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Form 10-Q MATRIX SERVICE CO For: Dec 31

February 8, 2022 4:36 PM EST

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-Q 
_______________________________________
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2021
or
Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from             to            
Commission File No. 1-15461
__________________________________________
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: (918838-8822
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 shareMTRXNASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer 
Non-accelerated Filer Smaller Reporting Company 
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of February 7, 2022 there were 27,888,217 shares of the Company’s common stock, $0.01 par value per share, issued and 26,783,265 shares outstanding.


TABLE OF CONTENTS
PAGE
FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Matrix Service Company
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
Three Months EndedSix Months Ended
December 31,
2021
December 31,
2020
December 31,
2021
December 31,
2020
Revenue$161,965 $167,468 $330,058 $350,239 
Cost of revenue158,758 152,155 330,359 320,576 
Gross profit (loss)3,207 15,313 (301)29,663 
Selling, general and administrative expenses15,922 16,724 32,551 34,852 
Restructuring costs695 5,045 1,300 4,725 
Operating loss(13,410)(6,456)(34,152)(9,914)
Other income (expense):
Interest expense (Note 5)(502)(358)(2,501)(733)
Interest income29 38 50 71 
Other(60)973 (143)2,006 
Loss before income tax expense (benefit)(13,943)(5,803)(36,746)(8,570)
Provision (benefit) for federal, state and foreign income taxes10,976 (1,212)5,711 (942)
Net loss$(24,919)$(4,591)$(42,457)$(7,628)
Basic loss per common share$(0.93)$(0.17)$(1.59)$(0.29)
Diluted loss per common share$(0.93)$(0.17)$(1.59)$(0.29)
Weighted average common shares outstanding:
Basic26,749 26,489 26,680 26,377 
Diluted26,749 26,489 26,680 26,377 
See accompanying notes.










-1-

Matrix Service Company
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
 
 Three Months EndedSix Months Ended
December 31,
2021
December 31,
2020
December 31,
2021
December 31,
2020
Net loss$(24,919)$(4,591)$(42,457)$(7,628)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) (net of tax expense (benefit) of $(8) and $46 for the three and six months ended December 31, 2021, respectively, and $41 and $53 for the three and six months ended December 31, 2020, respectively)99 819 (696)1,223 
Comprehensive loss$(24,820)$(3,772)$(43,153)$(6,405)
See accompanying notes.



















-2-

Matrix Service Company
Condensed Consolidated Balance Sheets
(In thousands)
(unaudited)
December 31,
2021
June 30,
2021
Assets
Current assets:
Cash and cash equivalents (Note 1)$65,040 $83,878 
Restricted cash (Note 1)2,600  
Accounts receivable, less allowances (December 31, 2021—$547 and June 30, 2021—$898)121,601 148,030 
Costs and estimated earnings in excess of billings on uncompleted contracts34,503 30,774 
Inventories6,297 7,342 
Income taxes receivable16,236 16,965 
Other current assets8,460 4,230 
Total current assets254,737 291,219 
Property, plant and equipment at cost:
Land and buildings41,545 41,633 
Construction equipment94,091 94,453 
Transportation equipment50,051 50,510 
Office equipment and software43,062 42,706 
Construction in progress282 493 
Total property, plant and equipment - at cost229,031 229,795 
Accumulated depreciation(166,296)(160,388)
Property, plant and equipment - net62,735 69,407 
Restricted cash, non-current (Note 1)25,000  
Operating lease right-of-use assets20,414 22,412 
Goodwill60,546 60,636 
Other intangible assets, net of accumulated amortization5,660 6,614 
Deferred income taxes 5,295 
Other assets, non-current11,472 11,973 
Total assets$440,564 $467,556 
See accompanying notes.









-3-


Matrix Service Company
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
December 31,
2021
June 30,
2021
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$55,953 $60,920 
Billings on uncompleted contracts in excess of costs and estimated earnings84,859 53,832 
Accrued wages and benefits15,968 21,008 
Accrued insurance6,175 6,568 
Operating lease liabilities5,364 5,747 
Other accrued expenses5,610 5,327 
Total current liabilities173,929 153,402 
Deferred income taxes33 34 
Operating lease liabilities18,925 20,771 
Other liabilities, non-current2,067 7,810 
Total liabilities194,954 182,017 
Commitments and contingencies
Stockholders’ equity:
Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of December 31, 2021 and June 30, 2021; 26,773,975 and 26,549,438 shares outstanding as of December 31, 2021 and June 30, 2021279 279 
Additional paid-in capital135,913 137,575 
Retained earnings132,721 175,178 
Accumulated other comprehensive loss(7,445)(6,749)
261,468 306,283 
Less: Treasury stock, at cost — 1,114,242 shares as of December 31, 2021, and 1,338,779 shares as of June 30, 2021(15,858)(20,744)
Total stockholders' equity245,610 285,539 
Total liabilities and stockholders’ equity$440,564 $467,556 
See accompanying notes.








-4-

Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 Six Months Ended
December 31,
2021
December 31,
2020
Operating activities:
Net loss$(42,457)$(7,628)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization7,841 9,287 
Stock-based compensation expense3,735 4,199 
Operating lease impairment due to restructuring 242 
Deferred income tax5,340 (760)
Gain on sale of property, plant and equipment(102)(1,186)
Provision for uncollectible accounts(35)(41)
Accelerated amortization of deferred debt amendment fees (Note 5)1,518  
Other45 200 
Changes in operating assets and liabilities increasing (decreasing) cash:
Accounts receivable26,464 9,644 
Costs and estimated earnings in excess of billings on uncompleted contracts(3,729)18,150 
Inventories1,045 (304)
Other assets and liabilities(3,784)(6,095)
Accounts payable(4,866)(21,788)
Billings on uncompleted contracts in excess of costs and estimated earnings31,027 (1,645)
Accrued expenses(10,657)3,549 
Net cash provided by operating activities11,385 5,824 
Investing activities:
Capital expenditures(569)(3,068)
Proceeds from asset sales108 1,634 
Net cash used by investing activities$(461)$(1,434)

 See accompanying notes.

















-5-



Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Six Months Ended
December 31,
2021
December 31,
2020
Financing activities:
Advances under senior secured revolving credit facility$ $1,125 
Repayments of advances under senior secured revolving credit facility (10,913)
Payment of debt amendment fees(1,010)(663)
Issuances of common stock199  
Proceeds from issuance of common stock under employee stock purchase plan143 155 
Repurchase of common stock for payment of statutory taxes due on equity-based compensation(853)(1,549)
Other(236) 
Net cash used by financing activities(1,757)(11,845)
Effect of exchange rate changes on cash, cash equivalents and restricted cash(405)900 
Increase (decrease) in cash, cash equivalents and restricted cash8,762 (6,555)
Cash, cash equivalents and restricted cash, beginning of period (Note 1)83,878 100,036 
Cash, cash equivalents and restricted cash, end of period (Note 1)$92,640 $93,481 
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Income taxes$(341)$197 
Interest, including payment of debt amendment fees$1,798 $1,039 
Non-cash investing and financing activities:
Purchases of property, plant and equipment on account$5 $11 

 See accompanying notes.
























-6-






Matrix Service Company
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share data)
(unaudited)
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Loss
Total
Balances, September 30, 2021$279 $135,308 $157,640 $(17,385)$(7,544)$268,298 
Net loss  (24,919)  (24,919)
Other comprehensive income    99 99 
Exercise of stock options (19,550 shares) (189) 388  199 
Issuance of deferred shares (51,319 shares) (1,018) 1,018   
Treasury shares sold to Employee Stock Purchase Plan (6,078 shares) (54) 121  67 
Stock-based compensation expense 1,866    1,866 
Balances, December 31, 2021$279 $135,913 $132,721 $(15,858)$(7,445)$245,610 
Balances, September 30, 2020$279 $132,687 $203,365 $(22,342)$(7,969)$306,020 
Net loss  (4,591)  (4,591)
Other comprehensive income    819 819 
Issuance of deferred shares (35,615 shares) (632) 632   
Treasury shares sold to Employee Stock Purchase Plan (8,585 shares) (79) 152  73 
Treasury shares purchased to satisfy tax withholding obligations (1,436 shares)   (13) (13)
Stock-based compensation expense 1,981    1,981 
Balances, December 31, 2020$279 $133,957 $198,774 $(21,571)$(7,150)$304,289 

























-7-



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
Loss
Total
Balances, June 30, 2021$279 $137,575 $175,178 $(20,744)$(6,749)$285,539 
Net loss  (42,457)  (42,457)
Other comprehensive loss    (696)(696)
Exercise of stock options (19,550 shares) (189) 388  199 
Issuance of deferred shares (268,403 shares) (5,102) 5,102   
Treasury shares sold to Employee Stock Purchase Plan (13,287 shares) (106) 249  143 
Treasury shares purchased to satisfy tax withholding obligations (76,703 shares)   (853) (853)
Stock-based compensation expense 3,735    3,735 
Balances, December 31, 2021$279 $135,913 $132,721 $(15,858)$(7,445)$245,610 
Balances, June 30, 2020$279 $138,966 $206,402 $(29,385)$(8,373)$307,889 
Net loss  (7,628)  (7,628)
Other comprehensive income    1,223 1,223 
Issuance of deferred shares (514,318 shares) (9,067) 9,067   
Treasury shares sold to Employee Stock Purchase Plan (17,315 shares) (141) 296  155 
Treasury shares purchased to satisfy tax withholding obligations (170,201 shares)   (1,549) (1,549)
Stock-based compensation expense 4,199    4,199 
Balances, December 31, 2020$279 $133,957 $198,774 $(21,571)$(7,150)$304,289 






















-8-

Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1 – Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of Matrix Service Company and its subsidiaries (“Matrix”, “we”, “our”, “us”, “its” or the “Company”), unless otherwise indicated. Intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. The information furnished reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations, cash flows and financial position for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2021, included in our Annual Report on Form 10-K for the year then ended. The results of operations for the three and six month periods ended December 31, 2021 may not necessarily be indicative of the results of operations for the full year ending June 30, 2022.
Significant Accounting Policies
We updated our significant accounting policies as a result of entering into an asset-backed credit agreement (the "ABL Facility"), which requires us to maintain a restricted cash balance (See Note 5 - Debt for more information about the ABL Facility). Our 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, 2021.
Cash, Cash Equivalents and Restricted Cash
The ABL Facility requires us to maintain a minimum of $25.0 million of restricted cash at all times. Since this cash must be restricted through the maturity date of the ABL Facility, which is beyond one year, we have classified this restricted cash as non-current in our Condensed Consolidated Balance Sheets. In addition, we must maintain a restricted cash balance of $2.6 million in support of the purchase card program that is associated with our prior card administrator while we transition to our new card administrator. We have included this restricted cash in current assets in our Condensed Consolidated Balance Sheets since we expect to terminate the prior purchase card program during fiscal 2022.
The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Condensed Consolidated Balance Sheets to the total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows (in thousands):
December 31,
2021
June 30,
2021
Cash and cash equivalents$65,040 $83,878 
Restricted cash, current2,600  
Restricted cash, non-current25,000  
Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows$92,640 $83,878 
Note 2 – Revenue
Remaining Performance Obligations
We had $396.8 million of remaining performance obligations yet to be satisfied as of December 31, 2021. We expect to recognize $326.6 million of our remaining performance obligations as revenue within the next twelve months.
-9-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)

Contract Balances
Contract terms with customers include the timing of billing and payments, which usually differs from the timing of revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets and liabilities are calculated on a contract-by-contract basis and reported on a net basis at the end of each period and are classified as current. We present our contract assets in the balance sheet as Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts ("CIE"). CIE consists of revenue recognized in excess of billings. We present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and Estimated Earnings ("BIE"). BIE consists of billings in excess of revenue recognized. The following table provides information about CIE and BIE:
December 31,
2021
June 30,
2021
Change
 (in thousands)
Costs and estimated earnings in excess of billings on uncompleted contracts$34,503 $30,774 $3,729 
Billings on uncompleted contracts in excess of costs and estimated earnings(84,859)(53,832)(31,027)
Net contract liabilities$(50,356)$(23,058)$(27,298)
The difference between the beginning and ending balances of our CIE and BIE primarily results from the timing of revenue recognized relative to its billings. The amount of revenue recognized during the six months ended December 31, 2021 that was included in the June 30, 2021 BIE balance was $48.4 million. This revenue consists primarily of work performed during the period on contracts with customers that had advance billings.
Progress billings in accounts receivable at December 31, 2021 and June 30, 2021 included retentions to be collected within one year of $13.6 million and $19.9 million, respectively. Contract retentions collectible beyond one year are included in other assets, non-current in the Condensed Consolidated Balance Sheet and totaled $2.1 million as of December 31, 2021 and $3.1 million as of June 30, 2021.
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 EndedSix Months Ended
 December 31,
2021
December 31,
2020
December 31,
2021
December 31,
2020
 (In thousands)
United States$145,917 $146,200 $299,201 $307,577 
Canada15,260 19,132 28,770 38,743 
Other international788 2,136 2,087 3,919 
Total Revenue$161,965 $167,468 $330,058 $350,239 

Contract Type Disaggregation:
 Three Months EndedSix Months Ended
 December 31,
2021
December 31,
2020
December 31,
2021
December 31,
2020
 (In thousands)
Fixed-price contracts$100,841 $113,871 $202,906 $247,227 
Time and materials and other cost reimbursable contracts61,124 53,597 127,152 103,012 
Total Revenue$161,965 $167,468 $330,058 $350,239 

-10-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)

Typically, we assume more risk with fixed-price contracts since increases in costs to perform the work may not be recoverable. However, these types of contracts typically offer higher profits than time and materials and other cost reimbursable contracts when completed at or below the costs originally estimated. The profitability of time and materials and other cost reimbursable contracts is typically lower than fixed-price contracts and is usually less volatile than fixed-price contracts since the profit component is factored into the rates charged for labor, equipment and materials, or is expressed in the contract as a percentage of the reimbursable costs incurred.
Other
Our results of operations for the first quarter of fiscal 2022 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 $5.9 million. The change in forecasted costs was principally due to unexpected equipment repairs during commissioning that delayed the scheduled completion and increased the estimated costs to complete. We achieved a critical performance milestone in the second quarter of fiscal 2022, which significantly reduced our financial exposure and resulted in no change to the expected outcome of the project.
Our results of operations were materially impacted by an increase in the costs required to complete a thermal energy storage tank repair and maintenance project in the Storage and Terminal Solutions segment, which resulted in a decrease in gross profit of $2.8 million and $5.5 million in the three and six months ended December 31, 2021, respectively. The increase in costs was primarily due to changes in repair scope, expanded client weld testing and associated schedule delays. We expect to complete these repairs in the second half of fiscal 2022.
Note 3 – Leases
We enter into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. Real estate leases accounted for approximately 94% of all right-of-use assets as of December 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 14 years. Construction equipment leases generally have "month-to-month" lease terms that automatically renew as long as the equipment remains in use.
The components of lease expense in the Condensed Consolidated Statements of Income are as follows:
Three Months EndedSix Months Ended
December 31, 2021December 31, 2020December 31, 2021December 31, 2020
Lease expenseLocation of Expense(in thousands)
Operating lease expenseCost of revenue and Selling, general and administrative expenses$1,878 $2,310 $3,970 $4,798 
Short-term lease expense(1)
Cost of revenue5,292 6,274 10,863 12,248 
Total lease expense$7,170 $8,584 $14,833 $17,046 
(1)Primarily represents the lease expense of construction equipment that is subject to month-to-month rental agreements with expected rental durations of less than one year.


-11-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)

The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in our Condensed Consolidated Balance Sheets, were as follows:
December 31, 2021
Maturity Analysis:(in thousands)
Remainder of Fiscal 2022$3,499 
Fiscal 20234,881 
Fiscal 20243,667 
Fiscal 20253,160 
Fiscal 20262,882 
Thereafter11,220 
Total future operating lease payments29,309 
Imputed interest (5,020)
Net present value of future lease payments24,289 
Less: current portion of operating lease liabilities5,364 
Non-current operating lease liabilities$18,925 

The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of December 31, 2021:
Weighted-average remaining lease term (in years)7.3 years
Weighted-average discount rate5.2 %

Supplemental cash flow information related to leases is as follows:
Six Months Ended
December 31, 2021
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating lease payments$4,197 
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases$1,344 

Note 4 – Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying value of goodwill by segment are as follows:
Utility and Power InfrastructureProcess and Industrial FacilitiesStorage and Terminal SolutionsTotal
 (In thousands)
Net balance at June 30, 2021$6,984 $26,878 $26,774 $60,636 
Translation adjustment(1)
(28)(7)(55)(90)
Net balance at December 31, 2021$6,956 $26,871 $26,719 $60,546 
(1)The translation adjustments relate to the periodic translation of Canadian Dollar and South Korean Won denominated goodwill recorded as a part of prior acquisitions in Canada and South Korea, in which the local currency was determined to be the functional currency.
-12-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)

We test our 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, we concluded, that based on the totality of both positive and negative factors, no impairment indicators existed at December 31, 2021. However, based on future operating performance and economic factors, including our future share price, we may need to perform an interim goodwill impairment test, which could result in an impairment.
Other Intangible Assets
Information on the carrying value of other intangible assets is as follows:
  At December 31, 2021
  
Useful LifeGross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
 (Years)(In thousands)
Intellectual property10 to 15$2,483 $(2,116)$367 
Customer-based6 to 1517,274 (11,981)5,293 
Total amortizing intangible assets$19,757 $(14,097)$5,660 
 
  At June 30, 2021
 Useful LifeGross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
 (Years)(In thousands)
Intellectual property10 to 15$2,483 $(2,031)$452 
Customer-based6 to 1517,354 (11,192)6,162 
Total amortizing intangible assets$19,837 $(13,223)$6,614 
Amortization expense totaled $0.4 million and $1.0 million during the three and six months ended December 31, 2021 and $0.5 million and $1.1 million during the three and six months ended December 31, 2020, respectively.
We estimate that the remaining amortization expense related to December 31, 2021 amortizing intangible assets will be as follows (in thousands):
Period ending:
Remainder of Fiscal 2022$864 
Fiscal 20231,729 
Fiscal 20241,416 
Fiscal 20251,096 
Fiscal 2026555 
Total estimated remaining amortization expense at December 31, 2021$5,660 
Note 5 – Debt
ABL Credit Facility
On September 9, 2021, we and our primary U.S. and Canada operating subsidiaries entered into an asset-backed credit agreement (the "ABL Facility") as borrowers with Bank of Montreal, as Administrative Agent, Swing-Line Lender, a Letter of Credit Issuer and a Lender. The ABL Facility is guaranteed by substantially all of our remaining U.S. and Canadian subsidiaries. The ABL Facility provides for available borrowings of up to $100.0 million, which may be increased further by an amount not to exceed $15.0 million, subject to certain conditions, including obtaining additional commitments. The ABL Facility is intended to be used for working capital, capital expenditures, issuances of letters of credit and other lawful purposes. Our obligations under the ABL Facility are secured by a first lien on all our assets and the assets of our co-borrowers and guarantors under the ABL Facility.
-13-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)

The maximum amount that we may borrow under the ABL Facility is subject to a borrowing base, which is based on restricted cash plus a percentage of the value of certain accounts receivable, inventory and equipment, reduced for certain reserves. We are required to maintain a minimum of $25.0 million of restricted cash at all times, but such amounts are also included in the borrowing base. The ABL Facility matures and any outstanding amounts become due and payable on September 9, 2026.
At December 31, 2021, our borrowing base was $70.1 million and we had $33.4 million in letters of credit outstanding issued by Bank of Montreal, which resulted in availability of $36.7 million under the ABL Facility. In addition, there were $9.5 million in letters of credit outstanding issued by JPMorgan Chase Bank, N.A. ("JPMorgan"). JPMorgan was the administrative agent of our former senior secured revolving credit facility, which was terminated and replaced with the ABL Facility. The JPMorgan letters of credit outstanding as of December 31, 2021 were in the process of being replaced by Bank of Montreal letters of credit, and that process was substantially complete at the end of January. The letters of credit outstanding from Bank of Montreal had reduced from $33.4 million as of December 31, 2021 to $23.6 million as of January 31, 2022. In addition, the letters of credit outstanding from JPMorgan had reduced from $9.5 million as of December 31, 2021 to $0.2 million as of January 31, 2022.
Borrowings under the ABL Facility bear interest through maturity at a variable rate based upon, at our option, an annual rate equal to any of a base rate (“Base Rate”), Canadian prime rate, CDOR rate or a LIBOR rate, plus an applicable margin. The Base Rate is defined as a fluctuating interest rate equal to the greatest of (i) rate of interest announced by Bank of Montreal from time to time as its prime rate; (ii) the U.S. federal funds rate plus 0.50%; (iii) LIBOR rate for one month period plus 1.00%; and (iv) 1.00%. Depending on the amount of average availability, the applicable margin is between 1.00% to 1.50% for either U.S. Base Rate Loans or Canadian prime rate, and between 2.00% and 2.50% for CDOR and LIBOR rate borrowings. Interest is payable either (i) monthly for Base Rate borrowings or (ii) the last day of the interest period for LIBOR or CDOR rate borrowings, as set forth in the Credit Agreement. The fee for undrawn amounts is 0.25% per annum and is due quarterly.
The ABL Facility contains customary conditions to borrowings, events of default and covenants, including, but not limited to, covenants that restrict our ability to sell assets, engage in mergers and acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay cash dividends, issue equity instruments, make distribution or redeem or repurchase capital stock. In the event that our availability is less than the greater of (i) $15.0 million and (ii) 15.00% of the commitments under the ABL Facility then in effect, a consolidated Fixed Charge Coverage Ratio of at least 1.00 to 1.00 must be maintained. We are in compliance with all covenants of the ABL Facility as of December 31, 2021.
Senior Secured Revolving Credit Facility
The ABL Facility replaced the Fifth Amended and Restated Credit Agreement (the "Prior Credit Agreement"), that was entered into on November 2, 2020, and subsequently amended on May 4, 2021, by and among us and certain foreign subsidiaries, as Borrowers, various subsidiaries of ours, as Guarantors, JPMorgan, as Administrative Agent, Sole Lead Arranger and Sole Book Runner, and the other Lenders party thereto. The Prior Credit Agreement provided for a three-year senior secured revolving credit facility of $200.0 million that was set to expire November 2, 2023.
We had no borrowings and $41.3 million of letters of credit outstanding under the Prior Credit Agreement as of the date we commenced the ABL Facility. As of December 31, 2021 there were $9.5 million in letters of credit outstanding under the Prior Credit Agreement, which decreased to $0.2 million outstanding as of January 31, 2022. Interest expense during the six months ended December 31, 2021 included $1.5 million of accelerated amortization of deferred debt amendment fees associated with the Prior Credit Agreement.
Note 6 – Income Taxes
Effective Tax Rate
Our effective tax rates were (78.7)% and (15.5)% for the three and six months ended December 31, 2021, compared to 20.9% and 11.0% during the three and six months ended December 31, 2020, respectively. The effective tax rates in fiscal 2022 were negatively impacted by a $14.2 million valuation allowance placed on our deferred tax assets during the second quarter. The effective tax rates in fiscal 2021 were negatively impacted by deferred tax asset adjustments of $0.2 million and $1.2 million during the three and six months ended December 31, 2020, respectively.

-14-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)

In determining the need for a valuation allowance on deferred tax assets, the accounting standards provide that the existence of a cumulative loss over a three-year period generally precludes the use of management’s projections of future taxable income. Consequently, we have recorded a full valuation allowance against the deferred tax assets in the U.S. taxable jurisdiction in the amount of $14.2 million. These assets are primarily comprised of federal net operating losses, which have an indefinite carryforward, federal tax credits and those state net operating losses for which a valuation allowance did not previously exist. To the extent the Company generates taxable income in the future, or cumulative losses are no longer present and our future projections for growth or tax planning strategies are demonstrated, we will realize the benefit associated with the net operating losses for which the valuation allowance has been provided.
Net Operating Loss Carryback Refund
Through provisions in the CARES Act, we had an income tax benefit from the ability to carryback the fiscal 2021 federal net operating loss to a period with a higher statutory federal income tax rate. We estimate that we will receive a $12.6 million tax refund in connection with this carryback, which is included in income taxes receivable in the Condensed Consolidated Balance Sheets.
Refund of Overpayment of Estimated Taxes
In January 2022, we received a $2.4 million tax refund in connection with overpayments of estimated taxes from prior years, which was included in income taxes receivable in the Condensed Consolidated Balance Sheets as of December 31, 2021.
Deferred Payroll Taxes
As of September 30, 2021, we deferred a total of $11.1 million of U.S. payroll tax through provisions of CARES Act. We repaid half of the deferred payroll tax outstanding during the three months ended December 31, 2021 and must repay the remaining balance by December 31, 2022. The remaining balance of deferred payroll taxes is included within accrued wages and benefits in the Condensed Consolidated Balance Sheets.
Note 7 – Commitments and Contingencies
Insurance Reserves
We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses through the use of deductibles, self-insured retentions and coverage limits.
Typically, our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of our services and provide warranties for materials and workmanship. We may also be required to name the customer as an additional insured up to the limits of insurance available, or we may be required to purchase special insurance policies or surety bonds for specific customers or provide letters of credit in lieu of bonds to satisfy performance and financial guarantees on some projects. We maintain a performance and payment bonding line sufficient to support the business. We generally require our subcontractors to indemnify us and our customer and name us as an additional insured for activities arising out of the subcontractors’ work. We also require certain subcontractors to provide additional insurance policies, including surety bonds in favor of us, to secure the subcontractors’ work or as required by the subcontract.
There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against a valid claim or loss under the contracts with our customers.
Unpriced Change Orders and Claims
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $10.1 million at December 31, 2021 and $14.6 million at June 30, 2021. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings. 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.

-15-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)

Other
During the third quarter of fiscal 2020, we commenced litigation in an effort to collect accounts receivable from an iron and steel customer following the deterioration of the relationship in the second quarter of fiscal 2020. The unpaid receivable balance at December 31, 2021 was $17.0 million. Litigation is unpredictable, however, based on the terms of the contract with this customer, we believe we are entitled to collect the full amount owed under the contract.
We and our subsidiaries are participants in various legal actions. It is the opinion of management that none of the other known legal actions will have a material impact on our financial position, results of operations or liquidity.
Note 8 – Earnings per Common Share
Basic earnings per share (“Basic EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share (“Diluted EPS”) includes the dilutive effect of stock options and nonvested deferred shares. In the event we report a loss, stock options
and nonvested deferred shares are not included since they are anti-dilutive.
The computation of basic and diluted earnings per share is as follows:
 Three Months EndedSix Months Ended
December 31,
2021
December 31,
2020
December 31,
2021
December 31,
2020
 (In thousands, except per share data)
Basic EPS:
Net loss$(24,919)$(4,591)$(42,457)$(7,628)
Weighted average shares outstanding26,749 26,489 26,680 26,377 
Basic loss per share$(0.93)$(0.17)$(1.59)$(0.29)
Diluted EPS:
Diluted weighted average shares26,749 26,489 26,680 26,377 
Diluted loss per share$(0.93)$(0.17)$(1.59)$(0.29)

Note 9 – Segment Information
We report our results of operations through three reportable segments: Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions.
Utility and Power Infrastructure: consists of power delivery services provided to investor owned utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, upgrades and maintenance, as well as emergency and storm restoration services. We also provide engineering, fabrication, and construction services for LNG utility peak shaving facilities, and provide construction and maintenance services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configuration.
Process and Industrial Facilities: primarily serves customers in the downstream and midstream petroleum industries who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. We also serve customers in various other industries such as petrochemical, sulfur, mining and minerals companies engaged primarily in the extraction of non-ferrous metals, aerospace and defense, cement, agriculture, and other industrial customers. Our services include plant maintenance, turnarounds, industrial cleaning services, engineering, fabrication, and capital construction.
-16-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)

Storage and Terminal Solutions: consists of work related to aboveground crude oil and refined product storage tanks and terminals. We also include work related to cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum, hydrogen and other specialty vessels such as spheres in this segment, as well as work related to marine structures and truck and rail loading/offloading facilities. Our services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, we offer tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.

We evaluate performance and allocate resources based on operating income. We record intersegment sales and transfers at cost; therefore, no intercompany profit or loss is recognized. In addition, corporate selling, general and administrative expenses are reported separately from the three reportable segments.
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.

-17-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)

Results of Operations
(In thousands)
 Three Months EndedSix Months Ended