What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2020-09-03 compared with 2019-09-04 · 536 added, 358 removed, 760 unchanged (54% of the section changed)

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Matrix Service Company (the “Company”) and its wholly-owned subsidiaries are responsible for establishing and maintaining adequate internal control over financial reporting.

The management of Matrix Service Company and its wholly-owned subsidiaries (the “Company”) are responsible for establishing and maintaining adequate internal control over financial reporting.

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S.

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Deloitte & Touche LLP’s report on the Company’s internal control over financial reporting is included herein.

President and Chief Executive Officer

Vice President and Chief Financial Officer

Hewitt /S/ Kevin S.

Hewitt Kevin S.

President and Chief Executive Officer Vice President and Chief Financial Officer

September 3, 2020

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Opinion on the Financial Statements

We have audited the accompanying Consolidated Balance Sheets of Matrix Service Company and subsidiaries (the “Company”) as of June 30, 2019 and 2018, and the related Consolidated Statements of Income, Comprehensive Income, Cash Flows and Changes in Stockholders’ Equity for each of the three years in the period ended June 30, 2019 and the related notes and schedules listed in the Index at Item 8 (collectively referred to as the "financial statements").

We have audited the accompanying Consolidated Balance Sheets of Matrix Service Company and subsidiaries (the “Company”) as of June 30, 2020 and 2019, the related Consolidated Statements of Income, Comprehensive Income, Cash Flows and Changes in Stockholders’ Equity for each of the three years in the period ended June 30, 2020 and the related notes and schedule listed in the Index at Item 8 (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

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Fiscal Years Ended

Cost of revenues

2020 June 30,

2019 June 30,

Revenue $ 1,100,938 $ 1,416,680 $ 1,091,553

Cost of revenue 998,762 1,284,729 999,617

Gross profit 102,176 131,951 91,936

Selling, general and administrative expenses 86,276 94,021 84,417

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

Restructuring costs 14,010 — —

Operating income (loss) ( 36,625 ) 37,930 ( 10,479 )

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Interest income 1,270 1,167 381

Other 308 611 550

Income (loss) before income tax expense ( 36,644 ) 38,412 ( 12,148 )

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

Net income attributable to noncontrolling interest

Net income (loss) attributable to Matrix Service Company

Basic earnings (loss) per common share $ ( 1.24 ) $ 1.04 $ ( 0.43 )

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Weighted average common shares outstanding:

Basic 26,621 26,891 26,769

Diluted 26,621 27,587 26,769

See accompanying notes

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Fiscal Years Ended

2020 June 30,

2019 June 30,

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

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Comprehensive income (loss) $ ( 33,696 ) $ 27,642 $ ( 11,567 )

Comprehensive income attributable to noncontrolling interest

Comprehensive income (loss) attributable to Matrix Service Company

See accompanying notes

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(In thousands)

2020 June 30,

Current assets:

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Costs and estimated earnings in excess of billings on uncompleted contracts 59,548 96,083

Inventories 6,460 8,017

Income taxes receivable 3,919 29

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Property, plant and equipment - net 80,748 79,335

Operating lease right-of-use assets 21,375 —

Goodwill 60,369 93,368

Other intangible assets 8,837 19,472

Deferred income taxes 5,988 2,683

Other assets 4,833 21,226

Total assets $ 517,310 $ 633,394

See accompanying notes

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(In thousands, except share data)

2020 June 30,

Liabilities and stockholders’ equity

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Accrued insurance 7,301 9,021

Operating lease liabilities 7,568 —

Income taxes payable — 2,517

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Deferred income taxes 61 298

Operating lease liabilities 19,997 —

Borrowings under senior secured revolving credit facility 9,208 5,347

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Accumulated other comprehensive loss ( 8,373 ) ( 7,751 )

337,274 369,716

Less treasury stock, at cost — 1,746,689 and 1,081,014 shares as of June 30, 2020 and June 30, 2019 ( 29,385 ) ( 17,759 )

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Fiscal Years Ended

2020 June 30,

2019 June 30,

Operating activities:

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

Adjustments to reconcile net income to net cash provided (used) by operating activities, net of effects of acquisitions:

Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of effects of acquisitions:

Depreciation and amortization 19,124 18,224 20,347

Goodwill and other intangible asset impairment

Goodwill and other intangible asset impairment (Note 4) 38,515 — 17,998

Stock-based compensation expense 9,877 11,908 8,618

Operating lease, fixed asset, and other intangible asset impairments due to restructuring (Note 14) 5,215 — —

Deferred income tax ( 3,630 ) 2,061 ( 1,186 )

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Provision for uncollectible accounts 1,158 5 107

Other ( 7 ) 701 397

Changes in operating assets and liabilities increasing (decreasing) cash, net of effects from acquisitions:

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Costs and estimated earnings in excess of billings on uncompleted contracts 36,535 ( 19,809 ) 14,548

Inventories 1,557 ( 2,872 ) ( 1,415 )

Other assets and liabilities 11,029 ( 12,246 ) 369

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Accrued expenses ( 17,398 ) 14,427 1,796

Net cash provided (used) by operating activities

Net cash provided by operating activities 44,085 41,394 74,671

Investing activities:

Capital expenditures ( 18,539 ) ( 19,558 ) ( 8,711 )

Acquisitions, net of cash acquired (Note 3)

Acquisitions, net of cash acquired — — ( 1,687 )

Proceeds from disposal of business (Note 3) — 3,885 —

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Fiscal Years Ended

2020 June 30,

2019 June 30,

Financing activities:

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Repurchase of common stock for payment of statutory taxes due on equity-based compensation ( 3,524 ) ( 1,685 ) ( 627 )

Capital contributions from noncontrolling interest

Net cash provided (used) by financing activities

Net cash used by financing activities ( 16,039 ) ( 1,107 ) ( 45,312 )

Effect of exchange rate changes on cash ( 609 ) ( 181 ) 229

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents 10,321 25,658 20,252

Cash and cash equivalents, beginning of period 89,715 64,057 43,805

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Cash paid during the period for:

Income taxes $ 6,394 $ 3,309 $ 1,410

Interest $ 2,148 $ 1,705 $ 2,719

Non-cash investing and financing activities:

Accrued acquisition working capital adjustment (Note 3)

Purchases of property, plant and equipment on account $ 48 $ 2,686 $ 156

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(In thousands, except share data)

Paid-In Capital

Stock Additional

Paid-In Capital Retained

Earnings Treasury

Stock Accumulated

Comprehensive

Non- Controlling Interest

Income(Loss) Total

Balances, July 1, 2017 $ 279 $ 128,419 $ 222,974 $ ( 22,539 ) $ ( 7,324 ) $ 321,809

Capital contributions from noncontrolling interest

Net income (loss)

Net loss — — ( 11,480 ) — — ( 11,480 )

Other comprehensive loss — — — — ( 87 ) ( 87 )

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Balances, June 30, 2018 279 132,198 211,494 ( 17,717 ) ( 7,411 ) 318,843

Net income — — 27,982 — — 27,982

Other comprehensive loss — — — — ( 340 ) ( 340 )

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Treasury shares repurchased to satisfy tax withholding obligations (79,111 shares) — — — ( 1,685 ) — ( 1,685 )

Open market purchases of treasury shares (310,532 shares) — — — ( 5,190 ) — ( 5,190 )

Stock-based compensation expense — 11,908 — — — 11,908

Balances, June 30, 2019 279 137,712 239,476 ( 17,759 ) ( 7,751 ) 351,957

Net loss — — ( 33,074 ) — — ( 33,074 )

Other comprehensive loss — — — — ( 622 ) ( 622 )

Treasury Shares Sold to Employee Stock Purchase Plan (20,733 shares) — ( 19 ) — 339 — 320

Exercise of stock options (12,500 shares)

Issuance of deferred shares (542,279 shares) — ( 8,604 ) — 8,604 — —

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Organization and Basis of Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of Matrix Service Company (“Matrix” or the “Company”) and its subsidiaries, all of which are wholly owned.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of Matrix Service Company and its subsidiaries (“Matrix” or the “Company”), all of which are wholly owned.

Intercompany transactions and balances have been eliminated in consolidation.

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Actual results could materially differ from those estimates.

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.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

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 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.

Revenue Recognition

Adoption of New Revenue Recognition Standard

The Company adopted ASU No.

2014-09, Revenue from Contracts with Customers (Topic 606) on July 1, 2018.

The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most previous revenue recognition guidance, including industry-specific guidance, and is applicable to all of the Company's contracts with customers.

The core principle of the revenue model is that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." The Company used the modified retrospective method of application.

Under the modified retrospective method, revenue recognized on completed contracts is not restated, however contracts in progress are accounted for as if they were under this new standard at inception.

Any difference between historical revenue and revenue under the new standard is recorded as a cumulative effect adjustment to retained earnings as of the date of adoption.

The cumulative impact of adopting Topic 606 was immaterial and did not require an adjustment to retained earnings.

See Note 2 – Revenue for new disclosures required as a result of adopting Topic 606.

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.

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This evaluation requires judgment and could change the timing of the amount of revenue and profit recorded for a given period.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Identify Performance Obligations

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In reimbursable and time and materials based contracts, the contract price is determined by the agreed upon rates or reimbursements for time and materials expended in completing the performance obligation(s) in the contract.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

A number of our contracts contain various cost and performance incentives and penalties that can either increase or decrease the contract price.

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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.

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As a practical expedient allowed under the revenue accounting standards, we record revenue for these contracts in the amount to which we have a right to invoice for the services performed provided that we have a right to consideration from the customer in an amount that corresponds directly with the value of the performance completed to date.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Costs incurred may include direct labor, direct materials, subcontractor costs and indirect costs, such as salaries and benefits, supplies and tools, equipment costs and insurance costs.

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Determine Contract Price paragraph above.

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

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

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

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.

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Accounts receivable are carried on a gross basis, less the allowance for uncollectible accounts.

The Company’s customers consist primarily of major integrated oil companies, steel companies, independent refiners and marketers, power companies, petrochemical companies, pipeline companies, mining companies, contractors and engineering firms.

The Company’s customers consist primarily of major integrated oil companies, independent refiners and marketers, power companies, petrochemical companies, pipeline companies, mining companies, contractors and engineering firms.

The Company is exposed to the risk of individual customer defaults or depressed cycles in our customers’ industries.

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Accounts payable retentions are generally settled within one year.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Loss Contingencies

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Leasehold improvements are amortized over the shorter of the useful life of the asset or the lease term.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Impairment of Long-Lived Assets

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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.

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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.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

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.

Other Intangible Assets

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If actual results of claim settlements are different than the amounts estimated we may be exposed to future gains and losses that could be material.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Stock-Based Compensation

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Transaction gains and losses are reported as a component of Other income (expense) in the Consolidated Statements of Income.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

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.

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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.

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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.

Note 2 – Revenue

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We present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and Estimated Earnings ("BIE").

BIE consists of advance payments and billings in excess of revenue recognized.

BIE consists of billings in excess of revenue recognized.

The following table provides information about CIE and BIE:

2020 June 30,

(In thousands)

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This revenue consists primarily of work performed during the period on contracts with customers that had advance billings.

Gross amounts of contact assets and liabilities on uncompleted contracts are as follows:

(In thousands)

Costs incurred and estimated earnings on uncompleted contracts

Billings on uncompleted contracts

Net contract liabilities

Progress billings in accounts receivable at June 30, 2020 and June 30, 2019 included retentions to be collected within one year of $ 37.3 million and $ 21.9 million, respectively.

Contract retentions collectible beyond one year are included in other assets in the Consolidated Balance Sheet and totaled $17.7 million as of June 30, 2019 and $2.6 million as of June 30, 2018 .

Contract retentions collectible beyond one year are included in other assets in the Consolidated Balance Sheets and totaled $ 1.6 million as of June 30, 2020 and $ 17.7 million as of June 30, 2019.

Disaggregated Revenue

The following table presents revenue disaggregated by the geographic area where the work was performed:

Revenue disaggregated by reportable segment is presented in Note 13 - Segment Information.

The following series of tables presents revenue disaggregated by geographic area where the work was performed and by contract type:

Geographic Disaggregation:

Twelve months ended

2020 June 30,

2019 June 30,

(In thousands)

United States $ 1,020,083 $ 1,367,844 $ 981,292

Canada 70,133 41,410 104,208

Other international 10,722 7,426 6,053

Total $ 1,100,938 $ 1,416,680 $ 1,091,553

Contract Type Disaggregation:

Twelve months ended

2020 June 30,

2019 June 30,

(In thousands)

Fixed-price contracts $ 685,559 $ 748,007 $ 588,039

Time and materials and other cost reimbursable contracts 415,379 668,673 503,514

Total $ 1,100,938 $ 1,416,680 $ 1,091,553

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 since 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— Acquisitions and Disposals

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The Company recognized a gain of $ 0.4 million on the sale, which was included in Other in the Consolidated Statements of Income.

The revenues and operating results of the business, which were included in the Oil Gas & Chemical segment, were not material.

Purchase of Houston Interests, LLC

On December 12, 2016 , the Company completed the acquisition of Houston Interests, LLC ("Houston Interests"), a global solutions company that provides consulting, engineering, design, construction services and systems integration.

Houston Interests brings expertise to the Company in natural gas processing;

sulfur recovery, processing and handling;

liquid terminals, silos and other bulk storage;

process plant design;

power generation environmental controls and material handling;

industrial power distribution;

electrical, instrumentation and controls;

marine structures;

and material handling systems and terminals for cement, sulfur, fertilizer, coal and grain facilities.

The business has been included in our Matrix PDM Engineering, Inc.

subsidiary, and its operating results impact primarily the Oil Gas & Chemical, Storage Solutions and Industrial segments.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

The Company purchased all of the equity interests of Houston Interests for $42.5 million, net of working capital adjustments and cash acquired.

The consideration paid is as follows (in thousands):

Cash paid for equity interest

Cash paid for working capital

cash acquired

Net purchase price

The Company funded the acquisition primarily from borrowings under the Company's senior secured revolving credit facility (See Note 5).

The net purchase price was allocated to the major categories of assets and liabilities based on their estimated fair value at the acquisition date.

The following table summarizes the net purchase price allocation (in thousands):

Assets Acquired:

Cash and cash equivalents

Accounts receivable

Costs and estimated earnings in excess of billings on uncompleted contracts

Other current assets

Current assets

Property, plant and equipment

Other intangible assets

Total assets acquired

Liabilities Acquired:

Accounts payable

Billings on uncompleted contracts in excess of costs and estimated earnings

Other accrued expenses

Current liabilities

Other liabilities

Total liabilities acquired

Net Purchase Price:

Net assets acquired

cash acquired

Net purchase price

The goodwill recognized from the acquisition is primarily attributable to the technical expertise of the acquired workforce and the complementary nature of Houston Interests' operations, which the Company believes will enable the combined entity to expand its service offerings and enter new markets.

All of the goodwill recognized is deductible for income tax purposes.

The Company agreed to pay the previous owners for any unused portion of acquired warranty obligations outstanding as of June 30, 2017.

This agreement was settled for $1.7 million , which was paid in July 2017.

This settlement was reflected as a decrease to the acquired current liabilities and an increase to the net purchase price.

The Company incurred $0.6 million of expenses related to closing the acquisition during the fiscal year ended June 30, 2017, which were included within selling, general and administrative expenses in the Consolidated Statements of Income.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

The unaudited financial information in the table below summarizes the combined results of operations of Matrix Service Company and Houston Interests for the fiscal year ended June 30, 2017, on a pro forma basis, as though the companies had been combined as of July 1, 2016.

The pro forma financial information presented in the table below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at July 1, 2016 nor should it be taken as indicative of future consolidated results of operations.

Fiscal Year Ended

June 30, 2017

(In thousands, except per share data)

Net income attributable to Matrix Service Company

Basic earnings per common share

Diluted earnings per common share

The pro forma financial information presented in the table above includes the following adjustments to the combined entities' historical financial statements:

Pro forma earnings were adjusted to include $0.8 million of integration expenses that would have been recognized had the acquisition occurred on July 1, 2016.

Interest expense for the combined entities was increased by $0.7 million for the fiscal year ended June 30, 2017.

The increase was attributable to the assumption that the Company's borrowings of $46.0 million used to fund a portion of the acquisition had been outstanding as of July 1, 2016.

This increase was partially offset by the assumption that Houston Interests' former debt was extinguished as of July 1, 2016.

Depreciation and intangible asset amortization expense for the combined entities was reduced by $1.4 million during the fiscal year ended June 30, 2017.

This reduction is primarily due to the recognition of amortizable intangible assets as part of the acquisition and the effect of fair value adjustments to acquired property, plant and equipment.

Pro forma earnings were adjusted to include additional income tax expense of $2.0 million .

Houston Interests was previously an exempt entity and income taxes were not assessed in its historical financial information.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

The revenue and operating results of the business, which were included in the Oil Gas & Chemical segment, were not material.

Note 4— Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill by segment are as follows:

Infrastructure

Infrastructure Oil Gas &

Chemical Storage

Solutions Industrial Total

(In thousands)

Net balance at July 1, 2016

Purchase of Houston Interests (Note 3)

Acquisition related adjustments

Translation adjustment (1)

Net balance at June 30, 2017 $ 42,152 $ 33,604 $ 16,764 $ 20,981 $ 113,501

1 unchanged sentence

Translation adjustment (1)

( 45 ) — ( 4 ) ( 9 ) ( 58 )

Net balance at June 30, 2018 24,826 33,604 16,760 20,972 96,162

Disposal of business (2)

— ( 2,775 ) — — ( 2,775 )

Translation adjustment (1)

4 — ( 24 ) 1 ( 19 )

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 — ( 169 ) ( 19 ) ( 118 )

Net balance at June 30, 2020 $ — $ 30,829 $ 16,567 $ 12,973 $ 60,369

(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.

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

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

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

However, the risk of impairment is dependent upon the relationship of fair values to carrying amounts at the reporting unit level.

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.

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.

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.

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.

In fiscal 2018, the Company recorded a $17.3 million impairment of goodwill included in the Electrical Infrastructure segment.

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 sluggish maintenance and capital spending by some key clients in our Northeast and Mid-Atlantic high voltage markets.

The estimated fair value of the reporting unit was derived by utilizing a combination of discounted cash flow analysis and market multiples.

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 Note 1 - Summary of Significant Accounting Policies, Goodwill.

Other Intangible Assets

In the fourth quarter of fiscal 2020, the Company fully impaired a customer relationship intangible asset with a net book value of $ 1.2 million.

The customer relationship primarily related to services which were impacted by the Company's performance improvement plan (see Note 14 - Restructuring Costs).

As a result, the customer relationship intangible asset was no longer recoverable.

As of June 30, 2020, this intangible asset had a remaining useful life of approximately 2 years, a gross carrying amount of $ 6.3 million and accumulated amortization of $ 5.1 million.

The impairment is included in the restructuring costs caption in the Consolidated Statements of Income.

Also in the fourth quarter of fiscal 2020, the Company fully impaired a customer relationship intangible asset with a net book value of $ 0.4 million in connection with the closure of an underperforming operating unit.

The closure was part the Company's performance improvement plan (see Note 14 - Restructuring Costs).

As of June 30, 2020, this intangible asset had a remaining useful life of approximately 4 years, a gross carrying amount of $ 0.9 million and accumulated amortization of $ 0.5 million.

The impairment is included in the restructuring costs caption in the Consolidated Statements of Income.

In the second quarter of fiscal 2020, 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.

As of December 31, 2019, this intangible asset had a remaining useful life of 9 years, 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 Consolidated Statements of Income.

In the fourth quarter of fiscal 2018, the Company recorded a $ 0.7 million impairment to a customer relationship intangible asset associated with an acquisition that was completed in fiscal 2013.

The impairment was triggered by lower than anticipated revenue and operating income.

The impairment is included in the Oil Gas & Chemical segment and is presented within the goodwill and other intangible asset impairment caption in the Consolidated Statements of Income.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

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

At June 30, 2020

(In thousands)

Intellectual property

Customer based

Useful Life Gross

Amount Accumulated

Amortization Net Carrying

(Years) (In thousands)

Intellectual property 10 to 15 $ 2,579 $ ( 1,956 ) $ 623

Customer based 6 to 15 21,840 ( 13,626 ) 8,214

Non-compete Agreements 4 1,453 ( 1,453 ) —

Total other intangible assets $ 25,872 $ ( 17,035 ) $ 8,837

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

At June 30, 2019

(In thousands)

Intellectual property

Customer based

Useful Life Gross

Amount Accumulated

Amortization Net Carrying

(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 other intangible assets $ 42,604 $ ( 23,132 ) $ 19,472

In June 2018, the Company recorded a $0.7 million impairment to a customer relationship intangible asset associated with an acquisition that was completed in fiscal 2013.

The impairment was triggered by lower than anticipated revenue and operating income.

The impairment is included in the Oil Gas & Chemical segment and is presented within the Goodwill and other intangible asset impairment caption in the Consolidated Statements of Income.

Amortization expense totaled $ 3.4 million, $ 3.3 million, and $ 4.8 million in fiscal 2020, 2019, and 2018, respectively.

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June 30, 2025 1,096

Thereafter 555

Total estimated amortization expense $ 8,837

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

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.

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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.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

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:

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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, or "Covenant EBITDA," over the previous four quarters.

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

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

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.

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)

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Capacity under the senior secured revolving credit facility 137,136 205,677

Letters of credit issued

Letters of credit 34,529 48,147

Borrowings outstanding 9,208 5,347

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

(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.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

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.

The carrying value of the senior secured revolving credit facility approximates its fair value at each balance sheet date.

Note 6— Income Taxes

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017.

The Act makes broad and complex changes to the U.S.

tax code, which have affected our current results and will affect our future results.

The following are significant changes in the tax code that became effective for the Company beginning July 1, 2018:

eliminating the deduction for domestic production activity;

limiting the annual deduction for business interest;

taxing global intangible low-tax income;

allowing a deduction for domestically earned foreign intangible income;

restricting further deductibility of executive performance compensation in excess of $1.0 million ;

establishing a new base erosion and anti-abuse tax on payments between U.S.

taxpayers and foreign related parties.

We completed the accounting for the Act as of December 31, 2018 and accounted for the tax effect of the Act as follows:

Deferred Taxes Remeasurement

We remeasured our domestic deferred tax assets and liabilities based on the rates at which we expect them to reverse in the future.

At June 30, 2018, we completed the remeasurement of our domestic deferred tax assets and liabilities which resulted in an income tax benefit of $0.5 million recognized in fiscal 2018.

One-time Transition Tax on Unrepatriated Earnings of Certain Foreign Subsidiaries

The Act includes a one-time transition tax based on our total post-1986 foreign earnings and profits ("E&P") which we have previously deferred from U.S.

income taxes.

Based on our completed calculations surrounding this tax, we incurred no additional tax related to this provision since our foreign subsidiaries have overall negative E&P.

Global Intangible Low-Tax Income (“GILTI”)

The Act creates a new requirement that certain income earned by controlled foreign corporations must be included currently in the gross income of the U.S.

GAAP, we have made an accounting policy election to treat taxes due on future U.S.

inclusions in taxable income related to GILTI as a current-period expense when incurred instead of factoring such amounts into the measurement of our deferred taxes.

For fiscal 2019, we have no U.S.

taxable income inclusion related to GILTI.

Valuation Allowances on Foreign Tax Credit Carryforwards

We continue to assess our ability to utilize our foreign tax credits in light of the lower U.S.

federal income tax rate.

As of June 30, 2019, we had $1.5 million of foreign tax credit carryforwards, the majority of which relate to our branch operations in Canada.

Future operations of our Canadian branches will impact our ability to utilize these credits.

During our third fiscal quarter we concluded that we are unlikely to realize the benefit of foreign tax credits generated by our Canadian branch operations, which expire in fiscal 2021.

Therefore, we recorded a valuation allowance of $0.6 million during the third fiscal quarter.

In our fourth fiscal quarter, we placed an additional valuation allowance of $0.3 million on foreign tax credits expiring in fiscal 2025.

The remaining credits will expire in fiscal 2023 through fiscal 2025 if not utilized.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Indefinite Reinvestment Assertion

We do not provide for outside basis differences under the indefinite reinvestment assertion of ASC 740-30.

Based on our analysis of the Act, we do not anticipate the need to provide for additional taxes for basis differences or withholding taxes on remitted foreign earnings in the immediate future.

Coronavirus Aid, Relief, and Economic Security Act

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

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

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

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

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

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

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

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

The income tax provisions in the CARES Act have not had a material impact on the Company as of June 30, 2020.

The CARES Act also provides certain payroll tax credits and allows companies to defer payroll tax that would otherwise be due from enactment through December 31, 2020.

The Company has recognized $ 0.8 million of payroll tax credits during fiscal 2020 and has deferred $ 3.8 million of payroll tax as of June 30, 2020.

The payroll tax credits are included as a reduction of selling, general and administrative expenses in the Consolidated Statements of Income and the deferred payroll taxes are included within other liabilities in the Consolidated Balance Sheets.

The Company must repay half of the deferred payroll tax by December 31, 2021 and the remainder by December 31, 2022.

The Company has also received $ 1.1 million of subsidies in Canada during fiscal 2020 as part the Canada Emergency Wage Subsidy program, which was designed to compensate Canadian employers whose business has been affected by the COVID-19 pandemic.

These subsidies are included as a reduction of selling, general and administrative expenses in the Consolidated Statements of Income.

Sources of pretax income (loss)

Fiscal Years Ended

2020 June 30,

2019 June 30,

(In thousands)

Domestic $ ( 32,660 ) $ 46,032 $ ( 2,656 )

Foreign ( 3,984 ) ( 7,620 ) ( 9,492 )

Total $ ( 36,644 ) $ 38,412 $ ( 12,148 )

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Components of the provision for income tax expense (benefit)

Fiscal Years Ended

2020 June 30,

2019 June 30,

(In thousands)

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Federal $ ( 376 ) $ 6,085 $ ( 121 )

State 412 2,390 135

Foreign 23 ( 97 ) 504

Federal ( 5,000 ) ( 528 ) 1,093

State ( 1,091 ) 451 ( 590 )

Foreign 2,462 2,129 ( 1,689 )

( 3,629 ) 2,052 ( 1,186 )

$ ( 3,570 ) $ 10,430 $ ( 668 )

Reconciliation between the expected income tax provision applying the domestic federal statutory tax rate and the reported income tax provision

Fiscal Years Ended

2020 June 30,

2019 June 30,

(In thousands)

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Impairment of non-deductible goodwill (1)

1,813 — 2,342

Charges without tax benefit 1,707 1,233 1,100

Change in valuation allowance (2)

3,062 4,512 1,173

Reversal of branch liability (2)

— ( 3,546 ) —

Excess tax expense (benefit) on stock-based compensation 230 ( 296 ) 511

Remeasurement of deferred taxes (3)

IRC S199 deduction

Research and development and other tax credits ( 1,724 ) ( 1,972 ) ( 1,665 )

Foreign tax differential ( 132 ) ( 248 ) ( 10 )

Noncontrolling interest

Change in uncertain tax positions 20 22 ( 7 )

Other ( 83 ) 370 ( 496 )

Provision (benefit) for federal, state and foreign income taxes $ ( 3,570 ) $ 10,430 $ ( 668 )

Relates to a $17.3 million impairment of goodwill, which included $8.3 million of non-deductible goodwill.

See Note 4 - Goodwill and Other Intangible Assets for more information about the impairment.

(1) In fiscal 2020, the Company impaired $32.9 million of goodwill, which included $ 8.6 million of non-deductible goodwill.

In fiscal 2018, the Company impaired $17.3 million of goodwill, which included $ 8.3 million of non-deductible goodwill.

See Note 4 - Goodwill and Other Intangible Assets for more information about the impairments.

(2) In fiscal 2020, the Company placed $3.1 million of valuation allowances on net operating loss carryforwards and foreign tax credits primarily related to Canada.

In fiscal 2019, the Company placed $4.5 million of valuation allowances on net operating loss carryforwards and foreign tax credits generated by its branch operations in Canada, which will likely not be utilized prior to their expiration.

These valuation allowances were largely offset by the reversal $3.5 million of branch liabilities associated with the Canadian net operating loss carryforwards and foreign tax credits.

This represents the amount recognized for excess tax benefits upon the vesting or exercise of nonvested deferred share awards and stock options, respectively, for which the Company expects to receive an income tax deduction.

The Company adopted ASU 2016-09 in fiscal 2017, which required that excess tax benefits and tax deficiencies be recognized as part of the provision for income taxes.

This represents the remeasurement of deferred taxes in connection with Tax Cuts and Jobs Act - see Deferred Taxes Remeasurement paragraph above.

(3) This represents the remeasurement of deferred taxes in connection with Tax Cuts and Jobs Act.

Matrix Service Company

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Significant components of the Company’s deferred tax assets and liabilities

2020 June 30,

(In thousands)

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Accrued losses 96 194

Restructuring reserve 1,381 —

Foreign currency translation and other 843 833

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Tax over book depreciation 11,313 9,349

Tax over book amortization

Tax over book (book over tax) amortization ( 5,195 ) 1,770

Branch future liability 74 34

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As reported in the Consolidated Balance Sheets:

2020 June 30,

(In thousands)

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These carryforwards will generally expire as shown below:

Operating Loss Carryforwards

Expiration Period

Amount (in thousands)

State net operating losses

June 2024 to June 2039

Foreign net operating losses

June 2029 to June 2039

Operating Loss Carryforwards Expiration Period Amount (in thousands)

State net operating losses June 2024 to June 2040 $ 19,676

Foreign net operating losses June 2029 to June 2040 $ 24,618

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Tax Credit Carryforwards

Expiration Period

Amount (in thousands)

State tax credits

June 2032 to June 2034

Federal foreign tax credits

June 2020 to June 2025

Foreign tax credits

June 2035 to June 2039

Tax Credit Carryforwards Expiration Period Amount (in thousands)

State tax credits June 2032 to June 2035 $ 877

Federal foreign tax credits June 2021 to June 2025 $ 1,239

Foreign tax credits June 2035 to June 2040 $ 627

In general, it is the practice and intention of the Company to reinvest the earnings of its foreign subsidiaries in its foreign operations.

We do not provide for outside basis differences under the indefinite reinvestment assertion of ASC 740-30.

The Company files tax returns in multiple domestic and foreign taxing jurisdictions.

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At June 30, 2020, the Company updated its evaluation of its open tax years in all known jurisdictions.

We have recorded a $0.5 million liability as of June 30, 2019 for unrecognized tax positions and the payment of related interest and penalties.

As of June 30, 2020, we have a $ 0.5 million liability for unrecognized tax positions and the payment of related interest and penalties.

We treat the related interest and penalties as income tax expense.

Due to the uncertainties related to these tax matters, we are unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority will occur.

Note 7—Contingencies

Note 7— Commitments and Contingencies

Insurance Reserves

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Unpriced Change Orders and Claims

As of June 30, 2019 and June 30, 2018 , costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $10.1 million and $15.0 million , respectively.

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

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

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However, customers may not pay these amounts until final resolution of related claims, and accordingly, collection of these amounts may extend beyond one year.

During the third quarter of fiscal 2020, the Company commenced litigation in an effort to collect $ 17.8 million in accounts receivable from an iron and steel customer following the deterioration of the relationship in the second quarter of fiscal 2020.

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.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

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

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

Note 8—Operating Leases

The Company is the lessee under operating leases covering real estate and office equipment under non-cancelable operating lease agreements that expire at various times.

Future minimum lease payments under non-cancelable operating leases that were in effect at June 30, 2019 total $39.4 million and are payable as follows:

fiscal 2020 — $7.8 million ;

fiscal 2021 — $6.9 million ;

fiscal 2022 — $6.0 million ;

fiscal 2023 — $4.3 million ;

fiscal 2024 — $2.7 million and thereafter— $11.7 million .

Included in these payments is an operating lease the Company is expecting to commence in the first quarter of fiscal 2020 that has a 10 year term and future minimum lease payments of $11.9 million .

Operating lease expense was $8.3 million , $8.6 million and $7.9 million for the fiscal years ended June 30, 2019 , June 30, 2018 and June 30, 2017 , respectively.

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— 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 87 % of all right-of-use assets as of June 30, 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 recorded $ 3.2 million of impairments to right-of-use assets related to leased office space that was closed in connection with the Company's restructuring activities, see Note 14 – Restructuring Costs for additional information.

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

Fiscal Year Ended

June 30, 2020

Lease expense Location of Expense in Statements of Income (in thousands)

Operating lease expense Cost of revenue and selling, general and administrative expenses $ 12,274

Short-term lease expense (1)

Cost of revenue 37,371

Total lease expense $ 49,645

(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.

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:

June 30, 2020

Maturity Analysis:

(in thousands)

Fiscal 2021 $ 8,719

Fiscal 2022 5,430

Fiscal 2023 3,978

Fiscal 2024 3,010

Fiscal 2025 2,352

Thereafter 9,630

Total future operating lease payments 33,119

imputed interest ( 5,554 )

Net present value of future lease payments 27,565

current portion of operating lease liabilities 7,568

Non-current operating lease liabilities $ 19,997

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of June 30, 2020:

Weighted-average remaining lease term (in years) 6.2 years

Weighted-average discount rate 5.6 %

Supplemental cash flow information related to leases is as follows:

Fiscal Year Ended

June 30, 2020

(in thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Operating lease payments $ 12,798

Right-of-use assets obtained in exchange for lease liabilities:

Operating leases $ 36,984

During the third quarter of fiscal 2020, the Company received leasehold improvements of $ 2.5 million from a lessor as a tenant incentive.

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

Note 9— Stockholders’ Equity

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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.

Under the November 2018 Program, the Company may repurchase common stock of the Company 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.

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.

The Company may repurchase its stock from time to time in the open market at prevailing market prices or in privately negotiated transactions and is not obligated to purchase any shares.

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.

3 unchanged sentences

The Company has 1,746,689 treasury shares as of June 30, 2020 and intends to utilize these treasury shares in connection with equity awards under the Company’s stock incentive plans and for sales to the Employee Stock Purchase Plan.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Note 10— Stock-Based Compensation

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Measured but unrecognized stock-based compensation expense at June 30, 2020 was $ 11.9 million, all of which related to nonvested deferred shares which are expected to be recognized as expense over a weighted average period of 1.6 years.

The Company recognized excess tax benefits of $0.3 million and $0.5 million related to stock-based compensation vesting for the fiscal years ended June 30, 2019 and 2017, respectively.

The Company recognized excess tax expense of $0.5 million for the fiscal year ended June 30, 2018 related to stock-based compensation vesting.

The Company recognized excess tax expense of $ 0.2 million and $ 0.5 million related to stock-based compensation vesting for the fiscal years ended June 30, 2020 and 2018, respectively.

The Company recognized excess tax benefits of $0.3 million for the fiscal year ended June 30, 2019 related to stock-based compensation vesting.

Plan Information

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The Company did not award any new stock options in fiscal years 2020, 2019, or 2018.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Stock option activity and related information for the fiscal year ended June 30, 2020 is as follows:

Weighted-Average

Contractual Life

Weighted-Average

Exercise Price

Options Weighted-Average

Contractual Life Weighted-Average

Exercise Price Aggregate

Intrinsic Value

(In thousands)

(Years) (In thousands)

Outstanding at June 30, 2019 53,700 2.4 $ 10.19 $ 541

Granted — — —

Exercised — — —

Canceled — — —

Outstanding at June 30, 2020 53,700 1.4 $ 10.19 $ —

1 unchanged sentence

Exercisable at June 30, 2020 53,700 1.4 $ 10.19 $ —

The total intrinsic value of stock options exercised was $0.3 million during each of fiscal 2018 and fiscal 2017.

The total intrinsic value of stock options exercised was $ 0.1 million and $ 0.3 million during fiscal year 2019 and fiscal 2018, respectively.

No stock options were exercised in fiscal 2020.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Nonvested Deferred Shares

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• Time-based awards—Employee awards generally vest in four equal annual installments beginning one year after the grant date.

Beginning in fiscal 2019, the award agreements contain a provision that accelerates the vesting for retirement eligible participants and participants that become retirement eligible during the vesting period.

The award is forfeited if retirement occurs before the first anniversary of the award.

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The model also took into account the expected dividends over the performance period of those peer companies which pay cash dividends.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Nonvested deferred share activity for the fiscal year ended June 30, 2020 is as follows:

Weighted Average Grant

Date Fair Value per Share

Shares Weighted Average Grant

Date Fair Value per

Nonvested shares at June 30, 2019 1,459,511 $ 19.88

5 unchanged sentences

There were 314,711 and 253,241 deferred shares that vested and were released in fiscal 2019 and 2018 with weighted average fair values of $ 16.23 and $ 19.60 per share, respectively.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Note 11— Earnings per Common Share

6 unchanged sentences

Fiscal Years Ended

2020 June 30,

2019 June 30,

(In thousands, except per share data)

Net income (loss) attributable to Matrix Service Company

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

Weighted average shares outstanding 26,621 26,891 26,769

5 unchanged sentences

Diluted earnings (loss) per share $ ( 1.24 ) $ 1.01 $ ( 0.43 )

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

The following securities are considered antidilutive and have been excluded from the calculation of diluted earnings (loss) per share:

Fiscal Years Ended

2020 June 30,

2019 June 30,

(In thousands of shares)

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The Company matching contributions vest immediately.

The Company’s matching contributions were $6.2 million , $5.8 million , and $5.5 million for the fiscal years ended June 30, 2019 , 2018 and 2017 , respectively.

The Company’s matching contributions were $ 6.2 million in each of the fiscal years ended June 30, 2020 and 2019 and $ 5.8 million for the fiscal year ended June 30, 2018.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Multiemployer Pension Plans

17 unchanged sentences

Notes to Consolidated Financial Statements (continued)

Pension Fund EIN/Pension

Plan Number Pension

Protection Act

Company Contributions

(In thousands)

Boilermaker-Blacksmith National Pension Trust

48-6168020/001

Described below (1)

Joint Pension Fund Local Union 164 IBEW

22-6031199/001

Described below (2)

Joint Pension Fund of Local Union No 102 IBEW

22-1615726/001

IBEW Local 456 Pension Plan

Zone Status FIP/RP

Implemented Company Contributions

Fiscal Year Surcharge

Imposed Expiration

2020 2019 2020 2019 2018

(In thousands)

Boilermaker-Blacksmith National Pension Trust 48-6168020/001 Yellow Red Implemented $ 6,634 $ 12,434 $ 8,525 No Described below (1)

Joint Pension Fund Local Union 164 IBEW 22-6031199/001 Described below (2)

Yellow Implemented 1,560 2,180 2,391 No 5/31/2021

Joint Pension Fund of Local Union No 102 IBEW 22-1615726/001 Green Green NA 1,227 1,610 2,489 No 5/31/2022

IBEW Local 456 Pension Plan 22-6238995/001 Described below (2)

Green NA 427 574 6,005 No 5/31/2021

Local 351 IBEW Pension Plan

22-3417366/001

Steamfitters Local Union No 420 Pension Plan

23-2004424/001

IBEW Local Union 98 Pension Plan

23-1990722/001

Described below (2)

Indiana Laborers Pension Fund

35-6027150/001

Described below (2)

Iron Workers Mid-America Pension Plan, Local 395

36-6488227/001

Pipe Fitters Retirement Fund, Local 597

62-6105084/001

22-3417366/001 Green Green NA 1,709 2,025 1,187 No 12/4/2021

Steamfitters Local Union No 420 Pension Plan 23-2004424/001 Red Red Implemented 1,523 639 1,558 Yes Described below (3)

IBEW Local Union 98 Pension Plan 23-1990722/001 Red Red Implemented 352 828 1,106 Yes Described below (3)

Indiana Laborers Pension Fund 35-6027150/001 Described below (2)

Green NA 1,604 3,349 3,542 No Described below (3)

Iron Workers Mid-America Pension Plan, Local 395 36-6488227/001 Described below (2)

Green NA 840 2,596 4,412 No 5/31/2024

Pipe Fitters Retirement Fund, Local 597 62-6105084/001 Green Green NA 835 3,469 3,682 No Described below (4)

Iron Workers Pension Plan of Western Pennsylvania, Local 3 25-1283169/001 Described below (2)

Yellow Implemented 500 2,317 1,539 No 5/1/2021

Iron Workers Pension Plan, Local 55 34-6682351/001 Described below (2)

Described below (2)

Iron Workers Pension Plan of Western Pennsylvania, Local 3

25-1283169/001

Iron Workers Pension Plan, Local 55

34-6682351/001

NA 2,951 4,333 198 No 6/30/2024

National Electrical Benefit Fund, Locals 488 and 126 53-0181657/001 Green Green NA 1,502 4,577 824 No 1/1/2023

Connecticut Plumbers and Pipefitters Pension Fund, Local 777 06-6050353/001 Described below (2)

Green NA — 3,307 115 No 6/1/2021

Northwestern Ohio Plumbers and Pipefitters Pension, Local 50 34-6502487/001 Described below (2)

Green NA 2,504 1,161 61 No 3/31/2022

Ohio Carpenters' Pension Fund, Locals 1090 and 351 34-6574360/001 Red Red Implemented 3,042 2,962 318 Yes 4/30/2021

IBEW Local 654 Pension Plan 23-6538183/001 Described below (2)

Described below (2)

National Electrical Benefit Fund, Local 488

53-0181657/001

Connecticut Plumbers and Pipefitters Pension Fund, Local 777

06-6050353/001

NA 1,021 1,006 1,620 No 6/3/2023

Contributions to other multiemployer plans 9,172 15,019 15,152

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(1) Our employees are members of several Boilermaker unions that participate in the Boilermaker-Blacksmith National Pension Trust.

The most significant of these unions are Boilermakers Local 374 and Boilermakers Local 128, which have collective bargaining agreements that expire on December 31, 2019 and April 30, 2022, respectively.

For the Local 164 IBEW Pension Plan, Local 98 IBEW Pension Plan, Indiana Laborers Pension Fund, and Iron Workers Pension Plan Local 55, the Company has not received a funding notification that covers the Company's fiscal year 2019 during the preparation of this Form 10-K.

The most significant of these unions are Boilermakers Locals 549, 85, 92, 374, 363, and 128, which have collective bargaining agreements that expire on September 30, 2020, April 30, 2021, September 30, 2020, December 31, 2022, December 31, 2020 and April 30, 2022, respectively.

(2) For the Local 164 IBEW Pension Plan, Local 456 IBEW Pension Plan, Indiana Laborers Pension Fund, Local 395 Iron Workers Mid-America Pension Plan, Local 3 Iron Workers Pension Plan of Western Pennsylvania, Iron Workers Pension Plan Local 55, Local 777 Connecticut Plumbers and Pipefitters Pension Fund, Local 50 Northwestern Ohio Plumbers and Pipefitters Pension, and Local 654 IBEW Pension Plan, the Company has not received a funding notification that covers the Company's fiscal year 2020 during the preparation of this Form 10-K.

For Local 55 Iron Workers Pension Plan and Local 654 IBEW Pension Plan, the Company has not received a funding notification that covers the Company's fiscal year 2019 either.

Under Federal pension law, if a multiemployer pension plan is determined to be in critical or endangered status, the plan must provide notice of this status to participants, beneficiaries, the bargaining parties, the Pension Benefit Guaranty Corporation, and the Department of Labor.

The Company also observed that these plans have not submitted any Critical or Endangered Status Notices to the Department of Labor for calendar years that we have not received notification.

The Critical or Endangered Status Notices can be accessed at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/public-disclosure/2019-funding-status-notices.

The Critical or Endangered Status Notices can be accessed at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/public-disclosure/critical-status-notices.

(3) At the time of the filing of this Form 10-K, the Company's collective bargaining agreements have expired for these unions and no new agreements are in place.

(4) The Company's collective bargaining agreement with Pipe Fitters Local 597 does not have an expiration date.

The agreement was last renegotiated in 2019.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Employee Stock Purchase Plan

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The Company has made 1,000,000 shares available under the ESPP.

The ESPP can be terminated at the discretion of the Board of Directors or on January 2, 2021 .

The ESPP can be terminated at any time at the discretion of the Board of Directors and will automatically terminate on January 2, 2021 .

Shares are issued from Treasury Stock under the ESPP.

There were 20,733 shares issued in fiscal 2020, 15,812 shares in fiscal 2019, and 21,920 shares in fiscal 2018.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Note 13— Segment Information

We operate our business through four reportable segments:

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

Electrical Infrastructure;

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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.

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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 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.

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

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 Company evaluates performance and allocates resources based on operating income.

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(In thousands)

Infrastructure

Unallocated Corporate

Infrastructure Oil Gas &

Chemical Storage

Solutions Industrial Unallocated Corporate Total

Fiscal year ended June 30, 2020

Gross revenues

inter-segment revenues

Consolidated revenues

Operating income

Gross revenue $ 112,890 $ 203,404 $ 562,439 $ 228,827 $ — $ 1,107,560

inter-segment revenue — 2,454 3,240 928 — 6,622

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

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 )

Segment assets 96,010 74,041 203,291 19,957 124,011 517,310

2 unchanged sentences

Fiscal year ended June 30, 2019

Gross revenues

inter-segment revenues

Consolidated revenues

Operating income (loss)

Gross revenue $ 217,417 $ 322,065 $ 524,330 $ 357,464 $ — $ 1,421,276

inter-segment revenue — 2,198 2,398 — — 4,596

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

Intangible asset impairments and restructuring costs — — — — — —

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

Segment assets 155,880 91,959 188,912 90,336 106,307 633,394

2 unchanged sentences

Fiscal year ended June 30, 2018

Gross revenues

inter-segment revenues

Consolidated revenues

Gross revenue $ 255,931 $ 324,546 $ 319,106 $ 198,155 $ — $ 1,097,738

inter-segment revenue — 1,774 4,410 1 — 6,185

Consolidated revenue 255,931 322,772 314,696 198,154 — 1,091,553

Gross profit 18,300 33,423 25,778 14,435 — 91,936

Intangible asset impairments and restructuring costs 17,281 717 — — — 17,998

Operating income (loss) ( 16,531 ) 8,798 ( 5,907 ) 3,161 — ( 10,479 )

2 unchanged sentences

Depreciation and amortization expense 4,359 5,904 6,623 3,461 — 20,347

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Geographical information is as follows:

Long-Lived Assets

2020 June 30,

2019 June 30,

(In thousands)

United States $ 164,056 $ 193,472 $ 174,241

Canada 5,659 10,110 13,738

Other international 12,435 12,502 13,008

$ 182,150 $ 216,084 $ 200,987

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Information about Significant Customers:

Significant Customers as a Percentage of Segment Revenues

Infrastructure

Significant Customers as a Percentage of Segment Revenue

Consolidated Electrical

Infrastructure Oil Gas &

Chemical Storage

Solutions Industrial

Fiscal Year ended June 30, 2020

Customer one 9.7 % — % — % — % 47.1 %

Customer two 8.2 % — % — % 16.2 % — %

Customer three 8.2 % — % — % 16.1 % — %

1 unchanged sentence

Customer five 4.1 % — % 17.8 % 1.7 % — %

Customer six 3.8 % — % 20.1 % 0.2 % — %

Customer seven 3.2 % — % 10.7 % 2.5 % — %

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Customer nine 2.4 % — % — % — % 11.4 %

Customer ten 2.0 % 19.7 % — % — % — %

Customer eleven 1.8 % 16.1 % — % 0.1 % 0.7 %

Customer twelve 1.7 % 14.8 % — % — % 0.9 %

Customer thirteen 1.5 % 14.6 % — % — % — %

Fiscal Year ended June 30, 2019

Customer one 9.7 % — % — % — % 38.4 %

Customer two 7.6 % 49.0 % — % — % 0.4 %

Customer three 7.6 % — % — % — % 30.1 %

1 unchanged sentence

Customer five 7.1 % — % — % 19.4 % — %

Customer six 5.0 % — % — % 13.6 % — %

Customer seven 4.6 % 0.3 % 3.1 % 10.6 % — %

1 unchanged sentence

Customer nine 3.1 % — % — % — % 12.3 %

Customer ten 3.0 % — % — % — % 12.0 %

Customer eleven 2.1 % 13.4 % — % — % — %

Fiscal Year ended June 30, 2018

Customer one 11.4 % — % — % — % 62.9 %

Customer two 8.6 % — % 29.0 % — % — %

Customer three 6.4 % 26.5 % — % 0.6 % — %

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Customer five 4.2 % — % 12.0 % 2.2 % — %

Customer six 3.2 % — % 10.8 % — % — %

Customer seven 3.2 % — % — % 10.9 % — %

Customer eight 3.0 % 12.9 % — % — % — %

Customer nine 2.7 % — % — % — % 14.7 %

Customer ten 2.3 % 10.0 % — % — % — %

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

Note 14— Restructuring Costs

In February 2020, the Company announced a business improvement plan for the Electrical Infrastructure segment and its strategic initiative to exit the domestic iron and steel industry.

Planned activities under the business improvement plan and the wind down of the domestic iron and steel industry were expanded in the second half of the year due to lower revenue in fiscal 2020 and uncertainties caused by the COVID-19 pandemic.

The business improvement plan 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 the near-term revenue expectation.

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, other intangible assets and other fixed assets related to the closure of certain offices.

The Company incurred $14.0 million of restructuring costs in fiscal 2020 and has substantially completed its business improvement plan and the wind down of the domestic iron and steel business as of June 30, 2020.

Restructuring costs incurred are classified as follows:

Fiscal Year Ended

June 30, 2020

(in thousands)

Electrical Infrastructure

Severance costs and other benefits $ 1,571

Facility costs 234

Other intangible asset impairments 1,150

Total Electrical Infrastructure $ 2,955

Oil Gas & Chemical

Severance costs and other benefits $ 1,767

Facility costs 1,708

Other intangible asset impairments 375

Total Oil Gas & Chemical $ 3,850

Storage Solutions

Severance costs and other benefits $ 576

Facility costs 720

Other intangible asset impairments —

Total Storage Solutions $ 1,296

Severance costs and other benefits $ 4,861

Facility costs 1,048

Other intangible asset impairments —

Total Industrial $ 5,909

Total restructuring costs $ 14,010

Restructuring Costs by Type:

Total severance costs and other benefits $ 8,775

Total facility costs 3,710

Total other intangible asset impairments 1,525

Total restructuring costs $ 14,010

Matrix Service Company

Notes to Consolidated Financial Statements (continued)

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

Balance as of June 30, 2019 $ —

Restructuring costs incurred 14,010

Non-cash restructuring costs ( 5,215 )

Cash payments ( 6,392 )

Balance as of June 30, 2020 (1)

(1) The restructuring reserve is included within other accrued expenses in the Consolidated Balance Sheets .

Matrix Service Company

Quarterly Financial Data (Unaudited)

Fiscal Years Ended June 30, 2020 and June 30, 2019

Quarter Second

Quarter Third

Quarter Fourth

(In thousands, except per share amounts)

Fiscal Year 2020

Operating income

Earnings per common share:

Fiscal Year 2018

Revenue $ 338,097 $ 318,677 $ 248,327 $ 195,837

Gross profit 32,465 30,001 20,477 19,233

Intangible asset impairments and restructuring costs — 38,515 6,559 7,451

Operating income (loss) 8,774 ( 31,679 ) ( 5,800 ) ( 7,920 )

Net income (loss) attributable to Matrix Service Company

Net income (loss) 6,151 ( 28,008 ) ( 5,495 ) ( 5,722 )

Earnings (loss) per common share:

Basic 0.23 ( 1.04 ) ( 0.21 ) ( 0.22 )

Diluted 0.22 ( 1.04 ) ( 0.21 ) ( 0.22 )

Fiscal Year 2019

Revenue $ 318,511 $ 340,568 $ 358,887 $ 398,714

Gross profit 23,421 27,886 36,906 43,738

Operating income 2,220 5,527 12,794 17,389

Net income 2,305 3,932 8,933 12,812

Earnings per common share:

Basic 0.09 0.15 0.33 0.48

Diluted 0.08 0.14 0.33 0.47

The sum of earnings per share for the four quarters may not equal the total earnings per share for the year due to changes in the average number of common shares outstanding and rounding.

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(In thousands)

Charged to Other Accounts—Describe

Deductions—Describe

ADDITIONS COL.

Period Charged to

Expenses Charged to Other Accounts—Describe Deductions—Describe Balance at

Fiscal Year 2020

Deducted from asset accounts:

Allowance for doubtful accounts

Valuation reserve for deferred tax assets

Allowance for doubtful accounts $ 923 $ 1,158 $ — $ ( 1,176 ) (A) $ 905

Valuation reserve for deferred tax assets 4,959 3,062 — ( 258 ) (B) 7,763

Total $ 5,882 $ 4,220 $ — $ ( 1,434 ) $ 8,668

Fiscal Year 2019

Deducted from asset accounts:

Allowance for doubtful accounts

Valuation reserve for deferred tax assets

Allowance for doubtful accounts 6,327 5 — ( 5,409 ) (C) 923

Valuation reserve for deferred tax assets 1,638 4,594 — ( 1,273 ) (D) 4,959

Total 7,965 4,599 — ( 6,682 ) 5,882

Fiscal Year 2018

Deducted from asset accounts:

Allowance for doubtful accounts

Valuation reserve for deferred tax assets

Primarily relates to a $5.2 million reversal of a previous reserved account receivable balance that was fully settled with an agreement with the customer.

Relates to the deferred tax asset of $0.8 million created by a stock-based compensation award with a market condition that was fully reserved in fiscal 2018.

Allowance for doubtful accounts 9,887 107 — ( 3,667 ) (E) 6,327

Valuation reserve for deferred tax assets 1,719 1,020 — ( 1,101 ) (F) 1,638

Total 11,606 1,127 — ( 4,768 ) 7,965

(A) Primarily relates to a $0.6 million reserve that was recognized as bad debt expense and ultimately settled and written off within fiscal 2020 and $0.3 million of payments received on a balance that was fully reserved.

(B) Relates to foreign currency exchange rate differences for the portion of the valuation allowance on net operating loss and tax credit carryforwards in foreign jurisdictions.

(C) Primarily relates to a $5.2 million reversal of a previous reserved account receivable balance that was fully settled with an agreement with the customer.

(D) Relates to the deferred tax asset of $0.8 million created by a stock-based compensation award with a market condition that was fully reserved in fiscal 2018.

In fiscal 2019, upon the final determination that the award would not vest, the Company wrote off the deferred tax asset against the reserve.

The remaining balance relates to $0.5 million of fully reserved tax credits that expired in fiscal 2019.

Primarily relates to the reversal of reserved account receivable that was fully settled with cash and future backlog.

Primarily relates to $0.8 million of stock-based compensation expense recognized in fiscal 2018 that was not deductible for tax purposes due to not meeting a market condition vesting requirement and to $0.3 million of foreign tax credits that expired.

Primarily relates to a $0.2 million receivable written off against allowance for doubtful accounts.

(E) Primarily relates to the reversal of reserved account receivable that was fully settled with cash and future backlog.

(F) Primarily relates to $0.8 million of stock-based compensation expense recognized in fiscal 2018 that was not deductible for tax purposes due to not meeting a market condition vesting requirement and to $0.3 million of foreign tax credits that expired.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data