What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2020-09-03 compared with 2019-09-04 · 244 added, 191 removed, 276 unchanged (61% of the section changed)

2 unchanged sentences

GAAP represents a comprehensive set of accounting and disclosure rules and requirements, the application of which requires management judgments and estimates including, in certain circumstances, choices between acceptable GAAP alternatives.

The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.

We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances.

5 unchanged sentences

General Information about our Contracts with Customers

Our revenues come from contracts to provide engineering, procurement, fabrication and construction, repair and maintenance and other services.

Our revenue comes from contracts to provide engineering, procurement, fabrication and construction, repair and maintenance and other services.

Our engineering, procurement and fabrication and construction services are usually provided in association with capital projects, which commonly are fixed price contracts and are billed based on project milestones.

33 unchanged sentences

We record revenue for contracts with our customers as we satisfy the contracts' performance obligations.

We recognize revenue on performance obligations associated with fixed price contracts for engineering, procurement and construction services over time since these services create or enhance assets the customer controls as they are being created or enhanced.

We recognize revenue on performance obligations associated with fixed price contracts for engineering, procurement, fabrication and construction services over time since these services create or enhance assets the customer controls as they are being created or enhanced.

We measure progress of satisfying these performance obligations by using the percentage-of-completion method, which is based on costs incurred to date compared to the total estimated costs at completion, since it best depicts the transfer of control of assets being created or enhanced to the customer.

15 unchanged sentences

Determine Contract Price paragraph above.

Unpriced change orders are more fully discussed in Note 7 - Commitments and Contingencies.

Unpriced change orders are more fully discussed in Note 7 - Commitments and Contingencies of the Notes to Financial Statements.

Sometimes we seek claims for amounts in excess of the contract price for delays, errors in specifications and designs, contract terminations, change orders in dispute or other causes of additional costs incurred by us.

3 unchanged sentences

Determine Contract Price paragraph above.

Claims are more fully discussed in Note 7 - Commitments and Contingencies.

Claims are more fully discussed in Note 7 - Commitments and Contingencies of the Notes to 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 $10.1 million at June 30, 2019 and $15.0 million at June 30, 2018 .

Costs and estimated earnings in excess of billings on uncompleted contracts included revenue for unpriced change orders and claims of $14.5 million at June 30, 2020 and $10.1 million at June 30, 2019.

The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings.

11 unchanged sentences

In accordance with current accounting guidance, goodwill is not amortized and is tested at least annually for impairment at the reporting unit level, which is a level below our reportable segments.

We perform our annual test during the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant additional tests.

We perform our annual impairment test in the fourth quarter of each fiscal year, or in between annual tests whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable, to determine whether an impairment exists and to determine the amount of headroom.

We define "headroom" as the percentage difference between the fair value of a reporting unit and its carrying value.

The goodwill impairment test involves comparing management’s estimate of the fair value of a reporting unit with its carrying value, including goodwill.

1 unchanged sentence

If the fair value of a reporting unit is less than its carrying value, then goodwill is impaired to the extent of the difference, but the impairment may not exceed the balance of goodwill assigned to that reporting unit.

We performed our annual goodwill impairment test as of May 31, 2019, which indicated no impairment.

We utilize a discounted cash flow analysis, referred to as an income approach, and market multiples, referred to as a market approach, to determine the estimated fair value of our reporting units.

1 unchanged sentence

As a result, actual results may differ from the estimates utilized in our income approach.

For the market approach, significant judgments and assumptions include the selection of guideline companies and our forecasted EBITDA.

The use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate and could result in the recognition of an impairment charge in the financial statements.

As a test for reasonableness, we also consider the combined estimated fair values of our reporting units to our market capitalization.

We also consider the amount of headroom for each reporting unit when determining whether an impairment existed.

We define "headroom" as the percentage difference between the fair value of a reporting unit and its carrying value.

For the market approach, significant judgments and assumptions include the selection of guideline companies, forecasted guideline company EBITDA and our forecasted EBITDA.

The use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate and could result in the recognition of additional impairment charges in the financial statements.

As a test for reasonableness, we also consider the combined carrying values of our reporting units to our market capitalization.

In the second quarter of fiscal 2020, 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, 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 our 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 new 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.

During the third quarter of fiscal 2020, 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 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 additional impairments.

The Company performed its annual goodwill impairment test as of May 31, 2020, which resulted in no impairment.

The fiscal 2020 test indicated that three reporting units with a combined total of $ 14.2 million of goodwill as of June 30, 2020 were at higher risk of future impairment than others.

If the Company's view of project opportunities or gross margins deteriorates, particularly for the higher risk reporting units, then the Company may be required to record a material impairment of goodwill.

We considered the amount of headroom for each reporting unit when determining whether an impairment existed.

The amount of headroom varies by reporting unit.

Our significant assumptions, including revenue growth rates, gross margins, discount rate and other factors may change in light of changes in the economic and competitive environment in which we operate.

Our significant assumptions, including revenue growth rates, gross margins, discount rate and other factors may change in the future based on the changing economic and competitive environment in which we operate.

Assuming that all other components of our fair value estimate remain unchanged, a change in the following assumptions would have the following effect on headroom:

Headroom Sensitivity Analysis

Goodwill as of June 30, 2019 (in thousands) (1)

Baseline Headroom

Headroom if Revenue Growth Rate

Declines by 100 Basis Points

Headroom if Gross Margin

Declines by 100 Basis Points

Headroom if Discount Rate Increases by 100 Basis Points

Reporting Unit 1

Goodwill as of June 30, 2020

(in thousands) Baseline Headroom Headroom if Revenue Growth Rate

Declines by 100 Basis Points Headroom if Gross Margin

Declines by 100 Basis Points Headroom if Discount Rate Increases by 100 Basis Points

Reporting Unit 1 $ 6,112 6% -1% -28% -5%

1 unchanged sentence

Reporting Unit 3 $ 4,130 48% 37% -19% 26%

All other reporting units

In August 2018, the Company disposed of a business that marketed process heating equipment, which reduced goodwill by $2.8 million.

The business disposed of constituted its own reporting unit and the amount of goodwill written off was all of the goodwill assigned to that reporting unit.

None of the goodwill was considered impaired since the Company recorded a gain on the disposal.

Financial Statements and Supplementary Data, Note 3 - Acquisitions and Disposals for more information about the disposal.

The fiscal 2019 test indicated that some reporting units were at higher risk of future impairment than others.

If the market view of project opportunities or gross margins deteriorates next year prior to the annual test, an interim test may be required, particularly for the higher risk reporting units, which could result in a material impairment of goodwill.

All other reporting units $ 46,213 75% to 228% 67% to 209% 58% to 167% 56% to 191%

We use the asset and liability approach for financial accounting and reporting for income taxes.

4 unchanged sentences

Therefore, we estimate and provide for amounts of additional income taxes that may be assessed by the various taxing authorities.

The Company enters into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business.

The Company determines if an arrangement is or contains a lease at inception of the arrangement.

An arrangement is determined to be a lease if it conveys the right to control the use of identified property and equipment for a period of time in exchange for consideration.

Operating lease right-of-use assets are recognized as the present value of future lease payments over the lease term as of the commencement date, plus any lease payments made prior to commencement, and less any lease incentives received.

Operating lease liabilities are recognized as the present value of the future lease payments over the lease term as of the commencement date.

Operating lease expense is recognized based on the undiscounted future lease payments over the remaining lease term on a straight-line basis.

Lease expense related to short-term leases is recognized on a straight-line basis over the lease term.

Determinations with respect to lease term (including any renewals and terminations), incremental borrowing rate used to discount lease payments, variable lease expense and future lease payments require the use of judgment based on the facts and circumstances related to each lease.

The Company considers various factors, including economic incentives, intent, past history and business need, to determine the likelihood that a renewal option will be exercised.

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

Recently Issued Accounting Standards

Accounting Standards Update 2016-02, Leases (Topic 842)

On February 25, 2016, the FASB issued ASU 2016-02 that amends accounting for leases.

Under the new guidance, lessees will recognize the following for all leases (with the exception of short-term leases) at the lease commencement date:

(1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis;

and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

The Company plans to apply the new leases standard using the modified retrospective method, which recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

We currently expect to recognize between $23 million and $28 million of operating right-of-use lease assets and liabilities upon adoption during the first quarter of fiscal 2020.

We are not expecting the modified retrospective adjustment to retained earnings upon adoption to be material, and we do not expect the ASU will have a material impact on our future operating results or cash flows.

Our conclusions are preliminary and could change once we finalize the implementation during the first fiscal quarter of fiscal 2020.

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.

On June 16, 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, which will change how the Company accounts for its allowance for uncollectible accounts.

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.

1 unchanged sentence

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.

Previous 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.

1 unchanged sentence

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.

The Company adopted the standard on July 1, 2020 with no material impact to its estimate of the allowance for uncollectible accounts.

Results of Operations

We operate our business through four reportable segments:

In fiscal 2020, we operated our business through four reportable segments:

Electrical Infrastructure;

5 unchanged sentences

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.

We also perform work in the petrochemical, and sulfur extraction, recovery and processing markets.

Our services include plant maintenance, turnarounds, engineering and capital construction.

4 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.

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 majority of the work for all segments is performed in the United States, with 3.4% of revenues generated internationally during fiscal 2019 , 10.1% in fiscal 2018 and 19.7% in fiscal 2017.

The percentage of revenues generated internationally decreased in fiscal 2019 compared to fiscal 2018 and fiscal 2017 due to the completion of a significant Canadian power generation project in our Electrical Infrastructure segment in fiscal 2018.

Significant period to period changes in revenues, gross profits and operating results are discussed below on a consolidated basis and for each segment:

The Process and Industrial Facilities segment includes engineering, maintenance, turnarounds and capital projects for the refining, chemical and petrochemical industries;

midstream natural gas processing;

other industrial processing facilities including biofuels, fertilizer, and sulfur;

mining and minerals infrastructure;

and thermal vacuum chambers.

This segment is similar to the former Oil Gas & Chemical segment described above, but includes mining and minerals, thermal vacuum chambers, and work in other industrial facilities which were historically reported in the Industrial segment.

Due to changing markets facing our clients and to better align the financial reporting of the Company with our long-term strategic growth areas, we are changing our reporting segments.

Beginning in fiscal 2021, the Company’s financial results will be reported under the following three segments:

Utility and Power Infrastructure;

Process and Industrial Facilities;

and Storage and Terminal Solutions.

The services provided by each of these segments is described below.

The Utility and Power Infrastructure segment includes services provided in power delivery and power generation, as well as natural gas utility peak shaving.

This segment is similar to the former Electrical Infrastructure segment described above, but includes natural gas utility peak shaving facilities that have been historically reported in the Storage Solutions segment.

The Process and Industrial Facilities segment includes engineering, maintenance, turnarounds and capital projects for the refining, chemical and petrochemical industries;

midstream natural gas processing;

other industrial processing facilities including biofuels, fertilizer, and sulfur;

mining and minerals infrastructure;

and thermal vacuum chambers.

This segment is similar to the former Oil Gas & Chemical segment described above, but includes mining and minerals as well as thermal vacuum chambers, which were historically reported in the Industrial segment.

The Storage and Terminal Solutions segment includes engineering, construction, maintenance and repair for aboveground storage tanks and terminals;

LNG facilities for import/export fueling and bunkering;

NGL and other specialty vessels;

aboveground storage tank products;

and other renewable energy storage and terminal solutions.

This segment is similar to the former Storage Solutions segment described above, but does not include the natural gas utility peak shaving facilities, which will be reported as part of the Utility and Power Infrastructure segment.

The majority of the work for all segments is performed in the United States, with 7.3% of revenue generated internationally during fiscal 2020, 3.4% in fiscal 2019 and 10.1% in fiscal 2018.

The percentage of revenue generated internationally increased in fiscal 2020 compared to fiscal 2019 due to higher levels of work in Canada.

The percentage of revenue generated internationally decreased in fiscal 2019 compared to fiscal 2018 due to the completion of a significant Canadian power generation project in our Electrical Infrastructure segment in fiscal 2018.

Significant period to period changes in revenue, gross profits and operating results between fiscal 2020 and fiscal 2019 are discussed below on a consolidated basis and for each segment.

A discussion of results of operations changes between fiscal 2019 and fiscal 2018 is included in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended June 30, 2019, which was filed with the SEC on September 4, 2019.

Matrix Service Company

1 unchanged sentence

(In thousands)

Infrastructure

Fiscal Year 2019

Consolidated revenues

Gross profit %

Selling, general and administrative expenses

Operating income

Operating income %

Infrastructure Oil Gas &

Chemical Storage

Solutions Industrial Total

Fiscal Year 2020

Consolidated revenues

Gross profit %

Consolidated revenue $ 112,890 $ 200,950 $ 559,199 $ 227,899 $ 1,100,938

Gross profit (loss) (1,105) 15,822 71,934 15,525 102,176

Gross profit (loss) % (1.0) % 7.9 % 12.9 % 6.8 % 9.3 %

Selling, general and administrative expenses 7,543 19,300 43,332 16,101 86,276

Intangible asset impairments and restructuring costs 27,855 3,850 1,296 19,524 52,525

Operating income (loss) (36,503) (7,328) 27,306 (20,100) (36,625)

1 unchanged sentence

Fiscal Year 2019

Consolidated revenues

Consolidated revenue $ 217,417 $ 319,867 $ 521,932 $ 357,464 $ 1,416,680

Gross profit 15,470 35,987 56,011 24,483 131,951

Selling, general and administrative expenses

Operating income (loss)

Operating income (loss) %

Variances Fiscal Year 2019 to Fiscal Year 2018 Increase/(Decrease)

Consolidated revenues

Gross profit % 7.1 % 11.3 % 10.7 % 6.8 % 9.3 %

Selling, general and administrative expenses 11,802 23,003 41,914 17,302 94,021

Intangible asset impairments and restructuring costs — — — — —

Operating income 3,668 12,984 14,097 7,181 37,930

Operating income % 1.7 % 4.1 % 2.7 % 2.0 % 2.7 %

Variances Fiscal Year 2020 to Fiscal Year 2019 Increase/(Decrease)

Consolidated revenues

Consolidated revenue $ (104,527) $ (118,917) $ 37,267 $ (129,565) $ (315,742)

Gross profit (16,575) (20,165) 15,923 (8,958) (29,775)

Selling, general and administrative expenses (4,259) (3,703) 1,418 (1,201) (7,745)

Intangible asset impairments and restructuring costs 27,855 3,850 1,296 19,524 52,525

Operating income (40,171) (20,312) 13,209 (27,281) (74,555)

Operational Update

As the COVID-19 pandemic persists, the Company's top priority has been to maintain a safe working environment for all employees, customers and business partners.

We transitioned the majority of our administrative and engineering team members to remote working conditions in March 2020.

At this time, we have returned to the office in select locations where predetermined criteria have been met, but the majority of our administrative and engineering team members continue to work remotely.

Our project teams in coordination with our clients created work processes to integrate the guidance from governmental agencies and leading health organizations to protect the health and safety of everyone on our job sites while maintaining productivity.

There continues to be significant uncertainty regarding the near- and intermediate-term economic impacts from the COVID-19 pandemic, which has disrupted the markets we serve.

As a result, the Company expanded its previously announced business improvement plan, which consisted 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 our revenue expectations.

The Company's previously announced business improvement plan was in response to underperformance in the Company's Electrical Infrastructure segment, which led to a $24.9 million impairment of goodwill during the second quarter of fiscal 2020.

In addition, the Company recorded $13.6 million of goodwill and other intangible asset impairments during the second quarter of fiscal 2020 in connection with the deterioration of our relationship with a significant customer in the iron and steel industry.

The Company made a strategic decision to exit the domestic iron and steel business early in the third quarter of fiscal 2020, which resulted in incurring restructuring costs to exit the business.

Finally, during the second quarter of 2020, the Company placed a $2.4 million valuation allowance on a deferred tax asset that was created by net operating loss carryforwards and other tax credits in Canada, which was determined to be unrecoverable.

The Company incurred $14.0 million of restructuring costs in fiscal 2020 in connection with its business improvement plan, other restructuring activities, and the wind down of the domestic iron and steel business.

These initiatives were substantially completed as of June 30, 2020.

As a result of these actions, the Company expects to save approximately $45 million in planned annual operating costs.

In order to more clearly depict the core profitability of the Company, the following table presents our net income and earnings per fully diluted share for fiscal 2020 after adjusting for restructuring costs, impairments, and the Canadian tax valuation allowance:

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

(In thousands, except per share data)

Fiscal Year Ended June 30, 2020

Charge Income Tax Effect of Charge Net

(Loss) Earnings (Loss) Per Diluted Share

Net loss per common share, as reported $ (33,074) $ (1.24)

Restructuring costs incurred

$ 14,010 $ (3,369) 10,641 0.39

Electrical Infrastructure segment goodwill impairment

24,900 (4,889) 20,011 0.74

Industrial segment goodwill and other intangible asset impairment

13,615 (2,803) 10,812 0.40

Valuation allowance placed on a deferred tax asset

2,417 — 2,417 0.09

Adjustment for dilutive effect of using basic shares for net loss — 0.02

Adjusted net income and diluted earnings per common share

$ 10,807 $ 0.40

Weighted average common shares outstanding - diluted:

Previously anti-dilutive common shares

Adjusted weighted average common shares outstanding - diluted

(1) This table presents non-GAAP financial measures of our adjusted net income and adjusted diluted earnings per common share for fiscal 2020.

The most directly comparable financial measures are net loss and net loss per common share, respectively, presented in the Consolidated Statements of Income.

We have presented these non-GAAP financial measures because we believe they more clearly depict the core operating results of the Company during the period presented and provide a more comparable measure of the Company's operating results to other companies considered to be in similar businesses.

Since adjusted net income and adjusted diluted earnings per common share are not measures of performance calculated in accordance with GAAP, they should be considered in addition to, rather than as a substitute for, the most directly comparable GAAP financial measures.

Fiscal 2020 Versus Fiscal 2019

Consolidated revenue was $1.101 billion for the fiscal year ended June 30, 2020, compared to $1.417 billion in fiscal 2019.

On a segment basis, consolidated revenue increased in the Storage Solutions and Industrial segments by $207.2 million and $159.3 million, respectively.

These increases were partially offset by decreases in consolidated revenue for the Electrical Infrastructure and Oil Gas & Chemical segments of $38.5 million and $2.9 million, respectively.

On a segment basis, consolidated revenue decreased in the Industrial, Oil Gas & Chemical, and Electrical Infrastructure segments by $129.6 million, $118.9 million and $104.5 million, respectively.

These decreases were partially offset by an increase in the Storage Solutions segment of $37.3 million.

Consolidated gross profit was $102.2 million in fiscal 2020 compared to $132.0 million in fiscal 2019.

Gross margin increased to 9.3% in fiscal 2019 compared to 8.4% in fiscal 2018.

Fiscal 2019 was positively impacted by higher revenue volumes, which led to improved recovery of construction overhead costs.

Additionally, during the first half of fiscal 2019, the gross margin was negatively impacted by the wind down of lower margin work awarded in a highly competitive environment.

In the second half of fiscal 2019, the gross margin was positively impacted by increased volumes of higher margin capital work awarded in an improved business environment.

Gross margin was 9.3% in fiscal 2020 and fiscal 2019.

Gross margins in fiscal 2020 are the result of strong project execution, offset by the under recovery of construction overhead costs due to lower than anticipated revenue volumes, particularly in the fourth quarter.

Fiscal 2019 was positively impacted by higher revenue volumes, which led to an over recovery of construction overhead costs.

Consolidated SG&A expenses were $86.3 million in fiscal 2020 compared to $94.0 million in fiscal 2019.

The increase in fiscal 2019 was primarily due to improved operating results, which led to higher incentive compensation expense, investment in personnel to support increased revenue, and higher stock compensation expense.

These increases were partially offset by lower amortization expense on intangible assets that fully amortized in fiscal 2018.

The decrease in fiscal 2020 was primarily attributable to lower incentive compensation due to weaker operating results in the current year.and savings from executing the previously announced business improvement plan.

The Company recorded non-cash goodwill and other intangible asset impairments of $38.5 million during the second quarter of fiscal 2020.

Financial Statements, Note 4 - Goodwill and other intangible assets for more information about the impairments.

In addition, the Company recorded $14.0 million of restructuring costs in the third and fourth quarters of fiscal 2020 due to actions taken under our business improvement plan.

See Operational Update in this Results of Operations section and Item 8.

Financial Statements, Note 14 - Restructuring Costs, for more information.

Interest expense was $1.6 million in fiscal 2020 and $1.3 million in fiscal 2019.

The decrease in interest expense was primarily due to a lower average debt balance during fiscal 2019.

Interest income was $1.2 million during fiscal 2019 compared to $0.4 million in fiscal 2018 due to an increase in our average cash balance and higher short-term interest rates.

The increase in interest expense was primarily due to a higher average debt balance during fiscal 2020, partially offset by lower interest rates in fiscal 2020.

Interest income was $1.3 million during fiscal 2020 compared to $1.2 million in fiscal 2019 due to an increase in our average cash balance during fiscal 2020, partially offset by lower interest rates in fiscal 2020.

Our effective tax rate for fiscal 2020 was 9.7% compared to 27.2% in fiscal 2019.

The effective tax rate in fiscal 2019 was negatively impacted by $4.5 million of valuation allowances placed on net operating loss carryforwards and foreign tax credits generated by our branch operations in Canada, which we believe will not be utilized prior to their expiration, and $1.2 million of non-deductible expenses.

The tax benefit for fiscal 2020 was negatively impacted by a $3.1 million of valuation allowances placed on deferred tax assets that were created by net operating loss carryforwards and other tax credits primarily in Canada, the non-deductible portion of the goodwill impairments that would have resulted in a $1.8 million reduction of income tax expense, and $1.7 million of other non-deductible expenses.

These negative impacts were partially offset by $1.8 million of research and development and other tax credits.

These negative impacts were largely offset by the reversal of $3.5 million of branch liabilities associated with the valuation allowances placed on our Canadian branch net operating loss carryforwards and foreign tax credits, $2.0 million of research and development and other tax credits and $0.3 million of excess tax benefits related to the vesting of stock-based compensation.

1 unchanged sentence

Financial Statements and Supplementary Data, Note 6 - Income Taxes.

The rate for fiscal 2018 was negatively impacted by the impairment of $8.3 million of non-deductible goodwill and by a $0.8 million valuation allowance recorded on a deferred tax asset in connection with stock-based compensation.

In fiscal 2020, we expect our effective income tax rate to be 27.0%.

In fiscal 2019, net income was $28.0 million , or $1.01 per fully diluted share, compared to a net loss of $11.5 million, or $0.43 per fully diluted share, in fiscal 2018.

In fiscal 2020, net loss was $33.1 million, or $1.24 per fully diluted share, compared to net income of $28.0 million, or $1.01 per fully diluted share, in fiscal 2019.

Electrical Infrastructure

Revenue for the Electrical Infrastructure segment decreased $104.5 million to $112.9 million in fiscal 2020 compared to $217.4 million in fiscal 2019.

The decrease is primarily due to the strategic shift away from EPC power generation projects and lower volumes of power delivery work, partially offset by higher volumes of power generation package work.

The segment gross margin was 7.1% in fiscal 2019 compared to 7.2% in the same period last year.

The segment gross margins in both fiscal 2019 and 2018 were negatively impacted by lower than previously forecasted margins on a limited number of power delivery projects.

The decrease is primarily due to lower volumes of power delivery and power generation work.

The segment gross margin (loss) was (1.0)% in fiscal 2020 compared to 7.1% in the same period last year.

The fiscal 2020 segment gross loss was negatively impacted by poor execution in the first and second quarters and lower volumes throughout the year, which led to the under recovery of construction overhead costs.

The segment gross margin in fiscal 2019 was negatively impacted by lower than previously forecasted margins on a limited number of power delivery projects.

In fiscal 2019, we expanded our power delivery business geographically, however, the margins on this work did not meet our expectations.

1 unchanged sentence

The negative impacts to the fiscal 2019 segment gross margin were partially offset by strong project execution on power generation package work.

The fiscal 2018 segment gross margin was also negatively impacted by higher construction overhead costs.

In the second quarter of fiscal 2020, the Company announced a business improvement plan for this segment.

The plan included significant changes to the operations and management of the business, including changes to leadership and mid-level operational personnel, modifications to operational processes, and increased business development resources.

During the second half of fiscal 2020, we implemented the planned personnel changes, added business development resources and strengthened business processes, which has led to improved project execution.

However, it is still too early to assess the long-term effectiveness of the business improvement plan.

Furthermore, an improvement in the operating performance of this segment will be dependent upon the effectiveness and execution of the improvement plan, the markets we serve, the spending volumes of our existing clients and other external factors.

As a result of the COVID-19 pandemic, we have experienced suspensions of work at certain job sites and client proposal activity has slowed as customers manage other pandemic-related challenges.

We will continue to assess conditions in the areas we serve and resume normal operations based on the needs of our clients and safety guidelines to ensure the protection of our employees and customers.

Oil Gas & Chemical

Revenue for the Oil Gas & Chemical segment was $201.0 million in fiscal 2020 compared to $319.9 million in the same period a year earlier.

The decrease of $2.9 million is primarily due to lower volumes of engineering and capital work, largely offset by higher volumes of turnaround and maintenance work.

The decrease of $118.9 million is primarily due to lower volumes of turnaround and refinery maintenance work.

The segment gross margin was 7.9% in fiscal 2020 compared to 11.3% in the same period last year.

Project execution was strong in both fiscal 2019 and 2018.

Fiscal 2019 was also positively impacted by improved recovery of overhead costs.

The fiscal 2020 segment gross margin was negatively impacted by lower volumes, which led to the under recovery of construction overhead costs, partially offset by strong project execution.

Project execution was strong in fiscal 2019 and higher volumes led to an over recovery of construction overhead costs.

The short-term impact to the Company's refinery turnaround and maintenance operations as a result of the global pandemic has been significant.

The impact has been exacerbated by the timing of the onset of the pandemic during what is normally a busy spring turnaround season.

Although there have been project delays and temporary suspensions of planned seasonal work, in most cases the revenue volumes are moving out in time, but not eliminated.

The updated start dates on many of the delayed activities are uncertain and will depend on the needs of our clients, safety guidelines, and the market.

Storage Solutions

Revenue for the Storage Solutions segment was $559.2 million in fiscal 2020 compared to $521.9 million in fiscal 2019, an increase of $37.3 million.

The increase in segment revenue is primarily a result of increased tank and terminal construction work, and higher levels of repair and maintenance spending by our customers.

The increase in segment revenue is primarily a result of increased tank and terminal construction work and higher levels of work in Canada.

The segment gross margin was 12.9% in fiscal 2020 compared to 10.7% in fiscal 2019.

The fiscal 2020 segment gross margin was positively impacted by strong project execution on large capital projects.

During the first half of fiscal 2019, the segment gross margin was negatively impacted by the wind down of lower margin work awarded in a highly competitive environment and lower than previously forecasted margins on a limited number of those projects.

In the second half of fiscal 2019, the segment gross margin was positively impacted by increased volumes of higher margin work on capital projects awarded in an improved business environment, which also led to improved recovery of construction overhead costs.

The fiscal 2018 segment gross margin was negatively impacted by lower margin work awarded in a highly competitive environment and lower volumes, which led to the under recovery of construction overhead costs.

Revenue for the Industrial segment was $357.5 million in fiscal 2019 compared to $198.2 million in fiscal 2018, an increase of $159.3 million.

The increase in revenue is primarily attributable to higher volumes of iron and steel spending and increased thermal vacuum chamber work.

The segment gross margin was 6.8% in fiscal 2019 compared to 7.3% in fiscal 2018.

The fiscal 2019 segment gross margin was negatively impacted by a lower than previously forecasted margin on a thermal vacuum chamber project nearing completion, partially offset by improved gross margins on iron and steel work.

Fiscal 2018 Versus Fiscal 2017

Consolidated revenue was $1.092 billion for the fiscal year ended June 30, 2018, compared to $1.198 billion in fiscal 2017.

On a segment basis, consolidated revenue decreased in the Storage Solutions and Electrical Infrastructure segments by $167.0 million and $117.5 million, respectively.

These decreases were partially offset by increases in consolidated revenue for the Industrial and Oil Gas & Chemical segments of $96.3 million and $82.3 million, respectively.

Consolidated gross profit was $91.9 million in fiscal 2018 compared to $81.0 million in fiscal 2017.

Gross margin increased to 8.4% in fiscal 2018 compared to 6.8% in fiscal 2017.

The increase in gross margin in fiscal 2018 is primarily attributable to the financial impact of a large power generation project in the Electrical Infrastructure segment in fiscal 2017 and better recovery of overhead costs in fiscal 2018.

Consolidated SG&A expenses were $84.4 million in fiscal 2018 compared to $76.1 million in fiscal 2017.

The increase in fiscal 2018 is primarily attributable to overhead associated with a mid-year fiscal 2017 acquisition (see Note 3 - Acquisitions and Disposals, Item 8.

Financial Statements and Supplementary Data) that expanded the Company's engineering business, as well as higher project pursuit costs.

We performed our annual goodwill impairment test as of May 31, 2018.

The test indicated that the carrying amount of our Electrical Infrastructure reporting unit exceeded its estimated fair value, resulting in an impairment to goodwill of $17.3 million.

The impairment was triggered by lower financial projections as a result of the Company's decision to shift its strategy away from EPC power generation projects to smaller, individual packages that better fit the Company's strategy and risk profile, and the recent trend of sluggish maintenance and capital spending by some key clients in our Northeast and Mid-Atlantic high voltage markets.

We also recorded an impairment of $0.7 million associated with the customer relationships of a previous acquisition.

This impairment was recorded in the Oil Gas & Chemical segment.

Net interest expense was $2.2 million in fiscal 2018 and $2.1 million in fiscal 2017.

Interest expense in both fiscal years is primarily attributable to borrowings used to fund a mid-year fiscal 2017 acquisition, borrowings used to fund working capital requirements for a major project in the Electrical Infrastructure segment, and an increase in the unused senior secured revolving credit facility fee.

The Company repaid all of its outstanding debt under its senior secured revolving credit facility in the fourth quarter of fiscal 2018.

As a result of the Tax Cuts and Jobs Act and its transitional application to our June 30 fiscal year end, we expected our effective income tax rate to be approximately 32.0% during fiscal 2018.

Our effective tax rate for fiscal 2018 was 5.5% compared to 94.4% in fiscal 2017.

The fiscal 2017 tax rate was negatively impacted, in part, by the Electrical Infrastructure project discussed above.

The loss on this project produced a tax benefit in Canada, which had a lower tax rate than the U.S.

during fiscal 2017.

At the same time, the Company earned most of its taxable income domestically, which was taxed at a higher rate.

A full analysis of the Company's provision for income taxes is included in Item 8.

Financial Statements and Supplementary Data, Note 6 - Income Taxes.

In fiscal 2018, the Company had a net loss of $11.5 million, or $0.43 per fully diluted share, compared to a net loss of $0.2 million, or $0.01 per fully diluted share, in fiscal 2017.

Electrical Infrastructure

Revenue for the Electrical Infrastructure segment decreased $117.5 million to $255.9 million in fiscal 2018 compared to $373.4 million in fiscal 2017.

The decrease is due to the expected reduction in power generation revenue in connection with our strategic decision to exit full EPC power generation work and a reduction in high voltage revenue.

The segment gross margin of 7.2% in fiscal 2018 was impacted by under recovery of construction overhead costs, lower than expected direct margins and increased competition.

The fiscal 2017 segment gross margin was 1.9%, which was primarily attributable to the financial impact of an increased cost estimate on the power generating facility project mentioned above that was caused by various factors that delayed schedule progress and reduced productivity.

Oil Gas & Chemical

Revenue for the Oil Gas & Chemical segment was $322.8 million in fiscal 2018 compared to $240.5 million in the same period a year earlier.

The increase of $82.3 million is primarily attributable to higher turnaround and maintenance and construction volumes.

The segment gross margin was 10.4% in fiscal 2018 compared to 5.3% in the same period last year.

The segment gross margin for fiscal 2018 was positively impacted by strong project execution and improved recovery of construction overhead costs.

Fiscal 2017 gross margin was negatively impacted by project execution and lower volume which led to higher under recovery of construction overhead costs.

Storage Solutions

Revenue for the Storage Solutions segment was $314.7 million in fiscal 2018 compared to $481.7 million in fiscal 2017, a decrease of $167.0 million.

The decrease in segment revenue is primarily the result of delays in project awards during fiscal 2017 and the first half of fiscal 2018, which prevented the Company from replacing higher revenue generated in fiscal 2017 in connection with work on the construction of a significant crude gathering terminals project.

The segment gross margin was 8.2% in fiscal 2018 and 11.6% in fiscal 2017.

The fiscal 2018 segment gross margin was negatively impacted by lower direct margins and under recovery of construction overhead costs.

The fiscal 2017 segment gross margin was supported by strong project execution, partially offset by under recovery of construction overhead costs.

Revenue for the Industrial segment was $198.2 million in fiscal 2018 compared to $101.9 million in fiscal 2017, an increase of $96.3 million.

The increase in revenue is primarily attributable to higher business volumes in the iron and steel industry.

The segment gross margin was 7.3% in fiscal 2018 compared to 5.4% in fiscal 2017.

The fiscal 2018 segment gross margin was positively impacted by higher volumes, which led to improved recovery of construction overhead costs, and a favorable project closeout.

The fiscal 2017 segment gross margin was negatively impacted by lower than anticipated volumes, which led to under recovery of construction overhead costs.

As a result of the COVID-19 pandemic, global energy demand, and regulatory issues, we experienced short-term suspensions of work on a limited number of projects, but work on most of these projects has resumed.

In addition, some project awards and starts were delayed for durations varying from a few weeks to a few quarters.

Revenue for the Industrial segment was $227.9 million in fiscal 2020 compared to $357.5 million in fiscal 2019, a decrease of $129.6 million.

The decrease in revenue is primarily attributable to our strategic decision to exit the domestic iron and steel industry early in the third quarter, and lower volumes of thermal vacuum chamber work.

We no longer have a continuous presence in any domestic iron and steel facility and final wind-down of the business is substantially complete.

The segment gross margin was 6.8% in fiscal 2020 and fiscal 2019.

The fiscal 2020 segment gross margin was negatively impacted by sharply lower volumes and under recovery of overhead costs during the second half of the year due to the wind down of the domestic iron and steel business.

These negative impacts to segment gross margin were partially offset by good project execution on both capital and repair and maintenance projects during the first half of the year and a favorable project closeout on a thermal vacuum chamber project in the fourth quarter.

The fiscal 2019 segment gross margin was negatively impacted by a lower than previously forecasted margin on a thermal vacuum chamber project, partially offset by improved gross margins on iron and steel work.

Non-GAAP Financial Measures

Adjusted EBITDA

We have presented Adjusted EBITDA, which we define as net income (loss) attributable to Matrix Service Company before impairment of goodwill and other intangible assets, interest expense, income taxes, depreciation and amortization, because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses.

We believe that the line item on our Consolidated Statements of Income entitled “Net income (loss) attributable to Matrix Service Company” is the most directly comparable GAAP measure to Adjusted EBITDA.

We have presented Adjusted EBITDA, which we define as net income (loss) before impairment of goodwill and other intangible assets, restructuring costs, interest expense, income taxes, depreciation and amortization, because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses.

We believe that the line item on our Consolidated Statements of Income entitled “Net income (loss)” is the most directly comparable GAAP measure to Adjusted EBITDA.

Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance.

1 unchanged sentence

In addition, this measure is not a measure of our ability to fund our cash needs.

As Adjusted EBITDA excludes certain financial information compared with net income (loss) attributable to Matrix Service Company, the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions that are excluded.

As Adjusted EBITDA excludes certain financial information compared with net income (loss), the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions that are excluded.

Our non-GAAP performance measure, Adjusted EBITDA, has certain material limitations as follows:

2 unchanged sentences

Any measure that excludes impairments to intangible assets has material limitations since these expenses represent the loss of an asset that was acquired in exchange for cash or other assets.

• It does not include restructuring costs.

Restructuring costs represent material costs that were incurred by the Company and are oftentimes cash expenses.

Therefore, any measure that excludes restructuring costs has material limitations.

• It does not include interest expense.

6 unchanged sentences

Therefore, any measure that excludes depreciation or amortization expense has material limitations.

A reconciliation of Adjusted EBITDA to net income (loss) attributable to Matrix Service Company follows:

A reconciliation of Adjusted EBITDA to net income (loss) follows:

Fiscal Years Ended

2020 June 30,

2019 June 30,

(in thousands)

Net income (loss) attributable to Matrix Service Company

Net income (loss) $ (33,074) $ 27,982 $ (11,480)

Goodwill and other intangible asset impairment 38,515 — 17,998

Restructuring costs 14,010 — —

Interest expense 1,597 1,296 2,600

6 unchanged sentences

Cash and cash equivalents on hand at June 30, 2020 totaled $100.0 million and availability under the senior secured revolving credit facility totaled $93.4 million, resulting in total liquidity of $193.4 million.

We expect to fund our operations for the next twelve months through the use of cash generated from operations, existing cash and cash equivalents balances and borrowings under our senior secured revolving credit facility, as necessary.

The Company's liquidity continues to be adequate to support its long-term strategic growth plans.

There continues to be significant uncertainty regarding the near- and intermediate-term business impacts from the COVID-19 pandemic.

However, the Company entered this environment with a strong balance sheet and liquidity, which it expects to be sufficient to support its near- to intermediate-term needs.

In fiscal 2020, the Company implemented steps to preserve its financial position including:

• restructuring the business to right-size the cost structure to the expected near-term revenue;

• eliminating all non-critical capital expenditures;

• suspending share repurchases.

We believe the cost reduction efforts were appropriate given the circumstances.

These reductions were significant, but did not impact our capabilities nor our ability to execute work.

These reductions will enable us to be more competitive and profitable in the future and preserve liquidity.

The following table provides a summary of changes in our liquidity for the fiscal year ended June 30, 2020 (in thousands):

1 unchanged sentence

Net increase in cash and cash equivalents 10,321

Decrease in credit facility capacity constraint

Increase in credit facility capacity constraint (68,541)

Net borrowings on credit facility (4,210)

Increase in letters of credit outstanding

Decrease in letters of credit outstanding 13,618

Foreign currency translation of outstanding borrowings 349

3 unchanged sentences

• Some cost plus and fixed price customer contracts are billed based on milestones which may require us to incur significant expenditures prior to collections from our customers.

• Some fixed price customer contracts allow for significant upfront billings at the beginning of the project, which temporarily increases liquidity near-term.

• Time and material contracts are normally billed in arrears.

9 unchanged sentences

• Contract disputes which can be significant.

Collection issues, including those caused by weak commodity prices or other factors which can lead to credit deterioration of our customers.

• Collection issues, including those caused by weak commodity prices, economic slowdowns or other factors which can lead to credit deterioration of our customers.

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

5 unchanged sentences

(In thousands)

Net loss $ (33,074)

Goodwill and other intangible asset impairment 38,515

Non-cash expenses 34,607

Deferred income tax (3,630)

Cash effect of changes in working capital, net of disposition

Cash effect of changes in working capital 7,674

Net cash provided by operating activities $ 44,085

Working capital changes, net of effects of a disposal of a business (see Item 8.

Financial Statements and Supplementary Data, Note 3 - Acquisitions and Disposals), at June 30, 2019 in comparison to June 30, 2018 include the following:

Accounts receivable, net of bad debt expense recognized during the period, increased by $15.4 million during fiscal 2019, which decreased cash flows from operating activities.

The increase is primarily due to higher volumes of business and the timing of billing and collections.

Costs and estimated earnings in excess of billings on uncompleted contracts ("CIE") increased $19.8 million, which decreased cash flows from operating activities.

Working capital changes at June 30, 2020 in comparison to June 30, 2019 include the following:

• Accounts receivable, net of bad debt expense recognized during the period, decreased by $56.6 million during fiscal 2020, which increased cash flows from operating activities.

The increase is primarily due to lower volumes of business and the timing of billing and collections.

• Costs and estimated earnings in excess of billings on uncompleted contracts ("CIE") decreased $36.5 million, which increased cash flows from operating activities.

Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") decreased $41.7 million, which decreased cash flows from operating activities.

CIE and BIE balances can experience significant fluctuations based on the timing of when job costs are incurred and the invoicing of those job costs to the customer.

Inventories increased $2.9 million, which decreased cash flows from operating activities.

The increase in inventories is primarily related to aluminum coil purchased to support our storage tank products business.

Other assets and liabilities increased $12.2 million, which decreased cash flows from operating activities.

The increase is primarily related to an increase in retentions that are expected to be collected beyond one year in connection with large projects.

These increases were partially offset by an increase in net income taxes payable and a decrease in income taxes receivable.

Accounts payable and other accrued expenses increased by $47.1 million, which increased cash flows from operating activities.

The variance is primarily attributable to higher volumes of business and the timing of vendor payments.

CIE and BIE balances declined primarily due to lower volumes of business in the second half of the year.

These balances routinely experience significant fluctuations based on the timing of when job costs are incurred and the invoicing of those job costs to the customer.

• Other assets and liabilities decreased $11.0 million, which increased cash flows from operating activities.

The decrease is primarily related to lower retentions that are expected to be collected beyond one year in connection with large projects, partially offset by an increase in net income taxes receivable.

• Accounts payable and other accrued expenses decreased by $56.3 million, which decreased cash flows from operating activities.

The variance is primarily attributable to lower volumes of business and the timing of vendor payments.

These decreases were partially offset by $3.8 million of deferred payroll tax associated with the CARES Act (see Item 8.

Financial Statements and Supplementary Data, Note 6 - Income Taxes).

Cash Flows Used for Investing Activities

Investing activities used $14.4 million of cash in the fiscal year ended June 30, 2019 primarily due to $19.5 million of capital expenditures, partially offset by $3.9 million of proceeds from the disposal of a business (see Item 8.

Financial Statements and Supplementary Data, Note 3 - Acquisitions and Disposals) and $1.2 million of proceeds from other assets sales.

Investing activities used $17.1 million of cash in the fiscal year ended June 30, 2020 primarily due to $18.5 million of capital expenditures, partially offset by $1.4 million of proceeds from asset sales.

Capital expenditures consisted of:

$7.8 million for transportation equipment, $5.9 million for software and office equipment, $5.2 million for construction and fabrication equipment, and $0.6 million for facilities.

$7.4 million for transportation equipment, $5.1 million for construction and fabrication equipment, $5.0 million for software and office equipment, and $1.1 million for facilities.

Cash Flows Used by Financing Activities

4 unchanged sentences

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

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 sub-facility for revolving loans and letters of credit denominated in Australian Dollars, Canadian Dollars, Euros and Pounds Sterling in an aggregate amount not to exceed the U.S.

Dollar equivalent of $75.0 million and a $200.0 million sublimit for total letters of credit.

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:

3 unchanged sentences

• 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.

in each case, plus the Applicable Margin, which is based on the Company's Leverage Ratio, as defined in the Credit Agreement.

The Applicable Margin on ABR loans ranges between 0.625% and 1.625%.

1 unchanged sentence

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 defined in the Credit Agreement, as of the end of any fiscal quarter, may not exceed 3.0 times Consolidated EBITDA, as defined in the Credit Agreement, over the previous four quarters.

For the four quarters ended June 30, 2019 , Consolidated EBITDA was $68.6 million .

Consolidated Funded Indebtedness at June 30, 2019 was $53.5 million .

Consolidated EBITDA, as defined in the Credit Agreement, or "Covenant EBITDA," differs from Adjusted EBITDA, as reported under "Results of Operations - Non-GAAP Financial Measure," in Item 7 primarily because it permits the Company to:

At June 30, 2020, the Company was at the lowest margin tier for all categories of loans and the unused revolving credit facility fee under the Credit Agreement.

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.

The Leverage Ratio covenant requires that Consolidated Funded Indebtedness, as defined in the Credit Agreement, as of the end of any fiscal quarter, may not exceed 3.0 times Consolidated EBITDA, as defined in the Credit Agreement, or "Covenant EBITDA," over the previous four quarters.

• We are required to maintain a Fixed Charge Coverage Ratio, determined as of the end of each fiscal quarter, greater than or equal to 1.25 to 1.00.

The Fixed Charge Coverage Ratio covenant requires that, as of the end of any fiscal quarter, Covenant EBITDA, after deducting capital expenditures, dividends and share repurchases, for the previous four quarters may not be less than 1.25 times the total of interest expense and cash paid for income taxes over the previous four quarters and scheduled maturities of certain indebtedness for the next four quarters.

• 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.

Covenant EBITDA differs from Adjusted EBITDA, as reported under "Results of Operations - Non-GAAP Financial Measure," in Item 7 primarily because it permits the Company to:

• exclude non-cash stock-based compensation expense,

1 unchanged sentence

• exclude certain other extraordinary items, as defined in the Credit Agreement.

The Company is in compliance with all affirmative, negative, and financial covenants under the Credit Agreement.

Availability under the senior secured revolving credit facility is as follows:

2020 June 30,

(In thousands)

3 unchanged sentences

Letters of credit (1)

34,529 48,147

Borrowings outstanding 9,208 5,347

Availability under the senior secured revolving credit facility $ 93,399 $ 152,183

The Company is in compliance with all other affirmative, negative, and financial covenants under the Credit Agreement.

At June 30, 2019 , the Company was at the lowest margin tier for all categories of loans and the unused revolving credit facility fee under the Credit Agreement.

(1) The Credit Agreement allows exclusion of letters of credit that support our workers' compensation programs when calculating availability under the credit facility.

At June 30, 2020, there were $6.5 million of letters of credit that support our workers' compensation programs.

Dividend Policy

3 unchanged sentences

Treasury Shares

On November 6, 2018, the Board of Directors approved a new stock buyback program (the "November 2018 Program"), which replaced the previous program that had been in place since December 2016 and was set to expire in December 2018.

On November 6, 2018, the Board of Directors approved a stock buyback program (the "November 2018 Program"), which replaced the previous program that had been in place since December 2016 and was set to expire in December 2018.

Under the November 2018 Program, the Company may repurchase common stock up to a maximum of $30.0 million per calendar year provided that the aggregate number of shares repurchased may not exceed 10%, or approximately 2.7 million, of the Company's shares outstanding as of November 6, 2018.

1 unchanged sentence

The November 2018 Program will continue unless and until it is modified or revoked by the Board of Directors.

In December 2018, the Company repurchased 310,532 shares of its common stock for $5.2 million under the November 2018 Program.

In fiscal 2020, the Company repurchased 1,047,606 shares of its common stock for $17.0 million under the November 2018 Program.

There were 1,349,037 shares available for repurchase under the November 2018 Program as of June 30, 2020.

6 unchanged sentences

Expiration Period

Year 1–3 Years 3–5 Years More than 5

(In thousands)

Letters of credit (1)

$ 40,991 $ — $ — $ — $ 40,991

Surety bonds 200,520 1,455 1 — 201,976

Total $ 241,511 $ 1,455 $ 1 $ — $ 242,967

(1) All letters of credit issued under our senior secured revolving credit facility are in support of our workers’ compensation insurance programs or certain construction contracts.

1 unchanged sentence

The letters of credit that support construction contracts carry expiry dates into calendar year 2021.

Our Credit Agreement allows exclusion of letters of credit that support our workers' compensation programs when calculating availability under the credit facility.

Our Credit Agreement allows exclusion of letters of credit that support our workers' compensation programs when calculating our compliance with the leverage ratio covenant.

At June 30, 2020, there were $6.5 million of letters of credit that support our workers' compensation programs.

2 unchanged sentences

Contractual Obligations by Expiration Period

Year 1-3 Years 3-5 Years More than 5

(In thousands)

Borrowings under senior secured revolving credit facility (1)

$ — $ 9,208 $ — $ — $ 9,208

Interest payments on debt (1)

1,634 736 — — 2,370

Operating leases 8,719 9,408 5,362 9,630 33,119

3 unchanged sentences

Interest payments on debt assumes the margin tier that the Company was at on June 30, 2020, which is the lowest margin tier under the Credit Agreement.

Includes an operating lease that the Company expects to commence during its first quarter of fiscal 2020.

The lease has a 10 year term and future lease payments of $11.9 million.

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-K

Item 7. Management’s Discussion and Analysis