MATRIX SERVICE CO 10-Q

Item 1. Financial Statements Matrix Service Company Condensed Consolidated Statements of Income (In thousands, except per share data) (unaudited) Three Months Ended Nine Months Ended March 31, 2020 March 31, 2019 March 31, 2020 March 31, 2019 Revenue $ 248,327 $ 358,887 $ 905,101 $ 1,017,966 Cost of revenue 227,850 321,981 822,158 929,753 Gross profit 20,477 36,906 82,943 88,213 Selling, general and administrative expenses 19,718 24,112 66,574 67,672 Goodwill and other intangible asset impairments — — 38,515 — Restructuring costs 6,559 — 6,559 — Operating income (loss) ( 5,800 ) 12,794 ( 28,705 ) 20,541 Other income (expense): Interest expense ( 398 ) ( 301 ) ( 1,231 ) ( 954 ) Interest income 356 307 1,247 863 Other ( 767 ) 58 ( 368 ) 582 Income (loss) before income tax expense ( 6,609 ) 12,858 ( 29,057 ) 21,032 Provision (benefit) for federal, state and foreign income taxes ( 1,114 ) 3,925 ( 1,705 ) 5,862 Net income (loss) $ ( 5,495 ) $ 8,933 $ ( 27,352 ) $ 15,170 Basic earnings (loss) per common share $ ( 0.21 ) $ 0.33 $ ( 1.02 ) $ 0.56 Diluted earnings (loss) per common share $ ( 0.21 ) $ 0.33 $ ( 1.02 ) $ 0.55 Weighted average common shares outstanding: Basic 26,478 26,788 26,781 26,918 Diluted 26,478 27,417 26,781 27,587 See accompanying notes. - 1 - Table of Contents Matrix Service Company Condensed Consolidated Statements of Comprehensive Income (In thousands) (unaudited) Three Months Ended Nine Months Ended March 31, 2020 March 31, 2019 March 31, 2020 March 31, 2019 Net income (loss) $ ( 5,495 ) $ 8,933 $ ( 27,352 ) $ 15,170 Other comprehensive gain (loss), net of tax: 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) ( 1,104 ) 216 ( 975 ) ( 452 ) Comprehensive income (loss) $ ( 6,599 ) $ 9,149 $ ( 28,327 ) $ 14,718 See accompanying notes. - 2 - Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands) (unaudited) March 31, 2020 June 30, 2019 Assets Current assets: Cash and cash equivalents $ 87,503 $ 89,715 Accounts receivable, less allowances (March 31, 2020—$1,821 and June 30, 2019—$923) 209,195 218,432 Costs and estimated earnings in excess of billings on uncompleted contracts 56,859 96,083 Inventories 7,738 8,017 Income taxes receivable 1,924 29 Other current assets 8,429 5,034 Total current assets 371,648 417,310 Property, plant and equipment at cost: Land and buildings 43,162 41,179 Construction equipment 94,064 91,793 Transportation equipment 55,793 52,526 Office equipment and software 38,122 43,632 Construction in progress 7,320 7,619 Total property, plant and equipment - at cost 238,461 236,749 Accumulated depreciation ( 154,493 ) ( 157,414 ) Property, plant and equipment - net 83,968 79,335 Operating lease right-of-use assets 25,840 — Goodwill 60,277 93,368 Other intangible assets, net of accumulated amortization 11,114 19,472 Deferred income taxes 5,462 2,683 Other assets 9,038 21,226 Total assets $ 567,347 $ 633,394 See accompanying notes. - 3 - Table of Contents Matrix Service Company Condensed Consolidated Balance Sheets (In thousands, except share data) (unaudited) March 31, 2020 June 30, 2019 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 77,246 $ 114,647 Billings on uncompleted contracts in excess of costs and estimated earnings 100,566 105,626 Accrued wages and benefits 23,013 38,357 Accrued insurance 9,065 9,021 Operating lease liabilities 8,639 — Income taxes payable — 2,517 Other accrued expenses 5,548 5,331 Total current liabilities 224,077 275,499 Deferred income taxes — 298 Operating lease liabilities 22,660 — Borrowings under senior secured revolving credit facility 8,888 5,347 Other liabilities 296 293 Total liabilities 255,921 281,437 Commitments and contingencies Stockholders’ equity: Common stock—$.01 par value; 60,000,000 shares authorized; 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 279 279 Additional paid-in capital 137,306 137,712 Retained earnings 212,124 239,476 Accumulated other comprehensive loss ( 8,726 ) ( 7,751 ) 340,983 369,716 Less: Treasury stock, at cost — 1,756,862 shares as of March 31, 2020, and 1,081,014 shares as of June 30, 2019 ( 29,557 ) ( 17,759 ) Total stockholders' equity 311,426 351,957 Total liabilities and stockholders’ equity $ 567,347 $ 633,394 See accompanying notes. - 4 - Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Nine Months Ended March 31, 2020 March 31, 2019 Operating activities: Net income (loss) $ ( 27,352 ) $ 15,170 Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of effects from acquisitions and disposals: Depreciation and amortization 14,388 13,623 Goodwill and other intangible asset impairment 38,515 — Stock-based compensation expense 8,115 9,045 Operating lease and fixed asset impairments due to restructuring 2,660 — Deferred income tax ( 3,091 ) 1,562 Gain on disposal of business — ( 427 ) Gain on sale of property, plant and equipment ( 536 ) ( 810 ) Provision for uncollectible accounts 1,292 ( 105 ) Other ( 110 ) 308 Changes in operating assets and liabilities increasing (decreasing) cash, net of effects from acquisitions and disposals: Accounts receivable 7,945 ( 71,436 ) Costs and estimated earnings in excess of billings on uncompleted contracts 39,224 921 Inventories 279 ( 3,492 ) Other assets and liabilities 5,427 ( 14,750 ) Accounts payable ( 35,129 ) 30,092 Billings on uncompleted contracts in excess of costs and estimated earnings ( 5,060 ) 1,626 Accrued expenses ( 15,080 ) 17,557 Net cash provided (used) by operating activities 31,487 ( 1,116 ) Investing activities: Capital expenditures ( 17,650 ) ( 13,721 ) Proceeds from disposal of business — 3,885 Proceeds from asset sales 1,018 1,059 Net cash used by investing activities $ ( 16,632 ) $ ( 8,777 ) See accompanying notes. - 5 - Table of Contents Matrix Service Company Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Nine Months Ended March 31, 2020 March 31, 2019 Financing activities: Advances under senior secured revolving credit facility $ 18,567 $ 12,430 Repayments of advances under senior secured revolving credit facility ( 14,357 ) ( 10,133 ) Open market purchase of treasury shares ( 17,045 ) ( 5,190 ) Issuances of common stock — 128 Proceeds from issuance of common stock under employee stock purchase plan 243 235 Repurchase of common stock for payment of statutory taxes due on equity-based compensation ( 3,517 ) ( 1,685 ) Net cash used by financing activities ( 16,109 ) ( 4,215 ) Effect of exchange rate changes on cash and cash equivalents ( 958 ) ( 273 ) Decrease in cash and cash equivalents ( 2,212 ) ( 14,381 ) Cash and cash equivalents, beginning of period 89,715 64,057 Cash and cash equivalents, end of period $ 87,503 $ 49,676 Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 5,841 $ 742 Interest $ 1,535 $ 1,340 Non-cash investing and financing activities: Purchases of property, plant and equipment on account $ 414 $ 1,100 See accompanying notes. - 6 - Table of Contents Matrix Service Company Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share data) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income(Loss) Total Balances, January 1, 2020 $ 279 $ 135,057 $ 217,619 $ ( 22,538 ) $ ( 7,622 ) $ 322,795 Net loss — — ( 5,495 ) — — ( 5,495 ) Other comprehensive loss — — — — ( 1,104 ) ( 1,104 ) Issuance of deferred shares (4,650 shares) — ( 77 ) — 77 — — Treasury shares sold to Employee Stock Purchase Plan (3,805 shares) — 24 — 62 — 86 Open market purchases of treasury shares (547,606 shares) — — — ( 7,132 ) — ( 7,132 ) Treasury shares purchased to satisfy tax withholding obligations (1,608 shares) — — — ( 26 ) — ( 26 ) Stock-based compensation expense — 2,302 — — — 2,302 Balances, March 31, 2020 $ 279 $ 137,306 $ 212,124 $ ( 29,557 ) $ ( 8,726 ) $ 311,426 Balances, January 1, 2019 $ 279 $ 131,889 $ 217,731 $ ( 18,230 ) $ ( 8,079 ) $ 323,590 Net income — — 8,933 — — 8,933 Other comprehensive income — — — — 216 216 Issuance of deferred shares (22,133 shares) — ( 366 ) — 366 — — Treasury shares sold to Employee Stock Purchase Plan (4,584 shares) — 6 — 76 — 82 Treasury shares purchased to satisfy tax withholding obligations (1,693 shares) — — — ( 34 ) — ( 34 ) Stock-based compensation expense — 3,307 — — — 3,307 Balances, March 31, 2019 $ 279 $ 134,836 $ 226,664 $ ( 17,822 ) $ ( 7,863 ) $ 336,094 See accompanying notes. Matrix Service Company - 7 - Table of Contents Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share data) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income(Loss) Total Balances, July 1, 2019 $ 279 $ 137,712 $ 239,476 $ ( 17,759 ) $ ( 7,751 ) $ 351,957 Net loss — — ( 27,352 ) — — ( 27,352 ) Other comprehensive loss — — — — ( 975 ) ( 975 ) Issuance of deferred shares (539,710 shares) — ( 8,563 ) — 8,563 — — Treasury shares sold to Employee Stock Purchase Plan (12,326 shares) — 42 — 201 — 243 Open market purchases of treasury shares (1,047,606 shares) — — — ( 17,045 ) — ( 17,045 ) Treasury shares purchased to satisfy tax withholding obligations (180,278 shares) — — — ( 3,517 ) — ( 3,517 ) Stock-based compensation expense — 8,115 — — — 8,115 Balances, March 31, 2020 $ 279 $ 137,306 $ 212,124 $ ( 29,557 ) $ ( 8,726 ) $ 311,426 Balances, July 1, 2018 $ 279 $ 132,198 $ 211,494 $ ( 17,717 ) $ ( 7,411 ) $ 318,843 Net income — — 15,170 — — 15,170 Other comprehensive loss — — — — ( 452 ) ( 452 ) Exercise of stock options (12,500 shares) — ( 126 ) — 254 — 128 Issuance of deferred shares (314,711 shares) — ( 6,306 ) — 6,306 — — Treasury shares sold to Employee Stock Purchase Plan (12,031 shares) — 25 — 210 — 235 Open market purchase of treasury shares (310,532 shares) — — — ( 5,190 ) — ( 5,190 ) Treasury shares purchased to satisfy tax withholding obligations (79,111 shares) — — — ( 1,685 ) — ( 1,685 ) Stock-based compensation expense — 9,045 — — — 9,045 Balances, March 31, 2019 $ 279 $ 134,836 $ 226,664 $ ( 17,822 ) $ ( 7,863 ) $ 336,094 See accompanying notes. - 8 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 – Basis of Presentation and Significant Accounting Policies Basis of Presentation The condensed consolidated financial statements include the accounts of Matrix Service Company (“Matrix”, “we”, “our”, “us”, “its” or the “Company”) and its subsidiaries, unless otherwise indicated. Intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. The information furnished reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations, cash flows and financial position for the interim periods presented. The accompanying condensed financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 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 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 The Company has updated its significant accounting policies to include its lease accounting policy as a result of adopting the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) on July 1, 2019. The Company's other significant accounting policies are detailed in “Note 1 - Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended June 30, 2019. Leases Adoption of New Leases Standard In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . Under this guidance, lessees are required to recognize virtually all leases on the balance sheet as a right-of-use asset and an associated operating lease liability or finance lease liability. The right-of-use asset represents the lessee's right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee's obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as operating leases or finance leases. Operating lease liabilities and right-of-use assets are adjusted to result in a single straight-line lease expense over the life of the lease. Finance lease liabilities and right-of-use assets, which contain provisions similar to capital leases under the prior accounting standards, result in the recognition of interest expense on the lease liability and amortization expense on the right-of-use asset over the term of the lease. On July 1, 2019, the Company adopted the standard using the modified retrospective method. The modified retrospective method permits the Company to record right-of-use assets and lease liabilities for existing leases as of the date of adoption rather than at the beginning of the earliest period presented. The Company recorded operating lease right-of-use assets of $ 24.6 million and operating lease liabilities of $ 25.8 million as of July 1, 2019. The adoption of the standard did not have a material impact on the Company’s retained earnings, Condensed Consolidated Statements of Income or Condensed Consolidated Statements of Cash Flows. Financial results reported in prior periods are unchanged and reflect the prior lease accounting standards in place at the time. The Company elected the package of practical expedients permitted under the transition guidance for the new standard, which among other things, allowed the Company to carry forward the historical lease classification of its existing leases. All of the Company's existing leases were classified as operating leases prior to adoption and have retained this classification after adoption. In addition, the Company elected not to utilize the hindsight practical expedient to determine the lease term for existing leases at adoption. - 9 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Lease Accounting Policy The Company enters into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. The Company determines if an arrangement is or contains a lease at inception of the arrangement. An arrangement is determined to be a lease if it conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. If certain criteria are satisfied, the lease is classified as a financing lease. If none of these criteria are satisfied, the lease is considered an operating lease. All of the Company's leases are classified as operating leases. Operating lease right-of-use assets are recognized as the present value of future lease payments over the lease term as of the commencement date, plus any lease payments made prior to commencement, and less any lease incentives received. Operating right-of-use assets are presented as noncurrent in the Condensed Consolidated Balance Sheets. Operating lease liabilities are recognized as the present value of the future lease payments over the lease term as of the commencement date and are presented as current and noncurrent in the Condensed Consolidated Balance Sheets. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases with an initial term of 12 months or less. The lease term used to measure the right-of-use assets and lease liabilities is generally the non-cancelable lease term for real estate leases and information technology equipment. Construction equipment is typically rented on a "month-to-month" basis and the lease term is estimated based on the expected duration of the rental. An option to renew or terminate a lease is included in the lease term when it is reasonably certain that the Company will exercise the option. Renewal options for real estate leases are typically for five years or less. Future lease payments are discounted based on the Company's estimate of its incremental borrowing rate at lease commencement. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments. Determinations with respect to lease term, including any renewals, incremental borrowing rate, and future lease payments require the use of judgment based on the facts and circumstances related to each lease. The Company considers various factors, including economic incentives, intent, past history and business need, to determine the likelihood that a renewal option will be exercised. After the commencement date, operating lease expense is recognized based on the undiscounted future lease payments over the remaining lease term on a straight-line basis. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term. Lease expense is included in cost of revenue and in selling, general and administrative expenses in the Condensed Consolidated Statements of Income. See Note 3 - Leases for the required periodic disclosures about the Company's leases. Recently Issued Accounting Standards Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments On June 16, 2016, the FASB issued ASU 2016-13, which will change how the Company accounts for credit losses, including those related to its trade accounts receivable. The amendments in this update require a financial asset (or a group of financial assets) to be presented at the net amount expected to be collected. The income statement will reflect any increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. Current GAAP delays the recognition of the full amount of credit losses until the loss is probable of occurring. The amendments in this update eliminate the probable initial recognition threshold and, instead, reflect the Company's current estimate of all expected credit losses. In addition, current guidance limits the information the Company may consider in measuring a credit loss to its past events and current conditions. The amendments in this update broaden the information the Company may consider in developing its expected credit loss estimate to include forecasted information. The Company will adopt these amendments on July 1, 2020. The Company must apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. At this time, the Company does not expect this update will have a material impact on its estimate of the allowance for uncollectible accounts. - 10 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 2 – Revenue Remaining Performance Obligations 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. Contract Balances Contract terms with customers include the timing of billing and payment, which usually differs from the timing of revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets and liabilities are calculated on a contract-by-contract basis and reported on a net basis at the end of each period and are classified as current. We present our contract assets in the balance sheet as Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts ("CIE"). CIE consists of revenue recognized in excess of billings. We present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and Estimated Earnings ("BIE"). BIE consists of billings in excess of revenue recognized. The following table provides information about CIE and BIE: March 31, 2020 June 30, 2019 Change (in thousands) Costs and estimated earnings in excess of billings on uncompleted contracts $ 56,859 $ 96,083 $ ( 39,224 ) Billings on uncompleted contracts in excess of costs and estimated earnings ( 100,566 ) ( 105,626 ) 5,060 Net contract liabilities $ ( 43,707 ) $ ( 9,543 ) $ ( 34,164 ) The difference between the beginning and ending balances of the Company's CIE and BIE primarily results from the timing of revenue recognized relative to its billings. The amount of revenue recognized during the nine months ended March 31, 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 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 Revenue disaggregated by reportable segment is presented in Note 9 - Segment Information. The following series of tables presents revenue disaggregated by geographic area where the work was performed and by contract type: Geographic Disaggregation: Three Months Ended Nine Months Ended March 31, 2020 March 31, 2019 March 31, 2020 March 31, 2019 (In thousands) United States $ 232,606 $ 345,953 $ 838,371 $ 985,603 Canada 12,633 10,691 58,506 27,486 Other international 3,088 2,243 8,224 4,877 Total Revenue $ 248,327 $ 358,887 $ 905,101 $ 1,017,966 - 11 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Contract Type Disaggregation: Three Months Ended Nine Months Ended March 31, 2020 March 31, 2019 March 31, 2020 March 31, 2019 (In thousands) Fixed-price contracts $ 182,282 $ 183,899 $ 533,375 $ 545,832 Time and materials and other cost reimbursable contracts 66,045 174,988 371,726 472,134 Total Revenue $ 248,327 $ 358,887 $ 905,101 $ 1,017,966 Typically, the Company assumes more risk with fixed-price contracts since increases in cost 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. 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 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 Nine Months Ended March 31, 2020 March 31, 2020 Lease expense Location of Expense in Statements of Income (in thousands) Operating lease expense Cost of revenues and selling, general and administrative expenses $ 3,229 $ 9,601 Short-term lease expense (1) Cost of revenues 9,808 30,423 Total lease expense $ 13,037 $ 40,024 (1) Primarily represents the lease expense of construction equipment that is subject to month-to-month rental agreements with expected rental durations of less than one year. - 12 - Table of Contents 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 the Company's Condensed Consolidated Balance Sheets, were as follows: March 31, 2020 Maturity Analysis: (in thousands) Remainder of Fiscal 2020 $ 2,892 Fiscal 2021 8,767 Fiscal 2022 6,209 Fiscal 2023 4,572 Fiscal 2024 2,992 Thereafter 11,922 Total future operating lease payments 37,354 Less: imputed interest ( 6,055 ) Net present value of future lease payments 31,299 Less: current portion of operating lease liabilities 8,639 Non-current operating lease liabilities $ 22,660 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) 6.1 years Weighted-average discount rate 5.6 % Supplemental cash flow information related to leases is as follows: Nine Months Ended March 31, 2020 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 9,773 Right-of-use assets obtained in exchange for lease liabilities: Operating leases $ 36,564 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. - 13 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 4 – Intangible Assets Including Goodwill Goodwill The changes in the carrying value of goodwill by segment are as follows: Electrical Infrastructure Oil Gas & Chemical Storage Solutions Industrial Total (In thousands) Net balance at June 30, 2019 $ 24,830 $ 30,829 $ 16,736 $ 20,973 $ 93,368 Goodwill impairment ( 24,900 ) — — ( 7,981 ) ( 32,881 ) Translation adjustment (1) 70 — ( 247 ) ( 33 ) ( 210 ) Net balance at March 31, 2020 $ — $ 30,829 $ 16,489 $ 12,959 $ 60,277 (1) The translation adjustments relate to the periodic translation of Canadian Dollar and South Korean Won denominated goodwill recorded as a part of prior acquisitions in Canada and South Korea, in which the local currency was determined to be the functional currency. The Company tests its goodwill for impairment annually in May. 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. Accordingly, the Company performed an interim impairment test as of December 31, 2019, reflecting updated revenue and gross margin assumptions, and concluded that the reporting unit's $24.9 million of goodwill was fully impaired. Additionally, in December 2019, the Company concluded that a goodwill impairment indicator existed for an Industrial segment reporting unit based on several second quarter events. These events included the deterioration of the relationship with a significant customer in the iron and steel industry in the second quarter. As a result, the customer canceled other previously awarded work and the Company is expecting little to no business from this customer in the foreseeable future. Accordingly, the Company performed an interim impairment test as of December 31, 2019 and concluded that the reporting unit's $8.0 million of goodwill was fully impaired. 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 primarily by utilizing a discounted cash flow analysis. The key assumptions used are described in Part II, Item 8. Financial Statements and Supplementary Data, Note 1 - Summary of Significant Accounting Policies, Goodwill in our fiscal 2019 Annual Report on Form 10-K. Other Intangible Assets 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 . The impairment is included within the goodwill and other intangible asset impairment caption in the condensed consolidated statements of income. - 14 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Information on the carrying value of other intangible assets is as follows: At March 31, 2020 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,579 $ ( 1,912 ) $ 667 Customer-based 6 to 15 28,861 ( 18,414 ) 10,447 Non-compete agreements 4 1,453 ( 1,453 ) — Total amortizing intangible assets $ 32,893 $ ( 21,779 ) $ 11,114 At June 30, 2019 Useful Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount (Years) (In thousands) Intellectual property 10 to 15 $ 2,579 $ ( 1,779 ) $ 800 Customer-based 6 to 15 38,572 ( 19,915 ) 18,657 Non-compete agreements 4 1,453 ( 1,438 ) 15 Total amortizing intangible assets $ 42,604 $ ( 23,132 ) $ 19,472 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 $ 772 Fiscal 2021 3,085 Fiscal 2022 2,266 Fiscal 2023 1,819 Fiscal 2024 1,506 Fiscal 2025 1,111 Thereafter 555 Total estimated remaining amortization expense at March 31, 2020 $ 11,114 Note 5 – Debt On February 8, 2017, the Company entered into the Fourth Amended and Restated Credit Agreement (the "Credit Agreement"), by and among the Company and certain foreign subsidiaries, as Borrowers, various subsidiaries of the Company, as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole Bookrunner, and the other Lenders party thereto. The Credit Agreement provides for a five-year senior secured revolving credit facility of $ 300.0 million that expires February 8, 2022 . The credit facility may be used for working capital, acquisitions, capital expenditures, issuances of letters of credit and other lawful purposes. - 15 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) The Credit Agreement includes the following covenants and borrowing limitations: • Our Leverage Ratio, determined as of the end of each fiscal quarter, may not exceed 3.00 to 1.00 . • We are required to maintain a Fixed Charge Coverage Ratio, determined as of the end of each fiscal quarter, greater than or equal to 1.25 to 1.00 . • Asset dispositions (other than dispositions in which all of the net cash proceeds therefrom are reinvested into the Company and dispositions of inventory and obsolete or unneeded equipment in the ordinary course of business) are limited to $ 20.0 million per 12-month period. The credit facility includes a U.S. Dollar equivalent sublimit of $ 75.0 million for revolving loans denominated in Australian Dollars, Canadian Dollars, Euros and Pounds Sterling and letters of credit in Australian Dollars, Euros, and Pounds Sterling. The credit facility also includes a $ 200.0 million sublimit for total letters of credit. Each revolving borrowing under the Credit Agreement will bear interest at a rate per annum equal to: • The ABR or the Adjusted LIBO Rate, in the case of revolving loans denominated in U.S. Dollars; • The Canadian Prime Rate or the CDOR rate, in the case of revolving loans denominated in Canadian Dollars; • The Adjusted LIBO Rate, in the case of revolving loans denominated in Pounds Sterling or Australian Dollars; or • The EURIBO Rate, in the case of revolving loans denominated in Euros, in each case, plus the Applicable Margin, which is based on the Company's Leverage Ratio. The Applicable Margin on ABR loans ranges between 0.625 % and 1.625 % . The Applicable Margin for Adjusted LIBO, EURIBO and CDOR loans ranges between 1.625 % and 2.625 % and the Applicable Margin for Canadian Prime Rate loans ranges between 2.125 % and 3.125 % . The unused credit facility fee is between 0.25 % and 0.45 % based on the Leverage Ratio. 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 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: March 31, 2020 June 30, 2019 (In thousands) Senior secured revolving credit facility $ 300,000 $ 300,000 Capacity constraint due to the Leverage Ratio 106,929 94,323 Capacity under the credit facility 193,071 205,677 Letters of credit 55,342 48,147 Borrowings outstanding 8,888 5,347 Availability under the senior secured revolving credit facility $ 128,841 $ 152,183 At March 31, 2020 , the Company was in compliance with all affirmative, negative, and financial covenants under the Credit Agreement. - 16 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) 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; and • 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 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 Insurance Reserves The Company maintains insurance coverage for various aspects of its operations. However, exposure to potential losses is retained through the use of deductibles, self-insured retentions and coverage limits. Typically, our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of our services and provide warranties for materials and workmanship. The Company may also be required to name the customer as an additional insured up to the limits of insurance available, or we may be required to purchase special insurance policies or surety bonds for specific customers or provide letters of credit in lieu of bonds to satisfy performance and financial guarantees on some projects. Matrix maintains a performance and payment bonding line sufficient to support the business. The Company generally requires its subcontractors to indemnify the Company and the Company’s customer and name the Company as an additional insured for activities arising out of the subcontractors’ work. We also require certain subcontractors to provide additional insurance policies, including surety bonds in favor of the Company, to secure the subcontractors’ work or as required by the subcontract. There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against a valid claim or loss under the contracts with our customers. 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 $ 10.8 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. - 17 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Other 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 other known legal actions, including a contract dispute with a customer involving the construction of a crude terminal, will have a material impact on the Company’s financial position, results of operations or liquidity. Note 8 – Earnings per Common Share Basic earnings per share (“Basic EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share (“Diluted EPS”) includes the dilutive effect of stock options and nonvested deferred shares. In the event we report a loss, stock options and nonvested deferred shares are not included since they are anti-dilutive. The computation of basic and diluted earnings per share is as follows: Three Months Ended Nine Months Ended March 31, 2020 March 31, 2019 March 31, 2020 March 31, 2019 (In thousands, except per share data) Basic EPS: Net income (loss) $ ( 5,495 ) $ 8,933 $ ( 27,352 ) $ 15,170 Weighted average shares outstanding 26,478 26,788 26,781 26,918 Basic earnings (loss) per share $ ( 0.21 ) $ 0.33 $ ( 1.02 ) $ 0.56 Diluted EPS: Weighted average shares outstanding – basic 26,478 26,788 26,781 26,918 Dilutive stock options — 27 — 28 Dilutive nonvested deferred shares — 602 — 641 Diluted weighted average shares 26,478 27,417 26,781 27,587 Diluted earnings (loss) per share $ ( 0.21 ) $ 0.33 $ ( 1.02 ) $ 0.55 The following securities are considered antidilutive and have been excluded from the calculation of Diluted EPS: Three Months Ended Nine Months Ended March 31, 2020 March 31, 2019 March 31, 2020 March 31, 2019 (In thousands) Stock options 18 — 23 — Nonvested deferred shares 1,023 188 844 152 Total antidilutive securities 1,041 188 867 152 - 18 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Note 9 – Segment Information We operate our business through four reportable segments: Electrical Infrastructure; Oil Gas & Chemical; Storage Solutions; and Industrial. The Electrical Infrastructure segment consists of power delivery services provided to investor owned utilities, including construction of new substations, upgrades of existing substations, short-run transmission line installations, distribution upgrades and maintenance, as well as emergency and storm restoration services. We also provide construction and maintenance services to a variety of power generation facilities, such as combined cycle plants and other natural gas fired power stations. The Oil Gas & Chemical segment serves customers primarily 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 perform work in the petrochemical, upstream petroleum, and sulfur extraction, recovery and processing markets. Our services include plant maintenance, turnarounds, engineering and capital construction. We also offer industrial cleaning services, including hydro-blasting, hydro-excavating, advanced chemical cleaning and vacuum services. The Storage Solutions segment consists of work related to aboveground storage tanks ("AST") and terminals. Also included in this segment are cryogenic and other specialty storage tanks and terminals including liquefied natural gas, liquid nitrogen/liquid oxygen, liquid petroleum and other specialty vessels such as spheres as well as marine structures and truck and rail loading/offloading facilities. Our services include engineering, fabrication and construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. 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 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. We also design instrumentation and control systems and offer specialized expertise in the design and construction of bulk material handling systems. The Company evaluates performance and allocates resources based on operating income. The accounting policies of the reportable segments are the same as those described in the Summary of Significant Accounting Policies footnote included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 and in Note 1 of this Quarterly Report on Form 10-Q. Intersegment sales and transfers are recorded at cost; therefore, no intersegment profit or loss is recognized. Segment assets consist primarily of accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, property, plant and equipment, operating lease right-of-use assets, goodwill and other intangible assets. - 19 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Results of Operations (In thousands) Three Months Ended Nine Months Ended March 31, 2020 March 31, 2019 March 31, 2020 March 31, 2019 Gross revenues Electrical Infrastructure $ 28,411 $ 60,669 $ 89,973 $ 163,543 Oil Gas & Chemical 53,539 83,414 167,821 246,497 Storage Solutions 144,460 134,822 439,246 374,787 Industrial 24,042 81,283 213,596 237,225 Total gross revenues $ 250,452 $ 360,188 $ 910,636 $ 1,022,052 Less: Inter-segment revenues Oil Gas & Chemical $ 1,226 $ 870 $ 1,986 $ 2,175 Storage Solutions 714 431 2,664 1,911 Industrial 185 — 885 — Total inter-segment revenues $ 2,125 $ 1,301 $ 5,535 $ 4,086 Consolidated revenues Electrical Infrastructure $ 28,411 $ 60,669 $ 89,973 $ 163,543 Oil Gas & Chemical 52,313 82,544 165,835 244,322 Storage Solutions 143,746 134,391 436,582 372,876 Industrial 23,857 81,283 212,711 237,225 Total consolidated revenues $ 248,327 $ 358,887 $ 905,101 $ 1,017,966 Gross profit (loss) Electrical Infrastructure $ 752 $ 6,210 $ ( 2,024 ) $ 13,155 Oil Gas & Chemical 2,946 10,736 10,778 25,518 Storage Solutions 18,010 14,575 58,840 35,275 Industrial ( 1,231 ) 5,385 15,349 14,265 Total gross profit $ 20,477 $ 36,906 $ 82,943 $ 88,213 Intangible asset impairments and restructuring costs Electrical Infrastructure $ 1,114 $ — $ 26,014 $ — Oil Gas & Chemical 1,409 — 1,409 — Storage Solutions 1,000 — 1,000 — Industrial 3,036 — 16,651 — Total intangible asset impairments and restructuring costs $ 6,559 $ — $ 45,074 $ — Operating income (loss) Electrical Infrastructure $ ( 2,259 ) $ 2,882 $ ( 33,766 ) $ 3,977 Oil Gas & Chemical ( 2,712 ) 4,796 ( 5,757 ) 8,895 Storage Solutions 6,479 3,730 24,830 5,371 Industrial ( 7,308 ) 1,386 ( 14,012 ) 2,298 Total operating income (loss) $ ( 5,800 ) $ 12,794 $ ( 28,705 ) $ 20,541 - 20 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Total assets by segment were as follows: March 31, 2020 June 30, 2019 Electrical Infrastructure $ 97,747 $ 155,880 Oil Gas & Chemical 86,194 91,959 Storage Solutions 228,717 188,912 Industrial 30,859 90,336 Unallocated assets 123,830 106,307 Total segment assets $ 567,347 $ 633,394 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. - 21 - Table of Contents Matrix Service Company Notes to Condensed Consolidated Financial Statements (unaudited) Restructuring costs incurred are classified as follows: Three Months Ended March 31, 2020 (in thousands) Electrical Infrastructure Severance costs and other benefits $ 811 Facility costs 303 Total Electrical Infrastructure $ 1,114 Oil Gas & Chemical Severance costs and other benefits $ 635 Facility costs 774 Total Oil Gas & Chemical $ 1,409 Storage Solutions Severance costs and other benefits $ 225 Facility costs 775 Total Storage Solutions $ 1,000 Industrial Severance costs and other benefits $ 2,230 Facility costs 806 Total Industrial $ 3,036 Total restructuring costs $ 6,559 Restructuring Costs by Type: Total severance costs and other benefits $ 3,901 Total facility costs 2,658 Total restructuring costs $ 6,559 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 6,559 Non-cash restructuring costs (1) ( 2,660 ) Cash payments ( 2,963 ) Balance as of March 31, 2020 $ 936 (1) 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. - 22 - Table of Contents