mtrx-20231231

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, 2023


☐			Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File No. 1-15461

__________________________________________

MATRIX SERVICE COMPANY

(Exact name of registrant as specified in its charter)

__________________________________________


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

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

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (918) 838-8822

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

___________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	MTRX	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☐

Accelerated Filer

☒

Non-accelerated Filer

☐

Smaller Reporting Company

☒

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of February 7, 2024 there were 27,304,734 shares of the Company's common stock, $0.01 par value per share, outstanding.

Table of Contents

TABLE OF CONTENTS


		PAGE
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Income for the Three and Six Months Ended December 31, 2023 and 2022	1

	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2023 and 2022	2

	Condensed Consolidated Balance Sheets as of December 31, 2023 and June 30, 2023	3

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2023 and 2022	5

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended December 31, 2023 and 2022	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	30

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	31

Signature		33

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Matrix Service Company

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(unaudited)


	Three Months Ended				Six Months Ended
	December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
Revenue	$	175,042	$	193,840	$	372,701	$	402,271
Cost of revenue	164,453		195,142		350,253		390,565
Gross profit (loss)	10,589		(1,302)		22,448		11,706
Selling, general and administrative expenses	15,731		17,545		32,844		34,356
Goodwill impairment	—		12,316		—		12,316
Restructuring costs	—		1,278		—		2,565
Operating loss	(5,142)		(32,441)		(10,396)		(37,531)
Other income (expense):
Interest expense	(319)		(916)		(644)		(1,288)
Interest income	162		46		312		70
Other (Note 3)	2,454		484		4,716		(590)
Loss before income tax expense	(2,845)		(32,827)		(6,012)		(39,339)
Provision for federal, state and foreign income taxes	6		—		6		—
Net loss	$	(2,851)	$	(32,827)	$	(6,018)	$	(39,339)

Basic loss per common share	$	(0.10)	$	(1.22)	$	(0.22)	$	(1.46)
Diluted loss per common share	$	(0.10)	$	(1.22)	$	(0.22)	$	(1.46)
Weighted average common shares outstanding:
Basic	27,377		26,999		27,314		26,916
Diluted	27,377		26,999		27,314		26,916

See accompanying notes.

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Matrix Service Company

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(unaudited)


	Three Months Ended				Six Months Ended
	December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
Net loss	$	(2,851)	$	(32,827)	$	(6,018)	$	(39,339)
Other comprehensive income (loss), net of tax:
Foreign currency translation loss	562		1,265		24		(488)
Comprehensive loss	$	(2,289)	$	(31,562)	$	(5,994)	$	(39,827)

See accompanying notes.

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Matrix Service Company

Condensed Consolidated Balance Sheets

(In thousands)

(unaudited)


	December 31, 2023		June 30, 2023
Assets
Current assets:
Cash and cash equivalents	$	47,160	$	54,812
Accounts receivable, less allowances (December 31, 2023—$408 and June 30, 2023—$1,061)	158,182		145,764
Costs and estimated earnings in excess of billings on uncompleted contracts	40,426		44,888
Inventories	8,441		7,437
Income taxes receivable	449		496
Prepaid expenses	8,470		5,741
Other current assets	4,184		3,118
Total current assets	267,312		262,256
Restricted cash	25,000		25,000
Property, plant and equipment - net	42,486		47,545
Operating lease right-of-use assets	18,992		21,799
Goodwill	29,131		29,120
Other intangible assets, net of accumulated amortization	2,202		3,066

Other assets, non-current	19,711		11,718
Total assets	$	404,834	$	400,504

See accompanying notes.

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Matrix Service Company

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)


	December 31, 2023		June 30, 2023
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	61,887	$	76,365
Billings on uncompleted contracts in excess of costs and estimated earnings	117,273		85,436
Accrued wages and benefits	13,804		13,679

Accrued insurance	5,781		5,579
Operating lease liabilities	3,981		4,661

Other accrued expenses	2,339		1,815
Total current liabilities	205,065		187,535
Deferred income taxes	26		26
Operating lease liabilities	18,655		20,660
Borrowings under asset-backed credit facility	—		10,000
Other liabilities, non-current	2,178		799
Total liabilities	225,924		219,020
Commitments and contingencies
Stockholders’ equity:
Matrix Service Company stockholders' equity:
Common stock—$0.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of December 31, 2023 and June 30, 2023; 27,300,485 and 27,047,318 shares outstanding as of December 31, 2023 and June 30, 2023, respectively	279		279
Additional paid-in capital	140,668		140,810
Retained earnings	52,899		58,917
Accumulated other comprehensive loss	(8,745)		(8,769)
	185,101		191,237
Treasury stock, at cost — 587,732 shares as of December 31, 2023, and 840,899 shares as of June 30, 2023	(6,191)		(9,753)
Total stockholders' equity	178,910		181,484
Total liabilities and stockholders’ equity	$	404,834	$	400,504

See accompanying notes.

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Matrix Service Company

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)


	Six Months Ended
	December 31, 2023		December 31, 2022
Operating activities:
Net loss	$	(6,018)	$	(39,339)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization	5,692		7,177
Goodwill impairment	—		12,316
Stock-based compensation expense	3,785		3,747



Loss (gain) on sale of property, plant and equipment (Note 3)	(4,589)		42


Other	125		82
Changes in operating assets and liabilities increasing (decreasing) cash:
Accounts receivable	(19,752)		(28,125)
Costs and estimated earnings in excess of billings on uncompleted contracts	4,462		(1,836)
Inventories	(1,004)		1,993
Other assets and liabilities	(1,763)		(5,170)
Accounts payable	(14,303)		5,253
Billings on uncompleted contracts in excess of costs and estimated earnings	31,837		34,656
Accrued expenses	2,257		(8,381)
Net cash provided (used) by operating activities	729		(17,585)
Investing activities:
Capital expenditures	(859)		(2,843)


Proceeds from asset sales (Note 3)	2,806		31
Net cash provided (used) by investing activities	1,947		(2,812)

See accompanying notes.

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Matrix Service Company

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)


	Six Months Ended
	December 31, 2023		December 31, 2022
Financing activities:
Advances under asset-backed credit facility	$	10,000	$	10,000
Repayments of advances under asset-backed credit facility	(20,000)		(10,000)




Proceeds from issuance of common stock under employee stock purchase plan	$	91	$	136
Repurchase of common stock for payment of statutory taxes due on equity-based compensation	(456)		(310)




Net cash used by financing activities	(10,365)		(174)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	37		(336)
Net decrease in cash, cash equivalents and restricted cash	(7,652)		(20,907)
Cash, cash equivalents and restricted cash, beginning of period	79,812		77,371
Cash, cash equivalents and restricted cash, end of period	$	72,160	$	56,464
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Income taxes	$	(43)	$	—
Interest	$	647	$	1,056

Non-cash investing and financing activities:
Purchases of property, plant and equipment on account	$	71	$	476

See accompanying notes.

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Matrix Service Company

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share data)

(unaudited)


	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
Balances, September 30, 2023	$	279	$	139,773	$	55,750	$	(9,307)	$	(7,372)	$	179,123
Net loss	—		—		(2,851)		—		—		(2,851)
Other comprehensive income	—		—		—		562		—		562


Issuance of restricted stock (86,783 shares)	—		(1,131)		—		—		1,131		—
Treasury shares sold to Employee Stock Purchase Plan (3,864 shares)	—		(4)		—		—		50		46


Stock-based compensation expense	—		2,030		—		—		—		2,030
Balances, December 31, 2023	$	279	$	140,668	$	52,899	$	(8,745)	$	(6,191)	$	178,910

Balances, September 30, 2022	$	279	$	137,651	$	104,766	$	(9,928)	$	(11,517)	$	221,251
Net loss	—		—		(32,827)		—		—		(32,827)
Other comprehensive income	—		—		—		1,265		—		1,265


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


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


	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
Balances, June 30, 2023	$	279	$	140,810	$	58,917	$	(8,769)	$	(9,753)	$	181,484
Net loss	—		—		(6,018)		—		—		(6,018)
Other comprehensive income	—		—		—		24		—		24


Issuance of restricted stock (297,026 shares)	—		(3,868)		—		—		3,868		—
Treasury shares sold to Employee Stock Purchase Plan (11,465 shares)	—		(59)		—		—		150		91

Treasury shares purchased to satisfy tax withholding obligations (55,324 shares)	—		—		—		—		(456)		(456)
Stock-based compensation expense	—		3,785		—		—		—		3,785
Balances, December 31, 2023	$	279	$	140,668	$	52,899	$	(8,745)	$	(6,191)	$	178,910

Balances, June 30, 2022	$	279	$	139,854	$	111,278	$	(8,175)	$	(15,530)	$	227,706
Net loss	—		—		(39,339)		—		—		(39,339)
Other comprehensive loss	—		—		—		(488)		—		(488)


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

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

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Matrix Service Company

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 – Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include the accounts of Matrix Service Company and its subsidiaries (“Matrix”, “we”, “our”, “us”, “its” or the “Company”), unless otherwise indicated. Intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. The information furnished reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations, cash flows and financial position for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2023, 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, 2023 may not necessarily be indicative of the results of operations for the full year ending June 30, 2024.

Significant Accounting Policies

Our significant accounting policies are detailed in “Note 1 - Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended June 30, 2023.

Accounting Standards Not Yet Adopted

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which expands disclosures about a public entity’s reportable segments and requires enhanced information about a reportable segment’s expenses, interim segment profit or loss, and how a public entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources. The update will be effective for annual periods beginning after December 15, 2023 (fiscal 2025). We are assessing the effect of this update on our consolidated financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which expands disclosures in an entity’s income tax rate reconciliation table and regarding cash taxes paid both in the U.S. and foreign jurisdictions. The update will be effective for annual periods beginning after December 15, 2024 (fiscal 2026). We are assessing the effect of this update on our consolidated financial statements and related disclosures.

Other accounting pronouncements issued but not effective until after December 31, 2023 are not expected to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.

Note 2 – Revenue

Remaining Performance Obligations

We had $749.4 million of remaining performance obligations yet to be satisfied as of December 31, 2023. We expect to recognize $437.1 million of our remaining performance obligations as revenue within the next twelve months.

Contract Balances

Contract terms with customers include the timing of billing and payments, which usually differs from the timing of revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets and liabilities are calculated on a contract-by-contract basis and 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:

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Table of Conten t s


	December 31, 2023		June 30, 2023		Change
	(In thousands)
Costs and estimated earnings in excess of billings on uncompleted contracts	$	40,426	$	44,888	$	(4,462)
Billings on uncompleted contracts in excess of costs and estimated earnings	(117,273)		(85,436)		(31,837)
Net contract liabilities	$	(76,847)	$	(40,548)	$	(36,299)

The difference between the beginning and ending balances of our CIE and BIE primarily results from the timing of revenue recognized relative to the billings on the associated contract. The amount of revenue recognized during the six months ended December 31, 2023 that was included in the June 30, 2023 BIE balance was $78.3 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, 2023 and June 30, 2023 included retentions to be collected within one year of $14.7 million and $16.3 million, respectively. Contract retentions collectible beyond one year are included in other assets, non-current in the Condensed Consolidated Balance Sheets and totaled $17.6 million as of December 31, 2023 and $10.0 million as of June 30, 2023.

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 $11.8 million at December 31, 2023 and $9.7 million at June 30, 2023. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings. The determination of our legal basis for a claim requires significant judgment. Generally, collection of amounts related to unpriced change orders and claims is expected within twelve months. However, since customers may not pay these amounts until final resolution of related claims, collection of these amounts may extend beyond one year.

Disaggregated Revenue

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

Geographic Disaggregation:


	Three Months Ended				Six Months Ended
	December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
	(In thousands)
United States	$	156,409	$	170,290	$	333,959	$	346,470
Canada	14,548		20,885		31,421		45,810
Other international	4,085		2,665		7,321		9,991
Total Revenue	$	175,042	$	193,840	$	372,701	$	402,271

Contract Type Disaggregation:


	Three Months Ended				Six Months Ended
	December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
	(In thousands)
Fixed-price contracts	$	97,711	$	105,283	$	214,468	$	214,756
Time and materials and other cost reimbursable contracts	77,331		88,557		158,233		187,515
Total Revenue	$	175,042	$	193,840	$	372,701	$	402,271

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Revisions in Estimates

During fiscal 2023, unfavorable changes in the estimated recovery of change orders and increased forecasted costs to complete and closeout certain midstream gas processing construction work in the Process and Industrial Facilities segment resulted in a reduction of gross profit of $9.6 million and $9.4 million during the three and six months ended December 31, 2022, respectively. This was primarily the result of the client not approving adequate compensation to us for the impact that excessive scope changes had on our ability to progress the work according to forecast and for the impacts of global supply chain issues and inflation.

Note 3 – Property, Plant and Equipment

Building Disposals

During the second quarter of fiscal 2024, we sold a facility in Catoosa, Oklahoma for $2.7 million in net proceeds, which resulted in a gain of $2.0 million. Proceeds were received in January 2024. The gain was included in Other income in the Condensed Consolidated Statements of Income. The facility was previously utilized for our industrial cleaning business, which was sold during the fourth quarter of fiscal 2023. The Catoosa, Oklahoma facility was closed as it was no longer strategic to the future of the business.

During the first quarter of fiscal 2024, we sold a previously utilized facility in Burlington, Ontario for $2.7 million in net proceeds, which resulted in a gain of $2.5 million. The gain was included in Other income in the Condensed Consolidated Statements of Income. We closed this previously utilized facility during the second quarter of fiscal 2023 because it was no longer strategic to the future of the business.

Note 4 – Goodwill

During the second quarter of fiscal 2023,we had indicators of a potential impairment and performed an interim impairment test within the Process and Industrial Facilities segment. We concluded that its $12.3 million of goodwill was fully impaired and recognized the impairment in operating income during the three and six months ended December 31, 2022. We did not record any impairments during the three and six months ended December 31, 2023.

Note 5 – Debt

On September 9, 2021, the Company and our primary U.S. and Canada operating subsidiaries entered into an asset-based credit agreement, which was amended on October 5, 2022 and December 29, 2023 (as amended, the "ABL Facility"), with Bank of Montreal, as Administrative Agent, Swing Line Lender and a Letter of Credit Issuer, and the lenders named therein. The maximum amount of loans under the ABL Facility is limited to $90.0 million. The ABL Facility's available borrowings may be increased by an amount not to exceed $15.0 million, subject to certain conditions, including obtaining additional commitments. The ABL Facility is intended to be used for working capital, capital expenditures, issuances of letters of credit and other lawful purposes. Our obligations under the ABL Facility are guaranteed by substantially all of our U.S. and Canadian subsidiaries and are secured by a first lien on all our assets and the assets of our co-borrowers and guarantors under the ABL Facility. The ABL Facility matures, and any outstanding amounts become due and payable, on September 9, 2026.

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 borrowing base is recalculated on a monthly basis and at December 31, 2023, our borrowing base was $69.1 million. During the quarter ended December 31, 2023, the Company repaid all outstanding borrowings under the ABL Facility. The Company had $10.0 million in letters of credit outstanding as of December 31, 2023, which resulted in availability of $59.1 million under the ABL Facility.

Borrowings under the ABL Facility bear interest through maturity at a variable rate based upon, at our option, an annual rate of either a base rate (“Base Rate”), an Adjusted Term Secured Overnight Financing Rate ("Adjusted Term SOFR"), or at the Canadian Prime Rate, plus an applicable margin. The Adjusted Term SOFR is defined as (i) the SOFR plus (ii) 11.448 basis points for a one-month tenor and 26.161 basis points for a three-month tenor; provided that the Adjusted Term SOFR cannot be below zero. The Base Rate is defined as a fluctuating interest rate equal to the greater of: (i) rate of interest announced by Bank of Montreal from time to time as its prime rate; (ii) the U.S. federal funds rate plus 0.50%; (iii) Adjusted Term SOFR for one month period plus 1.00%; or (iv) 1.00%. Depending on the amount of average availability, the applicable margin is between 1.00% to 1.50% for Base Rate and Canadian Prime Rate borrowings, which includes either U.S. or Canadian prime rate, and between 2.00% and 2.50% for Adjusted Term SOFR borrowings. Interest is payable either (i) monthly for Base Rate or

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Table of Conten t s

Canadian Prime Rate borrowings or (ii) the last day of the interest period for Adjusted Term SOFR borrowings, as set forth in the ABL Facility. The fee for undrawn amounts is 0.25% per annum and is due quarterly.

The ABL Facility contains customary conditions to borrowings, events of default and covenants, including, but not limited to, covenants that restrict our ability to sell assets, engage in mergers and acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay cash dividends, issue equity instruments, make distribution or redeem or repurchase capital stock. In the event that our availability is less than the greater of (i) $15.0 million and (ii) 15.00% of the commitments under the ABL Facility then in effect, a consolidated Fixed Charge Coverage Ratio of at least 1.00 to 1.00 must be maintained. We were in compliance with all covenants of the ABL Facility as of December 31, 2023.

Note 6 – Income Taxes

Effective Tax Rate

Our effective tax rates were zero for each of the three and six months ended December 31, 2023 and 2022. The effective tax rates during fiscal 2024 were impacted by valuation allowances of $1.2 million and $1.4 million placed on deferred tax assets during the three and six months ended December 31, 2023, respectively. The effective tax rates during fiscal 2023 were impacted by valuation allowances of $8.4 million and $9.8 million placed on deferred tax assets during the three and six months ended December 31, 2022, respectively.

Valuation Allowance

We placed a valuation allowance on our deferred tax assets in the second quarter of fiscal 2022 due to the existence of a cumulative loss over a three-year period. We will continue to place valuation allowances on newly generated deferred tax assets and will realize the benefit associated with the deferred tax assets for which the valuation allowance has been provided to the extent we generate taxable income in the future.

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.

Litigation

During fiscal 2020, we commenced litigation in an effort to collect an account receivable from an iron and steel customer on a reimbursable contract following the deterioration of the relationship. In connection with our suit, the customer filed certain counterclaims against us. In September 2023, a jury returned a verdict in our favor and awarded us the full contract balance. We received full payment of $16.8 million in October 2023.

During fiscal 2023, we completed cost reimbursable construction services for a customer at a mining and minerals facility. In late fiscal 2023, after numerous attempts to collect outstanding receivables, we filed a notice of default for lack of payment of outstanding balances, and in early fiscal 2024, we filed a lien on the facility. The customer responded by commencing litigation against us, alleging breach of contract and breach of express warranty. We deny all claims and filed a countersuit against the customer for failure to pay outstanding amounts of accounts receivable, which totaled $5.6 million as of December 31, 2023. 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.

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Table of Conten t s

During fiscal 2022, we filed an arbitration demand in an effort to collect outstanding balances of $32.7 million from a customer for which we completed a crude oil storage terminal project. The customer has filed counterclaims for liquidated damages and miscellaneous warranty items. We deny all claims and believe we are entitled to collect the full amount owed under the contract. Our hearing for this matter is currently scheduled for October 2024.

We believe we have set appropriate reserves for the matters described above based on our evaluation of the possible outcomes of the litigation. We and our subsidiaries are participants in various other 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 nonvested restricted stock shares. In the event we report a loss, nonvested restricted stock shares are not included since they are anti-dilutive.

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


	Three Months Ended				Six Months Ended
	December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
	(In thousands, except per share data)
Basic EPS:
Net loss	$	(2,851)	$	(32,827)	$	(6,018)	$	(39,339)
Weighted average shares outstanding	27,377		26,999		27,314		26,916
Basic loss per share	$	(0.10)	$	(1.22)	$	(0.22)	$	(1.46)
Diluted EPS:
Net loss	$	(2,851)	$	(32,827)	$	(6,018)	$	(39,339)



Diluted weighted average shares outstanding	27,377		26,999		27,314

SEC Form 10-Q filed by Matrix Service Company