888,217 shares of the Company’s common stock, $0.01 par value per share, issued and 26,524,288 shares 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 Nine Months Ended March 31, 2021 and 2020	1

	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended March 31, 2021 and 2020	2

	Condensed Consolidated Balance Sheets as of March 31, 2021 and June 30, 2020	3

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2021 and 2020	5

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended March 31, 2021 and 2020	6

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	39

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	41

Item 4.	Mine Safety Disclosures	41

Item 5.	Other Information	42

Item 6.	Exhibits	42

Signature		44

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				Nine Months Ended
	March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020
Revenue	$	148,260	$	248,327	$	498,499	$	905,101
Cost of revenue	146,700		227,850		467,276		822,158
Gross profit	1,560		20,477		31,223		82,943
Selling, general and administrative expenses	17,179		19,718		52,031		66,574
Goodwill and other intangible asset impairments	—		—		—		38,515
Restructuring costs	1,860		6,559		6,585		6,559
Operating loss	(17,479)		(5,800)		(27,393)		(28,705)
Other income (expense):
Interest expense	(322)		(398)		(1,055)		(1,231)
Interest income	25		356		96		1,247
Other	(157)		(767)		1,849		(368)
Loss before income tax benefit	(17,933)		(6,609)		(26,503)		(29,057)
Benefit from federal, state and foreign income taxes	(5,060)		(1,114)		(6,002)		(1,705)
Net loss	$	(12,873)	$	(5,495)	$	(20,501)	$	(27,352)

Basic loss per common share	$	(0.49)	$	(0.21)	$	(0.78)	$	(1.02)
Diluted loss per common share	$	(0.49)	$	(0.21)	$	(0.78)	$	(1.02)
Weighted average common shares outstanding:
Basic	26,515		26,478		26,422		26,781
Diluted	26,515		26,478		26,422		26,781

See accompanying notes.

-1-

Table of Contents

Matrix Service Company

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(unaudited)


	Three Months Ended				Nine Months Ended
	March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020
Net loss	$	(12,873)	$	(5,495)	$	(20,501)	$	(27,352)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) (net of tax expense (benefit) of ($33) and $20 for the three and nine months ended March 31, 2021, respectively, and ($51) and ($14) for the three and nine months ended March 31, 2020, respectively)	68		(1,104)		1,291		(975)
Comprehensive loss	$	(12,805)	$	(6,599)	$	(19,210)	$	(28,327)

See accompanying notes.

-2-

Table of Contents

Matrix Service Company

Condensed Consolidated Balance Sheets

(In thousands)

(unaudited)


	March 31, 2021		June 30, 2020
Assets
Current assets:
Cash and cash equivalents	$	73,751	$	100,036
Accounts receivable, less allowances (March 31, 2021—$856 and June 30, 2020—$905)	158,099		160,671
Costs and estimated earnings in excess of billings on uncompleted contracts	37,964		59,548
Inventories	6,217		6,460
Income taxes receivable	11,443		3,919
Other current assets	7,013		4,526
Total current assets	294,487		335,160
Property, plant and equipment at cost:
Land and buildings	41,379		42,695
Construction equipment	95,526		94,154
Transportation equipment	52,467		55,864
Office equipment and software	41,196		39,356
Construction in progress	2,217		4,427
Total property, plant and equipment - at cost	232,785		236,496
Accumulated depreciation	(160,051)		(155,748)
Property, plant and equipment - net	72,734		80,748
Operating lease right-of-use assets	21,109		21,375
Goodwill	60,605		60,369
Other intangible assets, net of accumulated amortization	7,181		8,837
Deferred income taxes	4,513		5,988
Other assets	11,048		4,833
Total assets	$	471,677	$	517,310

See accompanying notes.

-3-

Table of Contents

Matrix Service Company

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)


	March 31, 2021		June 30, 2020
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	50,163	$	73,094
Billings on uncompleted contracts in excess of costs and estimated earnings	59,495		63,889
Accrued wages and benefits	21,983		16,205

Accrued insurance	7,437		7,301
Operating lease liabilities	5,199		7,568

Other accrued expenses	4,958		7,890
Total current liabilities	149,235		175,947
Deferred income taxes	34		61
Operating lease liabilities	20,651		19,997
Borrowings under senior secured revolving credit facility	—		9,208
Other liabilities	7,897		4,208
Total liabilities	177,817		209,421
Commitments and contingencies
Stockholders’ equity:

Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of March 31, 2021 and June 30, 2020; 26,519,217 and 26,141,528 shares outstanding as of March 31, 2021 and June 30, 2020	279		279
Additional paid-in capital	136,042		138,966
Retained earnings	185,901		206,402
Accumulated other comprehensive loss	(7,082)		(8,373)
	315,140		337,274
Less: Treasury stock, at cost — 1,369,000 shares as of March 31, 2021, and 1,746,689 shares as of June 30, 2020	(21,280)		(29,385)
Total stockholders' equity	293,860		307,889
Total liabilities and stockholders’ equity	$	471,677	$	517,310

See accompanying notes.

-4-

Table of Contents

Matrix Service Company

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)


	Nine Months Ended
	March 31, 2021		March 31, 2020
Operating activities:
Net loss	$	(20,501)	$	(27,352)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and amortization	13,639		14,388
Goodwill and other intangible asset impairment	—		38,515
Stock-based compensation expense	6,413		8,115
Operating lease impairment due to restructuring	454		2,660
Deferred income tax	1,468		(3,091)

Gain on sale of property, plant and equipment	(1,123)		(536)
Provision for uncollectible accounts	(38)		1,292
Other	317		(110)
Changes in operating assets and liabilities increasing (decreasing) cash:
Accounts receivable	2,610		7,945
Costs and estimated earnings in excess of billings on uncompleted contracts	21,584		39,224
Inventories	243		279
Other assets and liabilities	(17,825)		5,427
Accounts payable	(22,966)		(35,129)
Billings on uncompleted contracts in excess of costs and estimated earnings	(4,394)		(5,060)
Accrued expenses	6,907		(15,080)
Net cash provided (used) by operating activities	(13,212)		31,487
Investing activities:
Capital expenditures	(3,897)		(17,650)


Proceeds from asset sales	1,784		1,018
Net cash used by investing activities	$	(2,113)	$	(16,632)

See accompanying notes.

-5-

Table of Contents

Matrix Service Company

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)


	Nine Months Ended
	March 31, 2021		March 31, 2020
Financing activities:
Advances under senior secured revolving credit facility	$	1,125	$	18,567
Repayments of advances under senior secured revolving credit facility	(10,913)		(14,357)
Payment of debt amendment fees	(924)		—
Open market purchase of treasury shares	—		(17,045)
Issuances of common stock	92		—

Proceeds from issuance of common stock under employee stock purchase plan	230		243
Repurchase of common stock for payment of statutory taxes due on equity-based compensation	(1,554)		(3,517)
Repayment of principal portion of long-term liability	(236)		—



Net cash used by financing activities	(12,180)		(16,109)
Effect of exchange rate changes on cash and cash equivalents	1,220		(958)
Decrease in cash and cash equivalents	(26,285)		(2,212)
Cash and cash equivalents, beginning of period	100,036		89,715
Cash and cash equivalents, end of period	$	73,751	$	87,503
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	200	$	5,841
Interest	$	1,404	$	1,535

Non-cash investing and financing activities:
Purchases of property, plant and equipment on account	$	33	$	414

See accompanying notes.

-6-

Table of Contents

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		Treasury Stock		Accumulated Other Comprehensive Income(Loss)		Total
Balances, January 1, 2021	$	279	$	133,957	$	198,774	$	(21,571)	$	(7,150)	$	304,289
Net loss	—		—		(12,873)		—		—		(12,873)
Other comprehensive income	—		—		—		—		68		68
Exercise of stock options (9,000 shares)	—		(68)		—		160		—		92

Issuance of deferred shares (900 shares)	—		(16)		—		16		—		—
Treasury shares sold to Employee Stock Purchase Plan (6,785 shares)	—		(45)		—		120		—		75

Treasury shares purchased to satisfy tax withholding obligations (428 shares)	—		—		—		(5)		—		(5)
Stock-based compensation expense	—		2,214		—		—		—		2,214
Balances, March 31, 2021	$	279	$	136,042	$	185,901	$	(21,280)	$	(7,082)	$	293,860

Balances, January 1, 2020	$	279	$	135,057	$	217,619	$	(22,538)	$	(7,622)	$	322,795
Net loss	—		—		(5,495)		—		—		(5,495)
Other comprehensive loss	—		—		—		—		(1,104)		(1,104)


Issuance of deferred shares (4,650 shares)	—		(77)		—		77		—		—
Treasury shares sold to Employee Stock Purchase Plan (3,805 shares)	—		24		—		62		—		86
Open market purchase of treasury shares (547,606 shares)	—		—		—		(7,132)		—		(7,132)
Treasury shares purchased to satisfy tax withholding obligations (1,608 shares)	—		—		—		(26)		—		(26)
Stock-based compensation expense	—		2,302		—		—		—		2,302
Balances, March 31, 2020	$	279	$	137,306	$	212,124	$	(29,557)	$	(8,726)	$	311,426

-7-

Table of Contents

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		Treasury Stock		Accumulated Other Comprehensive Income(Loss)		Total
Balances, July 1, 2020	$	279	$	138,966	$	206,402	$	(29,385)	$	(8,373)	$	307,889
Net loss	—		—		(20,501)		—		—		(20,501)
Other comprehensive income	—		—		—		—		1,291		1,291
Exercise of stock options (9,000 shares)	—		(68)		—		160		—		92

Issuance of deferred shares (515,218 shares)	—		(9,083)		—		9,083		—		—
Treasury shares sold to Employee Stock Purchase Plan (24,100 shares)	—		(186)		—		416		—		230

Treasury shares purchased to satisfy tax withholding obligations (170,629 shares)	—		—		—		(1,554)		—		(1,554)
Stock-based compensation expense	—		6,413		—		—		—		6,413
Balances, March 31, 2021	$	279	$	136,042	$	185,901	$	(21,280)	$	(7,082)	$	293,860

Balances, July 1, 2019	$	279	$	137,712	$	239,476	$	(17,759)	$	(7,751)	$	351,957
Net loss	—		—		(27,352)		—		—		(27,352)
Other comprehensive loss	—		—		—		—		(975)		(975)


Issuance of deferred shares (539,710 shares)	—		(8,563)		—		8,563		—		—
Treasury shares sold to Employee Stock Purchase Plan (12,326 shares)	—		42		—		201		—		243
Open market purchase of treasury shares (1,047,606 shares)	—		—		—		(17,045)		—		(17,045)
Treasury shares purchased to satisfy tax withholding obligations (180,278 shares)	—		—		—		(3,517)		—		(3,517)
Stock-based compensation expense	—		8,115		—		—		—		8,115
Balances, March 31, 2020	$	279	$	137,306	$	212,124	$	(29,557)	$	(8,726)	$	311,426

See accompanying notes.

-8-

Table of Contents

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 financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2020, included in the Company’s Annual Report on Form 10-K for the year then ended. The results of operations for the three and nine month periods ended March 31, 2021 may not necessarily be indicative of the results of operations for the full year ending June 30, 2021.

Significant Accounting Policies

The Company has updated its significant accounting policies as a result of adopting the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments-Credit Losses (Topic 326) on July 1, 2020, and our change in reportable segments effective July 1, 2020. The Company's other 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, 2020.

Credit Losses

Adoption of New Credit Losses Standard

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which changed how the Company accounts for credit losses, including those related to its accounts receivable and contract assets. Under this guidance, a financial asset (or a group of financial assets) are required to be presented at the net amount expected to be collected. The statement of income reflects any increases or decreases of expected credit losses that have taken place during the period.

The amendments in this update eliminate the probable initial recognition threshold and, instead, reflect the Company's current estimate of all lifetime expected credit losses on its accounts receivable and contract asset balances. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amounts. The Company determines its allowance for credit losses by using a loss-rate methodology, in which it assesses historical write-offs against total receivables and contract asset balances over several periods. In addition, the Company places reserves on specific balances as needed based on the most recent estimates of collectibility. The Company's adoption of this standard on July 1, 2020 did not have a material impact on its estimate of the allowance for credit losses.

Change in Reportable Segments

Due to changing markets facing our clients and to better align the financial reporting of the Company with our long-term strategic growth areas, we began reporting our financial results under new reportable segments effective July 1, 2020. The new reportable segments along with a description of each are as follows:

-9-

Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

•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. The Company also provides construction and maintenance services to a variety of power generation facilities, including gas fired facilities in simple or combined cycle configuration, and provides engineering, fabrication, and construction services for liquefied natural gas ("LNG") utility peak shaving facilities.

•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. The Company also serves 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. The Company's services include plant maintenance, turnarounds, industrial cleaning services, engineering, fabrication, and capital construction.

•Storage and Terminal Solutions: consists of work related to aboveground storage tanks and terminals. Also included in this segment are cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum, hydrogen and other specialty vessels such as spheres, as well as marine structures and truck and rail loading/offloading facilities. The Company's services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, the Company offers tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.

All prior period segment information has been restated to conform with our new reportable segments. In addition, beginning July 1, 2020, the Company is reporting separately corporate selling, general and administrative expenses and other corporate expenses that were previously allocated to the segments. Refer to Note 9 - Segment Information, and Part I, Item 2 - Management's Discussion and Analysis - Results of Operations, for more information.

Note 2 – Revenue

Remaining Performance Obligations

The Company had $444.5 million of remaining performance obligations yet to be satisfied as of March 31, 2021. The Company expects to recognize $340.8 million of its remaining performance obligations as revenue within the next twelve months.

Contract Balances

Contract terms with customers include the timing of billing and payment, 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:


	March 31, 2021		June 30, 2020		Change
	(in thousands)
Costs and estimated earnings in excess of billings on uncompleted contracts	$	37,964	$	59,548	$	(21,584)
Billings on uncompleted contracts in excess of costs and estimated earnings	(59,495)		(63,889)		4,394
Net contract liabilities	$	(21,531)	$	(4,341)	$	(17,190)

The difference between the beginning and ending balances of the Company's CIE and BIE primarily results from the timing of revenue recognized relative to its billings. The amount of revenue recognized during the nine months ended March 31, 2021 that was included in the June 30, 2020 BIE balance was $57.9 million. This revenue consists primarily of work performed during the period on contracts with customers that had advance billings.

-10-

Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

Progress billings in accounts receivable at March 31, 2021 and June 30, 2020 included retentions to be collected within one year of $20.7 million and $37.3 million, respectively. Contract retentions collectible beyond one year are included in other assets in the Condensed Consolidated Balance Sheet and totaled $3.8 million as of March 31, 2021 and $1.6 million as of June 30, 2020.

Disaggregated Revenue

Revenue disaggregated by reportable segment is presented in Note 9 - Segment Information. The following series of tables presents revenue disaggregated by geographic area where the work was performed and by contract type:

Geographic Disaggregation:


	Three Months Ended				Nine Months Ended
	March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020
	(In thousands)
United States	$	138,001	$	232,606	$	445,578	$	838,371
Canada	8,930		12,633		47,673		58,506
Other international	1,329		3,088		5,248		8,224
Total Revenue	$	148,260	$	248,327	$	498,499	$	905,101

Contract Type Disaggregation:


	Three Months Ended				Nine Months Ended
	March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020
	(In thousands)
Fixed-price contracts	$	96,412	$	182,282	$	343,639	$	533,375
Time and materials and other cost reimbursable contracts	51,848		66,045		154,860		371,726
Total Revenue	$	148,260	$	248,327	$	498,499	$	905,101

Typically, the Company assumes 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.

Other

Our results of operations were materially impacted by an increase in the forecasted costs to complete a large capital project in the Utility and Power Infrastructure segment, which resulted in a decrease in gross profit of $8.9 million in the three and nine months ended March 31, 2021. The change in estimate was due to lower than previously forecasted productivity caused by excessive rain at the project site, the continuing impact of COVID-19, and rework which led to higher costs and some schedule compression. The profit on future revenue related to this project will be recognized based on the current project forecast, which is at a reduced gross profit margin.

During the third quarter, the Company achieved mechanical completion of a large crude oil terminal project, demobilized from the project site and completed its assessment of additional recovery of unpriced change orders. The project's financial impact for the nine months ended March 31, 2021 was a $3.8 million reduction to gross profit.

-11-

Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 3 – Leases

The Company enters into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. Real estate leases accounted for approximately 95% of all right-of-use assets as of March 31, 2021. 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 a year to 15 years. Construction equipment leases generally have "month-to-month" lease terms that automatically renew as long as the equipment remains in use.

During the nine months ended March 31, 2021, the Company recognized $0.5 million of impairments of right-of-use assets in connection with the closure of leased office space. The impairments are included in restructuring costs in the condensed consolidated statements of income.

The components of lease expense in the condensed consolidated statements of income are as follows:


		Three Months Ended				Nine Months Ended
		March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020
Lease expense	Location of Expense	(in thousands)
Operating lease expense	Cost of revenue and selling, general and administrative expenses	$	1,743	$	3,229	$	6,542	$	9,601
Short-term lease expense(1)	Cost of revenue	6,772		9,808		19,020		30,423
Total lease expense		$	8,515	$	13,037	$	25,562	$	40,024

(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.

The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in the Company's Condensed Consolidated Balance Sheets, were as follows:


	March 31, 2021
Maturity Analysis:	(in thousands)
Remainder of Fiscal 2021	$	1,638
Fiscal 2022	6,123
Fiscal 2023	4,441
Fiscal 2024	3,390
Fiscal 2025	2,864
Thereafter	12,988
Total future operating lease payments	31,444
Imputed interest	(5,594)
Net present value of future lease payments	25,850
Less: current portion of operating lease liabilities	5,199
Non-current operating lease liabilities	$	20,651

The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of March 31, 2021:


Weighted-average remaining lease term (in years)	7.4 years
Weighted-average discount rate	5.4	%

-12-

Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

Supplemental cash flow information related to leases is as follows:


	Nine Months Ended
	March 31, 2021
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	8,072
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	$	5,576

Note 4 – Intangible Assets Including Goodwill

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, 2020	$	6,905	$	26,846	$	26,618	$	60,369



Translation adjustment(1)	70		27		139		236
Net balance at March 31, 2021	$	6,975	$	26,873	$	26,757	$	60,605

(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.

The Company tests its goodwill for impairment annually as of May 31st. While there continues to be uncertainty around the near-term level of spending by some of our customers due to the impacts of the COVID-19 pandemic and the timing of the economic recovery in certain energy markets, the Company concluded, that based on the totality of both positive and negative factors, no impairment indicators existed at March 31, 2021. However, if customer spending levels do not improve or if the outlook in certain key markets deteriorates, the Company may need to recognize an impairment in conjunction with the annual test in the fourth quarter.

Other Intangible Assets

Information on the carrying value of other intangible assets is as follows:


		At March 31, 2021
	Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(Years)	(In thousands)
Intellectual property	10 to 15	$	2,483	$	(1,989)	$	494
Customer-based	6 to 15	17,300		(10,613)		6,687


Total amortizing intangible assets		$	19,783	$	(12,602)	$	7,181

-13-

Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)


		At June 30, 2020
	Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(Years)	(In thousands)
Intellectual property	10 to 15	$	2,579	$	(1,956)	$	623
Customer-based	6 to 15	21,840		(13,626)		8,214


Total amortizing intangible assets		$	24,419	$	(15,582)	$	8,837

Amortization expense totaled $0.6 million and $1.7 million during the three and nine months ended March 31, 2021 and $0.8 million and $2.7 million during the three and nine months ended March 31, 2020, respectively.

We estimate that the remaining amortization expense related to March 31, 2021 amortizing intangible assets will be as follows (in thousands):


Period ending:
Remainder of Fiscal 2021	$	568
Fiscal 2022	1,817
Fiscal 2023	1,729
Fiscal 2024	1,416
Fiscal 2025	1,126
Fiscal 2026	167
Thereafter	358

Total estimated remaining amortization expense at March 31, 2021	$	7,181

Note 5 – Debt

On November 2, 2020, the Company entered into the Fifth Amended and Restated Credit Agreement (the “Credit Agreement”), by and among the Company and certain foreign subsidiaries, as Borrowers, various subsidiaries of the Company, as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole Bookrunner, and the other Lenders party thereto. The Credit Agreement replaced the Fourth Amended and Restated Credit Agreement, which is described in Part II, Item 8. Financial Statements and Supplementary Data, Note 5 - Debt, in the Company’s Annual Report on Form 10-K for the year ended June 30, 2020.

The Credit Agreement provides for a three-year senior secured revolving credit facility of $200.0 million that expires November 2, 2023. The credit facility may be used for working capital, acquisitions, capital expenditures, issuances of letters of credit and other lawful purposes.

The credit facility includes a U.S. Dollar equivalent sublimit of $75.0 million for revolving loans denominated in Australian Dollars, Canadian Dollars, Euros and Pounds Sterling and letters of credit in Australian Dollars, Euros, and Pounds Sterling.

Each revolving borrowing under the Credit Agreement will bear interest at a rate per annum equal to:

•The ABR or the Adjusted LIBO Rate, in the case of revolving loans denominated in U.S. Dollars;

•The Canadian Prime Rate or the CDOR rate, in the case of revolving loans denominated in Canadian Dollars;

•The Adjusted LIBO Rate or the Adjusted EURIBOR Rate, in the case of revolving loans denominated in Pounds Sterling or Australian Dollars; or

•The Adjusted EURIBOR Rate, in the case of revolving loans denominated in Euros,

-14-

Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

in each case, plus the Applicable Margin, which is based on the Company's Leverage Ratio. The Applicable Margin on ABR loans ranges between 1.00% and 2.00%. The Applicable Margin for Adjusted LIBO, Adjusted EURIBOR and CDOR loans ranges between 2.00% and 3.00% and the Applicable Margin for Canadian Prime Rate loans ranges between 2.50% and 3.50%.

The unused credit facility fee is between 0.35% and 0.50% based on the Leverage Ratio.

Covenants and limitations under the Credit Agreement include the following:

•Our Leverage Ratio, determined as of the end of each fiscal quarter, may not exceed 3.00 to 1.00. The Leverage Ratio covenant requires that Consolidated Funded Indebtedness, as defined in the Credit Agreement, as of the end of any fiscal quarter, may not exceed 3.0 times Consolidated EBITDA, as defined in the Credit Agreement, or “Covenant EBITDA,” over the previous four quarters.

•We are required to maintain a Fixed Charge Coverage Ratio (“FCCR”), determined as of the end of each fiscal quarter, greater than or equal to 1.25 to 1.00. The FCCR is calculated as follows:

◦If no borrowings are outstanding at quarter end, then the FCCR covenant requires that, as of the end of any fiscal quarter, Covenant EBITDA, after deducting capital expenditures and dividends for the previous four quarters, may not be less than 1.25 times the total of interest expense and cash paid for income taxes over the previous four quarters plus scheduled maturities of certain indebtedness for the next four quarters.

◦If borrowings are outstanding at quarter end, the FCCR is calculated the same except that all share repurchases for the previous four quarters are also deducted from Covenant EBITDA.

•Asset dispositions (other than dispositions in which all of the net cash proceeds therefrom are reinvested into the Company and dispositions of inventory and obsolete or unneeded equipment in the ordinary course of business) are limited to $20.0 million per 12-month period.

•Share repurchases are limited to $30.0 million per calendar year.

The Company entered into the Amended Credit Agreement to obtain temporary relief from the financial covenants due to the continued decline in operating results. Under the Amended Credit Agreement, the Company will not be required to comply with the Leverage Ratio and FCCR financial covenants for the quarters ending March 31, 2021, June 30, 2021, September 30, 2021 and December 31, 2021.

The Amended Credit Agreement adds a number of new requirements and restrictions. During a “Covenant Relief Period” commencing May 4, 2021 and ending on the date on which the Company provides a compliance certificate for the quarter ending March 31, 2022:

•No revolving loans will be made under the credit facility.

•If any new letters of credit are issued during the Covenant Relief Period, the Company will be required to provide cash collateral equal to 50% of the face value of the letter of credit (or 105% of the face value of the letter of credit if the aggregate amount of letters of credit outstanding exceeds $100 million).

•At all times prior to July 1, 2021, the Company will be required to maintain at least $50.0 million of unrestricted cash. Beginning July 1, 2021, and at all times during the remainder of the Covenant Relief Period, the Company will be required to maintain at least $60.0 million of unrestricted cash. The requirement to maintain unrestricted cash is in addition to any cash which would be required as collateral for any new letters of credit.

•Acquisitions, stock repurchases under the Company’s existing stock buyback program and cash dividends are prohibited.

-15-

Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

•Capital expenditures may not exceed $2.0 million in any fiscal quarter.

In addition to these provisions, the Amended Credit Agreement requires the Company to generate Covenant EBITDA of at least:

•$2.5 million for the fiscal quarter ending June 30, 2021;

•$8.0 million for the six months ending September 30, 2021; and

•$16.5 million for the nine months ending December 31, 2021.

As of March 31, 2021, the Company had $41.4 million in letters of credit issued under the credit facility and no borrowings.

Note 6 – Income Taxes

Effective Tax Rate

Our effective tax rates for the three and nine months ended March 31, 2021 were 28.2% and 22.6%, respectively; compared to 16.9% and 5.9% for the three and nine months ended March 31, 2020, respectively. Based on the third quarter and full year projected operating results for fiscal 2021, the Company, through provisions in the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), has an income tax benefit from the ability to carryback the fiscal 2021 federal net operating loss five years. $3.2 million of this benefit impacts the effective rate for the third quarter and is a result of the statutory federal income tax rate differential between the current and carryback years. The effective rate during the quarter was negatively impacted by $1.9 million of valuation allowances on certain deferred tax assets. In prior quarters this fiscal year, the Company recorded $1.2 million of other discrete deferred tax asset adjustments, which negatively impacted the effective rate for the nine months ended March 31, 2021. The Company estimates that it will receive a $7.8 million tax refund in connection with the carryback of the projected fiscal 2021 net operating loss, which is included in income taxes receivable in the condensed consolidated balance sheets.

Deferred Payroll Taxes

The Company has deferred $11.1 million of U.S. payroll tax as of March 31, 2021 through provisions of CARES Act. The deferred payroll taxes are included within other accrued expenses and other liabilities in the consolidated balance sheets. The Company must repay half of the deferred payroll tax by December 31, 2021 and the remainder by December 31, 2022.

Note 7 – Commitments and Contingencies

Insurance Reserves

The Company maintains insurance coverage for various aspects of its operations. However, exposure to potential losses is retained 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. The Company 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. Matrix maintains a performance and payment bonding line sufficient to support the business. The Company generally requires its subcontractors to indemnify the Company and the Company’s customer and name the Company 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 the Company, 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.

-16-

Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 $16.6 million at March 31, 2021 and $14.5 million at June 30, 2020. 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, the Company 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 receivable balance at March 31, 2021 was $17.0 million. Litigation is unpredictable, however, based on the terms of the contract with this customer, the Company is entitled to collect the full amount owed under the contract.

The Company and its subsidiaries are participants in various legal actions. It is the opinion of management that none of the other known legal actions, including a contract dispute with a customer involving the construction of a crude terminal, will have a material impact on the Company’s financial position, results of operations or liquidity.

Note 8 – 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.

The computation of basic and diluted earnings per share is as follows:


	Three Months Ended				Nine Months Ended
	March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020
	(In thousands, except per share data)
Basic EPS:
Net loss	$	(12,873)	$	(5,495)	$	(20,501)	$	(27,352)
Weighted average shares outstanding	26,515		26,478		26,422		26,781
Basic loss per share	$	(0.49)	$	(0.21)	$	(0.78)	$	(1.02)
Diluted EPS:



Diluted weighted average shares	26,515		26,478		26,422		26,781
Diluted loss per share	$	(0.49)	$	(0.21)	$	(0.78)	$	(1.02)

-17-

Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 9 – Segment Information

Change in Reportable Segments

•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. The Company also provides construction and maintenance services to a variety of power generation facilities, including gas fired facilities in simple or combined cycle configuration and provides engineering, fabrication, and construction services for LNG utility peak shaving facilities.

The Company evaluates performance and allocates resources based on operating income. Intersegment sales and transfers are recorded at cost; therefore, no intercompany profit or loss is recognized.

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.

-18-

Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

Results of Operations

(In thousands)


	Three Months Ended				Nine Months Ended
	March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020
Gross revenue
Utility and Power Infrastructure	$	44,720	$	55,670	$	157,414	$	152,552
Process and Industrial Facilities	43,095		76,297		141,570		375,518
Storage and Terminal Solutions	61,542		118,711		204,572		382,720

Total gross revenue	$	149,357	$	250,678	$	503,556	$	910,790
Less: Inter-segment revenue

Process and Industrial Facilities	$	261	$	1,327	$	1,543	$	2,788
Storage and Terminal Solutions	836		1,024		3,514		2,901

Total inter-segment revenue	$	1,097	$	2,351	$	5,057	$	5,689
Consolidated revenue
Utility and Power Infrastructure	$	44,720	$	55,670	$	157,414	$	152,552
Process and Industrial Facilities	42,834		74,970		140,027		372,730
Storage and Terminal Solutions	60,706		117,687		201,058		379,819

Total consolidated revenue	$	148,260	$	248,327	$	498,499	$	905,101
Gross profit (loss)
Utility and Power Infrastructure	$	(4,692)	$	3,138	$	7,818	$	1,744
Process and Industrial Facilities	(171)		3,070		11,352		30,498
Storage and Terminal Solutions	6,423		14,907		12,053		52,675
Corporate	—		(638)		—		(1,974)
Total gross profit	$	1,560	$	20,477	$	31,223	$	82,943
Selling, general and administrative expenses
Utility and Power Infrastructure	$	2,356	$	2,081	$	7,154	$	7,491
Process and Industrial Facilities	3,882		5,343		11,319		19,666
Storage and Terminal Solutions	4,792		6,165		13,854		19,942
Corporate	6,149		6,129		19,704		19,475
Total selling, general and administrative expenses	$	17,179	$	19,718	$	52,031	$	66,574
Intangible asset impairments and restructuring costs
Utility and Power Infrastructure	$	403	$	935	$	1,226	$	25,835
Process and Industrial Facilities	781		4,087		3,645		17,702
Storage and Terminal Solutions	590		821		1,244		821
Corporate	86		716		470		716
Total asset impairments and restructuring costs	$	1,860	$	6,559	$	6,585	$	45,074
Operating income (loss)
Utility and Power Infrastructure	$	(7,451)	$	122	$	(562)	$	(31,582)
Process and Industrial Facilities	(4,834)		(6,360)		(3,612)		(6,870)
Storage and Terminal Solutions	1,041		7,921		(3,045)		31,912
Corporate	(6,235)		(7,483)		(20,174)		(22,165)
Total operating loss	$	(17,479)	$	(5,800)	$	(27,393)	$	(28,705)

-19-

Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

Total assets by segment were as follows:


	March 31, 2021		June 30, 2020
Utility and Power Infrastructure	$	81,625	$	67,398
Process and Industrial Facilities	116,140		138,734
Storage and Terminal Solutions	164,652		187,167
Corporate	109,260		124,011
Total segment assets	$	471,677	$	517,310

Note 10 – Restructuring Costs

During the third quarter of fiscal 2020, the Company initiated a business improvement plan to increase profitability and reduce its cost structure related to:

•its strategic initiative to exit the domestic iron and steel industry;

•the implementation of business improvements in the power delivery portion of the Utility and Power Infrastructure segment; and

•the decline in revenue caused by the ongoing effects of the COVID-19 pandemic and related market disruptions.

The business improvement plan consists 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 the Company's staff and bring the cost structure of the business in line with revenue volumes. The Company incurred $14.0 million of restructuring costs during fiscal 2020 and $6.6 million during the nine months ended March 31, 2021. The restructuring costs consist primarily of severance costs, facility closure costs, intangible asset impairments and other liabilities as a result of exiting certain operations. The Company will continue to assess whether further reductions in its cost structure are necessary and may incur additional restructuring costs in the near-term.

-20-

Table of Contents

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

Restructuring costs under our business improvement plan are classified as follows:


	Three Months Ended				Nine Months Ended				Since Inception of Business Improvement Plan
	March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020
	(In thousands)
Utility and Power Infrastructure
Severance and other personnel-related costs	$	291	$	632	$	1,109	$	632	$	2,450
Facility costs	112		303		117		303		351
Other intangible asset impairments	—		—		—		—		1,150

Total Utility and Power Infrastructure	$	403	$	935	$	1,226	$	935	$	3,951
Process and Industrial Facilities
Severance and other personnel-related costs	$	315	$	2,506	$	2,905	$	2,506	$	9,073
Facility costs	264		1,581		279		1,581		3,035
Other intangible asset impairments	—		—		—		—		375
Other costs	202		—		461		—		461
Total Process and Industrial Facilities	$	781	$	4,087	$	3,645	$	4,087	$	12,944
Storage and Terminal Solutions
Severance and other personnel-related costs	$	423	$	47	$	1,076	$	47	$	1,422
Facility costs	167		774		168		774		888


Total Storage and Terminal Solutions	$	590	$	821	$	1,244	$	821	$	2,310
Corporate
Severance and other personnel-related costs	$	3	$	716	$	164	$	716	$	1,084
Facility costs	83		—		306		—		306
Total Corporate	$	86	$	716	$	470	$	716	$	1,390

Restructuring Costs by Type:
Severance and other personnel-related costs	$	1,032	$	3,901	$	5,254	$	3,901	$	14,029
Facility costs	626		2,658		870		2,658		4,580
Other intangible asset impairments	—		—		—		—		1,525
Other costs	202		—		461		—		461
Total restructuring costs	$	1,860	$	6,559	$	6,585	$	6,559	$	20,595

The restructuring reserve is included in other accrued expenses and other liabilities in the condensed consolidated balance sheets. The table below is a reconciliation of the beginning and ending restructuring reserve balance under the business improvement plan (in thousands):


Balance as of June 30, 2020	$	2,403
Restructuring costs incurred	3,510
Cash payments	(3,143)
Adjustment to liability	(510)
Balance as of March 31, 2021	$	2,260

-21-

Table of Contents

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

CRITICAL ACCOUNTING POLICIES

There have been no material changes in our critical accounting policies from those reported in our fiscal 2020 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 2020 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 revenues come from contracts to provide engineering, procurement, fabrication and construction, repair and maintenance and other services. Our engineering, procurement, fabrication and construction services are usually provided in association with capital projects, which commonly are fixed price contracts and 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 be in excess of 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 collectibility is probable. We also evaluate whether a contract should be combined with other contracts and accounted for as one 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.

-22-

Table of Contents

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 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 ASC 606, 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. The Company does 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 7 - Commitments and Contingencies.

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 7 - Commitments and Contingencies.

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 $16.6 million at March 31, 2021 and $14.5 million at June 30, 2020. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings.

-23-

Table of Contents

Loss Contingencies

Various legal actions, claims, and other contingencies arise in the normal course of our business. Contingencies are recorded in the 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.

Goodwill

Goodwill represents the excess of the purchase price of acquisitions over the acquisition date fair value of the net identifiable tangible and intangible assets acquired. 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 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 carrying values of our reporting units to our market capitalization.

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. Company management believes 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.

Leases

The Company enters into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. The Company determines if an arrangement is or contains a lease at inception of the arrangement. An arrangement is determined to be a lease if it conveys the right to control the use of identified property and equipment for a period of time in exchange for consideration. Operating lease right-of-use assets are recognized as the present value of future lease payments over the lease term as of the commencement date, plus any lease payments made prior to commencement, and less any lease incentives received. Operating lease liabilities are recognized as the present value of the future lease payments over the lease term as of the commencement date. Operating lease expense is recognized based on the undiscounted future lease payments over the remaining lease term on a straight-line basis. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term.

-24-

Table of Contents

Determinations with respect to lease term (including any renewals and terminations), incremental borrowing rate used to discount lease payments, variable lease expense and future lease payments require the use of judgment based on the facts and circumstances related to each lease. The Company considers various factors, including economic incentives, intent, past history and business need, to determine the likelihood that a renewal option will be exercised.

Right-of-use assets are evaluated for impairment in accordance with our policy for impairment of long-lived assets.

RESULTS OF OPERATIONS

Operational Update

Throughout the course of the COVID-19 pandemic, the Company's top priority has been to maintain a safe working environment for all field and office employees, customers and business partners. While North America has seen a significant reduction in infection rates and an equally significant increase in vaccine availability, our project teams, in coordination with our clients, continue to operate under enhanced work processes to protect the health and safety of everyone on our job sites.

Additionally, in direct response to market conditions, many of which are a result of COVID-19’s impact on energy demand, over the last year, the Company has reduced its cost structure in excess of $60 million, or approximately 25%, with a third of those reductions related to SG&A and the rest related to construction overhead, which is included in cost of revenue in the income statement. In order to achieve these cost savings, the Company incurred $14.0 million of restructuring costs during fiscal 2020 and $6.6 million during the nine months ended March 31, 2021. Despite these significant reductions in construction overhead, our third quarter revenue did not allow for complete recovery of overhead, which reduces gross margin. Based on our opportunity pipeline and the strengthening market, we believe our current adjusted overhead levels are appropriate. While the Company will continue to manage its cost structure, we are also focused on rebuilding our backlog and restoring revenue volume to more normalized levels.

In order to more clearly depict the core profitability of the Company, the following table presents our net income (loss) and earnings (loss) per fully diluted share for the three and nine months ended March 31, 2021 and 2020 after adjusting for restructuring costs, impairments and the tax impacts of these adjustments and other net tax items:

Reconciliation of Adjusted Net Income (Loss) and Diluted Earnings (Loss) per Common Share(1)

(In thousands, except per share data)


	Three Months Ended				Nine Months Ended
	March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020
Net loss, as reported	$	(12,873)	$	(5,495)	$	(20,501)	$	(27,352)
Restructuring costs incurred	1,860		6,559		6,585		6,559
Goodwill and intangible asset impairments	—		—		—		38,515
Tax impact of adjustments and other net tax items	(479)		(1,462)		(1,695)		(6,737)
Adjusted net income (loss)	$	(11,492)	$	(398)	$	(15,611)	$	10,985

Loss per fully diluted share, as reported	$	(0.49)	$	(0.21)	$	(0.78)	$	(1.02)
Adjusted earnings (loss) per fully diluted share	$	(0.43)	$	(0.02)	$	(0.59)	$	0.40

(1)This table presents non-GAAP financial measures of our adjusted net income (loss) and adjusted diluted earnings (loss) per common share for the three and nine months ended March 31, 2021 and 2020. The most directly comparable GAAP financial measures are net loss and diluted loss per common 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 the core operating results of the Company during the periods presented and provide a more comparable measure of the Company's operating results to other companies considered to be in similar businesses. Since adjusted net income (loss) and adjusted diluted earnings (loss) per common 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.

-25-

Table of Contents

Change in Reportable Segments

The Company evaluates performance and allocates resources based on operating income. Intersegment sales and transfers are recorded at cost; therefore, no intercompany profit or loss is recognized.

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

Consolidated

Consolidated revenue was $148.3 million for the three months ended March 31, 2021, compared to $248.3 million in the same period in the prior fiscal year. On a segment basis, revenue decreased for the Storage and Terminal Solutions, Process and Industrial Facilities, and Utility and Power Infrastructure segments by $57.0 million, $32.1 million, and $10.9 million, respectively.

Consolidated gross profit decreased to $1.6 million in the three months ended March 31, 2021 compared to $20.5 million in the same period in the prior fiscal year. Gross margin decreased to 1.1% in the three months ended March 31, 2021 compared to 8.2% in the same period in the prior fiscal year. Gross margins in fiscal 2021 were largely impacted negatively by lower than forecasted volumes, which led to under recovery of construction overhead costs as well as a lower than previously forecasted margin on a large capital project in the Utility and Power Infrastructure segment. These negative impacts were partially offset by increases in estimated recoveries on other completed capital projects.

Consolidated SG&A expenses were $17.2 million in the three months ended March 31, 2021 compared to $19.7 million in the same period a year earlier. The decrease is primarily attributable to implemented cost reductions.

As a result of actions taken to reduce the cost structure of the Company, we recorded $1.9 million of restructuring costs in the three months ended March 31, 2021. See "Operational Update" in this Results of Operations section and Item 1. Financial Statements, Note 10 - Restructuring Costs, for more information.

-26-

Table of Contents

Interest expense was $0.3 million in the three months ended March 31, 2021 compared to $0.4 million in the three months ended March 31, 2020. The decrease resulted from the Company's repayment of outstanding borrowings in the previous quarter. Interest income was less than $0.1 million in the three months ended March 31, 2021 compared to $0.4 million in the same period a year ago primarily due to lower interest rates in the current period.

Our effective tax rates for the three months ended March 31, 2021 and March 31, 2020 were 28.2% and 16.9%, respectively. Based on the third quarter and full year projected operating results for fiscal 2021, the Company, through provisions in the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), has an income tax benefit from the ability to carryback the fiscal 2021 federal net operating loss five years. $3.2 million of this benefit impacts the effective rate for the third quarter and is a result of the statutory federal income tax rate differential between the current and carryback years. The effective rate during the quarter was negatively impacted by $1.9 million of valuation allowances on certain deferred tax assets.

For the three months ended March 31, 2021, we had a net loss of $12.9 million, or $0.49 per fully diluted share, compared to a net loss of $5.5 million, or $0.21 per fully diluted share, in the three months ended March 31, 2020. For the three months ended March 31, 2021, the adjusted net loss was $11.5 million, or $0.43 per fully diluted share, compared to an adjusted net loss of $0.4 million, or $0.02 per fully diluted share, in the three months ended March 31, 2020.

Utility and Power Infrastructure

Revenue for the Utility and Power Infrastructure segment was $44.7 million in the three months ended March 31, 2021 compared to $55.7 million in the same period a year earlier. The decrease is due to lower volumes of power generation and power delivery work.

The segment gross margin (loss) was (10.5)% in fiscal 2021 compared to 5.6% in fiscal 2020. The fiscal 2021 segment gross margin was negatively impacted by an increase in the forecasted costs to complete a large capital project, which resulted in a decrease in gross profit of $8.9 million. The change in estimate was due to lower than previously forecasted productivity caused by excessive rain at the project site, the continuing impact of COVID-19, and rework which led to higher costs and some schedule compression. The profit on future revenue related to this project will be recognized based on the current project forecast, which is at a reduced gross profit margin, but near our expected range for the segment. In addition, segment gross margin was negatively impacted by low volumes, which led to the under recovery of construction overhead costs. These negative impacts were partially offset by good project execution in the remainder of the segment.

Fiscal 2020 segment gross margin was negatively impacted by lower volumes, which led to the under recovery of construction overhead costs, and a lower than previously expected margin on a capital project due to costs to remediate faulty equipment designed by a subcontractor.

Process and Industrial Facilities

Revenue for the Process and Industrial Facilities segment was $42.8 million in the three months ended March 31, 2021 compared to $75.0 million in the same period a year earlier. The decrease is primarily due to lower volumes of midstream gas and refinery capital projects. The decrease was also attributable to the completion of our remaining iron and steel projects in the third quarter of fiscal 2020 after our strategic exit from the business in the same period.

The segment gross margin was (0.4)% for the three months ended March 31, 2021 compared to 4.1% in the same period last year. Project execution generally met our expectations in the current quarter, however, segment gross margin was negatively impacted by low volumes, which led to the under recovery of construction overhead costs, and an adjustment related to the Company's assessment of the amount due on a completed project.

Fiscal 2020 segment gross margin was negatively impacted by low volumes, which led to the under recovery of construction overhead costs.

Storage and Terminal Solutions

Revenue for the Storage and Terminal Solutions segment was $60.7 million in the three months ended March 31, 2021 compared to $117.7 million in the same period a year earlier. The decrease in segment revenue is primarily a result of lower volumes of crude oil tank and terminal capital work.

-27-

Table of Contents

The segment gross margins were 10.6% and 12.7% in the three months ended March 31, 2021 and March 31, 2020, respectively. The fiscal 2021 segment gross margin was positively impacted by additional estimated recoveries of unpriced change orders on a large crude oil terminal project following the achievement of mechanical completion and demobilization from the project site. The project's financial impact for the three months ended March 31, 2021 was a $3.9 million increase to gross profit. The benefit of this adjustment was partially offset by the under recovery of construction overhead costs caused by lower revenue volumes.

The fiscal 2020 segment gross margin was positively impacted by strong project execution on large capital projects and higher volumes than fiscal 2021, which led to better recovery of construction overhead costs.

Corporate

Unallocated corporate expenses were $6.2 million during the three months ended March 31, 2021 compared to $7.5 million in the same period last year. The decrease is primarily attributable to cost reductions we implemented.

Nine Months Ended March 31, 2021 Compared to the Nine Months Ended March 31, 2020

Consolidated

Consolidated revenue was $498.5 million for the nine months ended March 31, 2021, compared to $905.1 million in the same period in the prior fiscal year. On a segment basis, revenue decreased for the Process and Industrial Facilities and Storage and Terminal Solutions segments by $232.7 million, and $178.8 million, respectively. These decreases were partially offset by an increase in the Utility and Power Infrastructure segment of $4.9 million.

Consolidated gross profit decreased to $31.2 million in the nine months ended March 31, 2021 compared to $82.9 million in the same period in the prior fiscal year. Gross margin decreased to 6.3% in the nine months ended March 31, 2021 compared to 9.2% in the same period in the prior fiscal year. Gross margins in fiscal 2021 were negatively impacted by lower than forecasted volumes, which led to under recovery of construction overhead costs as well as a lower than previously forecasted margin on a large capital project in the Utility and Power Infrastructure segment.

Consolidated SG&A expenses were $52.0 million in the nine months ended March 31, 2021 compared to $66.6 million in the same period a year earlier. The decrease is primarily attributable to implemented cost reductions.

As a result of actions taken to reduce the cost structure of the Company, we recorded $6.6 million of restructuring costs in the nine months ended March 31, 2021. See "Operational Update" in this Results of Operations section and Item 1. Financial Statements, Note 10 - Restructuring Costs, for more information.

Interest expense was $1.1 million in the nine months ended March 31, 2021 compared to $1.2 million in the nine months ended March 31, 2020. The decrease is primarily due to a lower average debt balance in fiscal 2021. Interest income was $0.1 million in the nine months ended March 31, 2021 compared to $1.2 million in the same period a year ago primarily due to lower interest rates in the current period.

Our effective tax rates for the nine months ended March 31, 2021 and March 31, 2020 were 22.6% and 5.9%, respectively. Based on the third quarter and full year projected operating results for fiscal 2021, the Company, through provisions in the CARES Act, has an income tax benefit from the ability to carryback the fiscal 2021 federal net operating loss five years. $3.2 million of this benefit impacts the effective rate for the third quarter and is a result of the statutory federal income tax rate differential between the current and carryback years. The effective rate during the quarter was negatively impacted by $1.9 million of valuation allowances on certain deferred tax assets. In prior quarters this fiscal year, the Company recorded $1.2 million of other discrete deferred tax asset adjustments, which negatively impacted the effective rate for the nine months ended March 31, 2021.

For the nine months ended March 31, 2021, we had a net loss of $20.5 million, or $0.78 per fully diluted share, compared to a net loss of $27.4 million, or $1.02 per fully diluted share, in the nine months ended March 31, 2020. For the nine months ended March 31, 2021, the adjusted net loss was $15.6 million, or $0.59 per fully diluted share, compared to adjusted net income of $11.0 million, or $0.40 per fully diluted share, in the nine months ended March 31, 2020.

Utility and Power Infrastructure

Revenue for the Utility and Power Infrastructure segment was $157.4 million in the nine months ended March 31, 2021 compared to $152.6 million in the same period a year earlier. The increase is due to a higher volume of LNG utility peak shaving work, partially offset by lower volumes of power delivery and power generation work.

-28-

Table of Contents

The segment gross margin was 5.0% in fiscal 2021 compared to 1.1% in fiscal 2020. The fiscal 2021 segment gross margin was negatively impacted by an increase in the forecasted costs to complete a large capital project, which resulted in a decrease in gross profit of $8.9 million during the quarter. The change in estimate was due to lower than previously forecasted productivity caused by excessive rain at the project site, the continuing impact of COVID-19, and rework which led to higher costs and some schedule compression. The profit on future revenue related to this project will be recognized based on the current project forecast, which is at a reduced gross profit margin, but near our expected range for the segment. In addition, segment gross margin was negatively impacted by low volumes, which led to the under recovery of construction overhead costs. These negative impacts were partially offset by good project execution in the remainder of the segment.

The fiscal 2020 segment gross margin was negatively impacted by poor execution in the first and second quarters, including a lower than previously expected margin on a capital project due to costs to remediate faulty equipment designed by a subcontractor. In addition, low volumes led to the under recovery of construction overhead costs.

Process and Industrial Facilities

Revenue for the Process and Industrial Facilities segment was $140.0 million in the nine months ended March 31, 2021 compared to $372.7 million in the same period a year earlier. The decrease is primarily due to our strategic exit from the domestic iron and steel industry in the third quarter of fiscal 2020, lower volumes of midstream gas projects, the completion of a major capital project, and reduced refinery turnaround and maintenance work during the first and second quarters.

The segment gross margin was 8.1% for the nine months ended March 31, 2021 compared to 8.2% in the same period last year. Segment gross margin in fiscal 2021 was positively impacted by strong project execution and the positive impact of a one-time workers' compensation item recorded in the second quarter, but these positive impacts were partially offset by lower revenue volumes, which led to the under recovery of construction overhead costs.

The fiscal 2020 segment gross margin was supported by good project execution on both capital and repair and maintenance iron and steel projects in the first and second quarters, partially offset by a lower volume of turnaround work, which led to the under recovery of construction overhead costs.

Storage and Terminal Solutions

Revenue for the Storage and Terminal Solutions segment was $201.1 million in the nine months ended March 31, 2021 compared to $379.8 million in the same period a year earlier. The decrease in segment revenue is primarily a result of lower volumes of crude oil tank and terminal capital work and lower repair and maintenance work.

The segment gross margin was 6.0% in the nine months ended March 31, 2021 compared to 13.9% in the same period last year. The fiscal 2021 segment gross margin was negatively impacted by increases in the costs to complete a large crude oil terminal project, partially offset by an increase in the estimated recovery of those costs. During the third quarter, the Company achieved mechanical completion on the project, demobilized and completed its assessment of unpriced change orders. The project's financial impact for the nine months ended March 31, 2021 was a $3.8 million reduction to gross profit. In addition, fiscal 2021 gross margin was negatively impacted by low volumes, which led to the under recovery of construction overhead costs.

Corporate

Unallocated corporate expenses were $20.2 million during the nine months ended March 31, 2021 compared to $22.2 million in the same period last year. The decrease is primarily attributable to cost reductions we implemented.

-29-

Table of Contents

Backlog

We define backlog as the total dollar amount of revenue that we expect to recognize as a result of performing work that has been awarded to us through a signed contract, limited notice to proceed 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 March 31, 2021:


	Utility and Power Infrastructure		Process and Industrial Facilities		Storage and Terminal Solutions		Total
	(In thousands)
Backlog as of December 31, 2020	$	198,212	$	157,428	$	267,133	$	622,773
Project awards	49,808		40,836		47,399		138,043

Other adjustment(1)	—		—		(74,219)		(74,219)
Revenue recognized	(44,720)		(42,834)		(60,706)		(148,260)
Backlog as of March 31, 2021	$	203,300	$	155,430	$	179,607	$	538,337
Book-to-bill ratio(2)	1.1		1.0		0.8		0.9

(1)The other adjustment in the Storage and Terminal Solutions segment was due to a customer's decision not to renew our existing LNTP for a storage tank capital project. The Company was paid for all work performed on the project and has been invited to rebid the project when the customer makes the final investment decision.

(2)Calculated by dividing project awards by revenue recognized during the period.

The following table provides a summary of changes in our backlog for the nine months ended March 31, 2021:


	Utility and Power Infrastructure		Process and Industrial Facilities		Storage and Terminal Solutions		Total
	(In thousands)
Backlog as of June 30, 2020	$	272,816	$	145,725	$	339,924	$	758,465
Project awards	87,898		149,732		114,960		352,590
Other adjustment(1)	—		—		(74,219)		(74,219)

Revenue recognized	(157,414)		(140,027)		(201,058)		(498,499)
Backlog as of March 31, 2021	$	203,300	$	155,430	$	179,607	$	538,337
Book-to-bill ratio(2)	0.6		1.1		0.6		0.7

(2)Calculated by dividing project awards by revenue recognized during the period.

-30-

Table of Contents

Due to the impact of the COVID-19 pandemic and the resulting disruption to energy and industrial markets, some of our customers continue to be conservative with their spending levels.

In the Utility and Power Infrastructure segment, performance in the power delivery business continues to be strong on lower revenue. Bidding activity is strong and we expect project awards to improve. Similarly, our opportunity pipeline for LNG peak shaving projects is building, however those awards, while significant, can be less frequent. During the third quarter of fiscal 2021, we received a key contract for an upgrade of an LNG peak shaving facility. We are optimistic that the priorities of the new Biden Administration will lead to increased opportunities in this segment.

In the Process and Industrial Facilities segment, the short-term impact of the global pandemic on the Company's refinery maintenance operations has moderated. We saw an increase in demand for refinery and maintenance work on existing long-term maintenance contracts with certain customers. However, other customers continue to delay or reduce discretionary maintenance and capital spending. In addition, we continue to see strong demand for thermal vacuum chambers, as well as increasing opportunities in mining and minerals and chemicals. The larger midstream gas projects continue to be limited, but we are seeing some activity in smaller capital work.

In the Storage and Terminal Solutions segment, we have seen deferrals in award dates and lengthening award cycles as a result of the COVID-19 pandemic and its disruption of global energy demand. Opportunities in crude oil tanks and terminals are limited. However, this segment also includes a strong funnel of opportunities in North America, Central America and the Caribbean for storage infrastructure projects related to natural gas, LNG, ammonia, hydrogen, NGLs and other forms of renewable energy that support clean energy investments, President Biden priorities, and chemical feed stocks.

Project awards in all segments are cyclical and are typically the result of a sales process that can take several months or years to complete. It is common for awards to shift from one period to another as the timing of awards is dependent upon a number of factors including changes in market conditions, permitting, off take agreements, project financing and other factors. Backlog volatility may increase for some segments from time to time when individual project awards are less frequent, but more significant. 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, and abnormally low or high temperatures. Some of these seasonal factors may cause some of our offices and projects to close or reduce activities temporarily. In addition to the above noted factors, the general timing of project starts and completions could exhibit significant fluctuations. Accordingly, results for any interim period may not necessarily be indicative of operating results for the full year.

Other factors impacting operating results in all segments come from decreased work volumes 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 the Company's operating results.

Our overhead cost structure is generally fixed. Significant fluctuations in revenue volumes usually leads to over or under recovery of fixed overhead costs, which can have a material impact on our gross margin and profitability.

-31-

Table of Contents

Non-GAAP Financial Measure

Adjusted EBITDA

We have presented Adjusted EBITDA, which we define as net loss before impairment of goodwill and other intangible assets, restructuring costs, interest expense, income taxes, 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 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 impairments to goodwill and other intangible assets. While impairments to intangible assets are non-cash expenses in the period recognized, cash or other consideration was still transferred in exchange for intangible assets in the period of the acquisition. Any measure that excludes impairments to intangible assets has material limitations since these expenses represent the loss of an asset that was acquired in exchange for cash or other assets.

•It does not include restructuring costs. Restructuring costs represent material costs that were incurred by the company and are oftentimes cash expenses. Therefore, any measure that excludes restructuring costs has material limitations.

•It does not include interest expense. Because we have borrowed money to finance our operations and acquisitions, pay commitment fees to maintain our credit facility, and incur fees to issue letters of credit under the credit facility, interest expense is a necessary and ongoing part of our costs and has assisted us in generating revenue. Therefore, any measure that excludes interest expense has material limitations.

•It does not include 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				Nine Months Ended
	March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020
	(In thousands)
Net loss	$	(12,873)	$	(5,495)	$	(20,501)	$	(27,352)
Goodwill and other intangible asset impairment	—		—		—		38,515
Restructuring costs	1,860		6,559		6,585		6,559
Interest expense	322		398		1,055		1,231
Benefit from income taxes	(5,060)		(1,114)		(6,002)		(1,705)
Depreciation and amortization	4,352		4,686		13,639		14,388
Adjusted EBITDA	$	(11,399)	$	5,034	$	(5,224)	$	31,636

-32-

Table of Contents

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 as of March 31, 2021 were cash and cash equivalents of $73.8 million and cash flows from operations. Due to the financial results of the Company, we are currently unable to obtain revolving loans under our credit facility and are subject to other restrictions as discussed below under the caption "Senior Secured Revolving Credit Facility".

There continues to be significant uncertainty regarding the near- and intermediate-term business impacts from the COVID-19 pandemic and its disruption of our markets. However, the Company continues to maintain a strong balance sheet, which we believe is sufficient to support its near- to intermediate-term needs. The Company continues to take the following actions:

•managing the cost structure of the business based on the expected near-term revenue;

•proactive working capital management; and

•eliminating all non-critical capital expenditures.

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.

•Some of our large construction projects may require security in the form of letters of credit or significant retentions. The timing of collection of retentions is often uncertain.

•Other changes in working capital.

•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.

•Strategic investments in new operations.

-33-

Table of Contents

Other factors that may impact long-term liquidity include:

•Capacity constraints under our senior secured revolving credit facility and remaining in compliance with all covenants contained in the credit agreement.

•Acquisitions and disposals of businesses.

•Purchases of shares under our stock buyback program.

Senior Secured Revolving Credit Facility