What changed in this filing

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Item 1. Financial Statements

2020-05-07 compared with 2020-02-06 · 130 added, 73 removed, 468 unchanged (30% of the section changed)

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Cost of revenue

Selling, general and administrative expenses

Goodwill and other intangible asset impairment

Goodwill and other intangible asset impairments

Restructuring costs

Operating income (loss)

13 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Net income (loss)

Other comprehensive gain (loss), net of tax:

Foreign currency translation gain (loss) (net of tax expense (benefit) of $59 and $37 for the three and six months ended December 31, 2019, respectively, and ($238) and ($176) for the three and six months ended December 31, 2018, respectively)

Foreign currency translation gain (loss) (net of tax expense (benefit) of ($51) and ($14) for the three and nine months ended March 31, 2020, respectively, and $97 and ($79) for the three and nine months ended March 31, 2019, respectively)

Comprehensive income (loss)

5 unchanged sentences

Cash and cash equivalents

Accounts receivable, less allowances (December 31, 2019—$1,722 and June 30, 2019—$923)

Accounts receivable, less allowances (March 31, 2020—$1,821 and June 30, 2019—$923)

Costs and estimated earnings in excess of billings on uncompleted contracts

37 unchanged sentences

60,000,000 shares authorized;

27,888,217 shares issued as of December 31, 2019 and June 30, 2019;

26,672,114 and 26,807,203 shares outstanding as of December 31, 2019 and June 30, 2019

27,888,217 shares issued as of March 31, 2020 and June 30, 2019;

26,131,355 and 26,807,203 shares outstanding as of March 31, 2020 and June 30, 2019

Additional paid-in capital

1 unchanged sentence

Accumulated other comprehensive loss

Treasury stock, at cost — 1,216,103 shares as of December 31, 2019, and 1,081,014 shares as of June 30, 2019

Treasury stock, at cost — 1,756,862 shares as of March 31, 2020, and 1,081,014 shares as of June 30, 2019

Total stockholders' equity

4 unchanged sentences

(In thousands)

Six Months Ended

Nine Months Ended

Operating activities:

4 unchanged sentences

Stock-based compensation expense

Operating lease and fixed asset impairments due to restructuring

Deferred income tax

9 unchanged sentences

Accrued expenses

Net cash provided by operating activities

Net cash provided (used) by operating activities

Investing activities:

7 unchanged sentences

(In thousands)

Six Months Ended

Nine Months Ended

Financing activities:

7 unchanged sentences

Effect of exchange rate changes on cash and cash equivalents

Increase in cash and cash equivalents

Decrease in cash and cash equivalents

Cash and cash equivalents, beginning of period

4 unchanged sentences

Purchases of property, plant and equipment on account

Accrual for unsettled stock repurchases

See accompanying notes.

3 unchanged sentences

Comprehensive

Balances, September 30, 2019

Other comprehensive income

Balances, January 1, 2020

Other comprehensive loss

Issuance of deferred shares (4,650 shares)

3 unchanged sentences

Stock-based compensation expense

Balances, December 31, 2019

Balances, September 30, 2018

Other comprehensive loss

Balances, March 31, 2020

Balances, January 1, 2019

Other comprehensive income

Issuance of deferred shares (22,133 shares)

Treasury shares sold to Employee Stock Purchase Plan (4,584 shares)

Open market purchases of treasury shares (310,532 shares)

Treasury shares purchased to satisfy tax withholding obligations (1,693 shares)

Stock-based compensation expense

Balances, December 31, 2018

Balances, March 31, 2019

See accompanying notes.

4 unchanged sentences

Balances, July 1, 2019

Other comprehensive income

Other comprehensive loss

Issuance of deferred shares (539,710 shares)

3 unchanged sentences

Stock-based compensation expense

Balances, December 31, 2019

Balances, March 31, 2020

Balances, July 1, 2018

6 unchanged sentences

Stock-based compensation expense

Balances, December 31, 2018

Balances, March 31, 2019

See accompanying notes.

9 unchanged sentences

The accompanying condensed financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2019 , included in the Company’s 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, 2019 may not necessarily be indicative of the results of operations for the full year ending June 30, 2020 .

The results of operations for the three and nine month periods ended March 31, 2020 may not necessarily be indicative of the results of operations for the full year ending June 30, 2020 .

Significant Accounting Policies

62 unchanged sentences

Remaining Performance Obligations

The Company had $ 645.0 million of remaining performance obligations yet to be satisfied as of December 31, 2019 .

The Company had $ 536.7 million of remaining performance obligations yet to be satisfied as of March 31, 2020 .

The Company expects to recognize $ 431.2 million of its remaining performance obligations as revenue within the next twelve months.

6 unchanged sentences

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 advance payments and billings in excess of revenue recognized.

BIE consists of billings in excess of revenue recognized.

The following table provides information about CIE and BIE:

4 unchanged sentences

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 six months ended December 31, 2019 that was included in the prior period BIE balance was $ 97.0 million .

The amount of revenue recognized during the nine months ended March 31, 2020 that was included in the June 30, 2019 BIE balance was $ 102.6 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, 2019 and June 30, 2019 included retentions to be collected within one year of $ 29.9 million and $ 21.9 million , respectively.

Contract retentions collectible beyond one year are included in other assets in the Condensed Consolidated Balance Sheet and totaled $ 12.5 million as of December 31, 2019 and $ 17.7 million as of June 30, 2019 .

Progress billings in accounts receivable at March 31, 2020 and June 30, 2019 included retentions to be collected within one year of $ 39.8 million and $ 21.9 million , respectively.

Contract retentions collectible beyond one year are included in other assets in the Condensed Consolidated Balance Sheet and totaled $ 5.7 million as of March 31, 2020 and $ 17.7 million as of June 30, 2019 .

Disaggregated Revenue

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands)

6 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands)

5 unchanged sentences

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.

The mix of revenue by contract type shifted significantly during the third quarter of fiscal 2020 due to the Company's strategic initiative to exit the domestic iron and steel industry, which was comprised primarily of time and materials and other cost reimbursable contracts.

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 86 % of all right-of-use assets as of December 31, 2019 .

Real estate leases accounted for approximately 86 % of all right-of-use assets as of March 31, 2020 .

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 16 years.

Construction equipment leases generally have "month-to-month" lease terms that automatically renew as long as the equipment remains in use.

The Company incurred $ 2.2 million of impairments to right-of-use assets related to leased office space that was closed in connection with a restructuring plan, see Note 10 – Restructuring Costs for additional information.

The components of lease expense in the Condensed Consolidated Statements of Income are as follows:

Three Months Ended

Six Months Ended

December 31, 2019

Nine Months Ended

March 31, 2020

Lease expense

10 unchanged sentences

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:

December 31, 2019

March 31, 2020

Maturity Analysis:

6 unchanged sentences

Non-current operating lease liabilities

The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of December 31, 2019 :

The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of March 31, 2020 :

Weighted-average remaining lease term (in years)

1 unchanged sentence

Supplemental cash flow information related to leases is as follows:

Six Months Ended

December 31, 2019

Nine Months Ended

March 31, 2020

(in thousands)

3 unchanged sentences

Operating leases

During the third quarter, the Company received leasehold improvements of $ 2.4 million from a lessor as a tenant incentive.

This incentive is considered to be a non-cash investing activity.

Matrix Service Company

7 unchanged sentences

Translation adjustment (1)

Net balance at December 31, 2019

Net balance at March 31, 2020

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 in May.

Except for the impairments discussed below, the Company concluded that no other impairment indicators existed as of December 31, 2019 .

However, if our market view of project opportunities or gross margins deteriorates, then additional interim goodwill impairment tests will be performed, which could result in the recognition of additional impairments to goodwill.

However, during the third quarter the Company concluded that goodwill impairment indicators existed based on the uncertainties caused by the COVID-19 pandemic and the significant decline in the price of crude oil.

These uncertainties have resulted in lowered revenue expectations for the remainder of fiscal 2020 and fiscal 2021 and led to significant volatility in the Company's stock price.

Accordingly, the Company performed an interim test as of March 31, 2020, which did not result in any impairments.

While near-term revenue expectations were reduced, the Company also projected significant reductions in its cost structure.

As of March 31, 2020, there were three reporting units with goodwill totaling $ 14.1 million that had low headroom, which we define as the percentage difference between the fair value of a reporting unit and its carrying value.

Our financial projections were based on the current assessment of our markets.

Our markets are at historically volatile levels and future developments are difficult to predict.

If the markets that impact our business continue to deteriorate, particularly in the reporting units mentioned above, the Company could recognize a significant goodwill impairment.

In the second quarter, the Company concluded that a goodwill impairment indicator existed in the Electrical Infrastructure segment based on the recent history of depressed gross margins and the second quarter’s downward acceleration of revenue and gross margin.

5 unchanged sentences

The remaining goodwill in the Industrial segment is related to a separate reporting unit that serves a broader customer base beyond iron and steel.

The estimated fair value of each reporting unit was derived by utilizing a discounted cash flow analysis.

The estimated fair value of each reporting unit was derived primarily by utilizing a discounted cash flow analysis.

The key assumptions used are described in Part II, Item 8.

1 unchanged sentence

Other Intangible Assets

In connection with the factors disclosed for the Industrial segment goodwill impairment above, the Company fully impaired a customer relationship with a net book value of $ 5.6 million and a remaining useful life of 9 years.

In December 2019, in connection with the factors disclosed for the Industrial segment goodwill impairment above, the Company fully impaired a customer relationship with a net book value of $ 5.6 million and a remaining useful life of 9 years.

This intangible asset had a gross carrying amount of $ 9.4 million and accumulated amortization of $ 3.8 million .

3 unchanged sentences

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

At December 31, 2019

At March 31, 2020

Gross Carrying

11 unchanged sentences

Total amortizing intangible assets

Amortization expense totaled $ 0.9 million and $ 1.9 million during the three and six months ended December 31, 2019 and $ 0.8 million and $ 1.7 million for the three and six months ended December 31, 2018 , respectively.

We estimate that the remaining amortization expense related to December 31, 2019 amortizing intangible assets will be as follows (in thousands):

Amortization expense totaled $ 0.8 million and $ 2.7 million during the three and nine months ended March 31, 2020 and $ 0.8 million and $ 2.5 million for the three and nine months ended March 31, 2019 , respectively.

We estimate that the remaining amortization expense related to March 31, 2020 amortizing intangible assets will be as follows (in thousands):

Period ending:

Remainder of Fiscal 2020

Total estimated remaining amortization expense at December 31, 2019

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

Total estimated remaining amortization expense at March 31, 2020

Note 5 – Debt

2 unchanged sentences

The credit facility may be used for working capital, acquisitions, capital expenditures, issuances of letters of credit and other lawful purposes.

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

The Credit Agreement includes the following covenants and borrowing limitations:

15 unchanged sentences

The Credit Agreement includes a Leverage Ratio covenant, which provides that Consolidated Funded Indebtedness, 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.

For the four quarters ended December 31, 2019 , Covenant EBITDA was $ 78.2 million .

Consolidated Funded Indebtedness at December 31, 2019 was $ 68.5 million .

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

Availability under the senior secured revolving credit facility at December 31, 2019 was as follows:

For the four quarters ended March 31, 2020 , Covenant EBITDA was $ 64.4 million .

Consolidated Funded Indebtedness at March 31, 2020 was $ 64.2 million .

Availability under the senior secured revolving credit facility at March 31, 2020 was as follows:

(In thousands)

5 unchanged sentences

Availability under the senior secured revolving credit facility

At December 31, 2019 , the Company was in compliance with all affirmative, negative, and financial covenants under the Credit Agreement.

At March 31, 2020 , the Company was in compliance with all affirmative, negative, and financial covenants under the Credit Agreement.

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

Note 6 – Income Taxes

Coronavirus Aid, Relief, and Economic Security Act

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the "CARES Act") was signed into law.

The purpose of the CARES Act was to provide $ 2.2 trillion in funding to fight the COVID-19 pandemic and provide economic relief in the form of tax relief, government loans and grants.

The CARES Act contains the following key provisions which affect income taxes:

Eliminates the 80 % of taxable income limitations by allowing corporations to fully utilize net operating loss carryforwards to offset taxable income in 2018, 2019, or 2020 and reinstating it for tax years after 2020;

Allows net operating losses generated in 2018, 2019 or 2020 to be carried back five years;

Increases the net interest expense deduction limit to 50 % of adjusted taxable income from 30 % for the 2019 and 2020 tax years;

Allows taxpayers with alternative minimum tax credits to claim a refund for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as required by the 2017 Tax Cuts and Jobs Act;

Allows entities to deduct more of their charitable cash contributions made during calendar year 2020 by increasing the taxable income limitation to 25 % from 10 % .

The income tax provisions in the CARES Act have not had a material impact on the Company as of March 31, 2020.

Effective Tax Rate

Our effective tax rates for the three and six months ended December 31, 2019 were 10.5 % and 2.6 % , respectively, compared to 27.4 % and 23.7 % , respectively, for the same period a year ago.

We previously expected our fiscal 2020 effective tax rate to be approximately 27.0 % .

The effective tax rate in both periods in fiscal 2020 was negatively impacted by a $ 2.4 million valuation allowance placed on a deferred tax asset that was created by net operating loss carryforwards and other tax credits in Canada that was triggered by the second quarter cancellation of a Canadian iron and steel project that significantly impacted the fiscal 2020 financial forecast.

Additionally, the effective tax rate in both periods in fiscal 2020 was negatively impacted by the non-deductible portion of the goodwill impairments.

We expect the effective tax rate to be approximately 28.0 % for the remainder of the fiscal year.

The effective tax rate for the three months ended December 31, 2018 was in line with expected statutory rate.

The effective tax rate for the sixth months ended December 31, 2018 was positively impacted by $ 0.3 million of excess tax benefits related to the vesting of stock-based compensation.

Our effective tax rates for the three and nine months ended March 31, 2020 were 16.9 % and 5.9 % , respectively.

The tax benefit for the three months ended March 31, 2020 was negatively impacted by higher than normal non-deductible expenses.

The tax benefit for the nine months ended March 31, 2020 was negatively impacted by a $ 2.5 million valuation allowance placed on a deferred tax asset that was created by net operating loss carryforwards and other tax credits in Canada and by the non-deductible portion of the goodwill impairments booked in the second quarter of fiscal 2020.

Note 7 – Commitments and Contingencies

8 unchanged sentences

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.

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

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 $ 9.1 million at December 31, 2019 and $ 10.1 million at June 30, 2019 .

Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $ 10.8 million at March 31, 2020 and $ 10.1 million at June 30, 2019 .

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.

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

During the third quarter, the Company commenced litigation in an effort to collect $ 16.5 million in accounts receivable from an iron and steel customer following the deterioration of the relationship in the second quarter.

Based on the terms of the contract with this customer, the Company is entitled to collect the full amount owed under the contract.

However, the timing of collection is uncertain.

The Company and its subsidiaries are participants in various legal actions.

It is the opinion of management that none of the known legal actions will have a material impact on the Company’s financial position, results of operations or liquidity.

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

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands, except per share data)

9 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands)

20 unchanged sentences

Finally, we offer AST products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.

The Industrial segment consists of work for integrated iron and steel companies, major mining and minerals companies engaged primarily in the extraction of copper, as well as companies in other industries, including aerospace and defense, cement, and agriculture and grain.

The Industrial segment consists of work for various industries, including major mining and minerals companies engaged primarily in the extraction of non-ferrous metals, aerospace and defense, cement, agriculture, and various industrial facilities.

Our services include engineering, fabrication and construction, and maintenance and repair, which includes planned and emergency services.

10 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Gross revenues

17 unchanged sentences

Total gross profit

Goodwill and other intangible asset impairment

Intangible asset impairments and restructuring costs

Electrical Infrastructure

1 unchanged sentence

Storage Solutions

Total goodwill and other intangible asset impairment

Total intangible asset impairments and restructuring costs

Operating income (loss)

11 unchanged sentences

Total segment assets

Note 10 - Restructuring Costs

In February 2020, the Company announced a business improvement plan related to its strategic initiatives to exit the domestic iron and steel industry and to implement business improvements in the Electrical Infrastructure segment.

Planned activities under the business improvement plan have been expanded due to lower revenue expectations for the remainder of fiscal 2020 and fiscal 2021 following the uncertainties caused by the COVID-19 pandemic and the significant decline in the price of crude oil, both of which began during the third quarter.

The business improvement plan consists of discretionary cost reductions, workforce reductions and closures 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 the near-term expectation of lower revenue.

The restructuring costs are primarily comprised of severance and personnel-related costs related to reductions in workforce and impairments of operating lease right-of-use assets and other fixed assets related to the closure of certain office spaces.

The Company incurred $6.6 million of restructuring costs during the three months ended March 31, 2020 and expects to incur an additional $4.0 to $6.0 million of restructuring costs related to activities planned during the fourth quarter of fiscal 2020.

Matrix Service Company

Notes to Condensed Consolidated Financial Statements

Restructuring costs incurred are classified as follows:

Three Months Ended March 31, 2020

(in thousands)

Electrical Infrastructure

Severance costs and other benefits

Facility costs

Total Electrical Infrastructure

Oil Gas & Chemical

Severance costs and other benefits

Facility costs

Total Oil Gas & Chemical

Storage Solutions

Severance costs and other benefits

Facility costs

Total Storage Solutions

Severance costs and other benefits

Facility costs

Total Industrial

Total restructuring costs

Restructuring Costs by Type:

Total severance costs and other benefits

Total facility costs

Total restructuring costs

The table below is a reconciliation of the beginning and ending restructuring reserve balance (in thousands):

Balance as of December 31, 2019

Restructuring costs incurred

Non-cash restructuring costs (1)

Cash payments

Balance as of March 31, 2020

Non-cash restructuring costs consisted of impairments of operating lease right-of-use assets and other fixed asset impairments related to the closure of certain leased office spaces.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements