UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(cid:95)(cid:3)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2014
or
(cid:134)(cid:3)
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File No. 1-15461
MATRIX SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
5100 E. Skelly Drive, Suite 700
Tulsa, Oklahoma
(Address of Principal Executive Offices)
73-1352174
(I.R.S. Employer
Identification No.)
74135
(Zip Code)
Registrant’s telephone number, including area code: (918) 838-8822
Securities Registered Pursuant to Section 12(b) of the Act:
(Title of class)
Common Stock, par value $0.01 per share
Securities Registered Pursuant to Section 12(g) of the Act: None
Name of each exchange on which registered: NASDAQ Global Select Market (common stock)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No (cid:59)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No (cid:59)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes (cid:59) No (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes (cid:59) No (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (cid:59)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer (cid:133) Accelerated filer (cid:59) Non-accelerated filer (cid:133) Smaller reporting company (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:59)
The aggregate market value of the registrant’s common stock held by non-affiliates computed by reference to the price at which the
common stock was last sold as of the last business day of the registrant’s most recently completed second quarter was approximately $635
million.
The number of shares of the registrant’s common stock outstanding as of September 3, 2014 was 26,376,223 shares.
Documents Incorporated by Reference
Certain sections of the registrant’s definitive proxy statement relating to the registrant’s 2014 annual meeting of stockholders, which
definitive proxy statement will be filed within 120 days of the end of the registrant’s fiscal year, are incorporated by reference into Part III of
this Form 10-K.
TABLE OF CONTENTS
Part I
Item 1.
Business …………………………………………………………………………………………………
Item 1A.
Risk Factors ……………………………………………………………………………………………..
Item 1B.
Unresolved Staff Comments …………………………………………………………………………….
Item 2.
Properties ………………………………………………………………………………………………..
Item 3.
Legal Proceedings ………………………………………………………………………………………
Item 4.
Mine Safety Disclosures ………………………………………………………………………………...
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ………………………………………………………………………………………………..
Item 6.
Selected Financial Data …………………………………………………………………………………
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations …………...
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk ………………………………………….
Item 8.
Financial Statements and Supplementary Data …………………………………………………………
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure …………...
Item 9A.
Controls and Procedures ………………………………………………………………………………...
Item 9B.
Other Information ……………………………………………………………………………………….
Part III
Item 10.
Directors, Executive Officers and Corporate Governance ……………………………………………...
Item 11.
Executive Compensation ………………………………………………………………………………..
Item 12.
Security Ownership of Certain Beneficial Owners, Management, and Related Stockholder Matters …
Item 13.
Certain Relationships and Related Transactions, and Director Independence ………………………….
Item 14.
Principal Accountant Fees and Services ………………………………………………………………...
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71
Item 15.
Exhibits and Financial Statement Schedules …………………………………………………………… 72
Part IV
1
Item 1. Business
FORWARD-LOOKING STATEMENTS
PART I
This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements,
other than statements of historical facts, included in this Annual Report which address activities, events or developments, which
we expect, believe or anticipate will or may occur in the future are forward-looking statements. The words “believes,”
“intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts” and similar expressions are also intended to identify
forward-looking statements.
These forward-looking statements include, among others, such things as:
•
•
•
amounts and nature of future revenues and margins from each of our segments;
the likely impact of new or existing regulations or market forces on the demand for our services;
expansion and other trends in the industries we serve;
• our ability to generate sufficient cash from operations or to raise cash in order to meet our short and long-term capital
requirements; and
• our ability to comply with the covenants in our credit agreement.
These statements are based on certain assumptions and analyses we made in light of our experience and our historical
trends, current conditions and expected future developments as well as other factors we believe are appropriate. However,
whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and
uncertainties which could cause actual results to differ materially from our expectations, including:
•
•
•
•
•
the risk factors discussed in Item 1A of this Annual Report and listed from time to time in our filings with the
Securities and Exchange Commission;
the inherently uncertain outcome of current and future litigation;
the adequacy of our reserves for contingencies;
economic, market or business conditions in general and in the oil, gas and power industries in particular;
changes in laws or regulations; and
• other factors, many of which are beyond our control.
Consequently, all of the forward-looking statements made in this Annual Report are qualified by these cautionary
statements and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected consequences or effects on our business operations. We assume no
obligation to update publicly, except as required by law, any such forward-looking statements, whether as a result of new
information, future events or otherwise.
BACKGROUND
The Company began operations in 1984 as an Oklahoma corporation under the name of Matrix Service. In 1989, we
incorporated in the State of Delaware under the name of Matrix Service Company. We provide engineering, fabrication,
infrastructure, construction, and maintenance services primarily to the oil, gas, power, petrochemical, industrial, mining and
minerals markets. We maintain regional offices throughout the United States and Canada, and operate through union and merit
subsidiaries.
The Company is licensed to operate in all 50 states and in four Canadian provinces. Our principal executive offices are
located at 5100 E. Skelly Drive, Suite 700, Tulsa, Oklahoma 74135. Our telephone number is (918) 838-8822. Unless the
context otherwise requires, all references herein to “Matrix Service Company”, “Matrix”, the “Company” or to “we”, “our”,
and “us” are to Matrix Service Company and its subsidiaries.
2
WEBSITE ACCESS TO REPORTS
Our public website is matrixservicecompany.com. We make available free of charge through the "Investor Relations"
section of our website our annual reports to stockholders, annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with,
or furnish it to, the Securities and Exchange Commission ("SEC"). Any materials we file with or furnish to the SEC is also
maintained on the SEC website (sec.gov).
The information contained on our website, or available by hyperlink from our website, is not incorporated into this Form
10-K or other documents we file with, or furnish to, the SEC. We intend to use our website as a means of disclosing material
non-public information and for complying with our disclosure obligations under Regulation FD. Such disclosures will be
included on our website in the "Investor Relations" section. We also intend to use social media channels as a means of
disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. We
encourage investors, the media, and others interested in Matrix to review the information posted on the company Facebook site
(facebook.com/matrixservicecompany), the company linkedin account (linkedin.com/company/matrix-service-company) and
the company twitter account (twitter.com/matrixserviceco). Investors, the media or other interested parties can subscribe to the
twitter feed at the address listed above. Any updates to the list of social media channels Matrix will use to announce material
information will be posted on the "Investor Relations" page of the company's website at matrixservicecompany.com.
Accordingly, investors should monitor such portions of our website and social media channels, in addition to following our
press releases, SEC filings and public conference calls and webcasts.
OPERATING SEGMENTS
We operate our business through four reportable segments: Electrical Infrastructure, Oil Gas & Chemical, Storage
Solutions, and Industrial.
The Electrical Infrastructure segment primarily encompasses construction and maintenance services to a variety of power
generation facilities, such as combined cycle plants, natural gas fired power stations, and renewable energy installations. We
also provide high voltage services to investor owned utilities, including construction of new substations, upgrades of existing
substations, short-run transmission line installations, distribution upgrades and maintenance, and storm restoration services.
The Oil Gas & Chemical segment includes our traditional turnaround activities, plant maintenance services and
construction in the downstream petroleum industry. Another key offering is industrial cleaning services, which include
hydroblasting, hydroexcavating, chemical cleaning and vacuum services. We also perform work in the petrochemical, natural
gas, gas processing and compression, and upstream petroleum markets.
The Storage Solutions segment includes new construction of crude and refined products aboveground storage tanks
(“ASTs”), as well as planned and emergency maintenance services. Also included in the Storage Solutions segment is work
related to specialty storage tanks including liquefied natural gas (“LNG”), liquid nitrogen/liquid oxygen (“LIN/LOX”), liquid
petroleum (“LPG”) tanks and other specialty vessels including spheres. We also offer aboveground storage tank products
including floating roof seals. Finally, the Storage Solutions segment includes balance of plant work in storage terminals and
tank farms.
The Industrial segment includes construction and maintenance work in the iron and steel and mining and minerals
industries, bulk material handling and fertilizer production facilities, as well as work for clients in other industrial markets.
PURCHASE OF KVAERNER NORTH AMERICAN CONSTRUCTION
Effective as of December 21, 2013, the Company acquired 100% of the stock of Kvaerner North American
Construction Ltd. and substantially all of the assets of Kvaerner North American Construction Inc,. together referenced as
"KNAC". The businesses are now known as Matrix North American Construction Ltd. and Matrix North American
Construction, Inc., together referenced as "Matrix NAC". Matrix NAC is a premier provider of maintenance and capital
construction services to power generation, integrated iron and steel, and industrial process facilities. The acquisition
significantly expands the Company's presence in the Electrical Infrastructure and Industrial Segments, and to a lesser extent,
the Oil Gas and Chemical segment. The KNAC acquisition brought opportunities in additional geographical markets, the
ability to execute additional and larger projects and expanded our relationship with some existing clients.
3
The Company purchased KNAC for $51.6 million, net of cash acquired. The acquisition was funded through a
combination of cash-on-hand and borrowings under our senior revolving credit facility.
OTHER BUSINESS MATTERS
Customers and Marketing
The Company provided services to approximately 560 customers in fiscal 2014. Two customers, TransCanada
Corporation and Enbridge, accounted for $218.6 million and $160.5 million, or 17.3% and 12.7% of our consolidated revenue,
respectively, all of which was in the Storage Solutions segment. The loss of these major customers or other significant
customers could have a material adverse effect on the Company; however, we are not dependent on any single contract or
customer on an on-going basis.
Matrix markets its services and products primarily through its marketing and business development personnel, senior
professional staff and its operating management. We competitively bid most of our projects; however, we have a number of
preferred provider relationships with customers who award us work through long-term agreements. Our projects have
durations ranging from a few days to multiple years.
Segment Financial Information
Financial information for our operating segments is provided in Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations, and in Note 13-Segment Information of the Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data.
Competition
Our industry is highly fragmented and intensely competitive. We compete with local, regional, national and international
contractors and service providers. Competitors vary with the markets we serve with few competitors competing in all of the
markets we serve or in all of the services we provide. Contracts are generally awarded based on quality, safety performance,
price, schedule, and customer satisfaction.
Backlog
We define backlog as the total dollar amount of revenues that we expect to recognize as a result of performing work that
has been awarded to us through a signed contract, notice to proceed or other type of assurance that we consider firm. The
following arrangements are considered firm:
•
fixed-price awards;
• minimum customer commitments on cost plus arrangements; and
•
certain time and material arrangements in which the estimated value is firm or can be estimated with a reasonable
amount of certainty in both timing and amount.
For long-term maintenance contracts, we include only the amounts that we expect to recognize as revenue over the next
12 months. For all other arrangements, we calculate backlog as the estimated contract amount less revenues recognized as of
the reporting date.
The following table provides a summary of changes in our backlog in fiscal 2014:
Backlog as of June 30, 2013
Backlog acquired
Project awards
Revenue recognized
Backlog as of June 30, 2014
Electrical
Infrastructure
Oil Gas &
Chemical
Storage
Solutions
(In thousands)
Industrial
Total
$
$
103,520 $
123,492
140,694
(205,570)
162,136 $
120,138 $
2,825
226,944
(239,690)
110,217 $
319,718 $
—
773,809
(610,896 )
482,631 $
83,361 $
115,723
168,691
(206,933 )
160,842 $
626,737
242,040
1,310,138
(1,263,089)
915,826
4
Seasonality
Quarterly operating results can exhibit seasonal fluctuations, especially in our Oil Gas & Chemical segment, for a variety
of reasons. Turnarounds and planned outages at customer facilities are typically scheduled in the spring and the fall when the
demand for energy is lower. Within the Electrical Infrastructure segment, transmission and distribution work is generally
scheduled by the public utilities when the demand for electricity is at its lowest. Therefore, revenue volume in the summer
months is typically lower than in other periods throughout the year. Also, we typically see a lower level of operating activity
relating to construction projects during the winter months and early in the calendar year because many of our customers’ capital
budgets have not been finalized. Our business can also be affected, both positively and negatively, by seasonal factors such as
energy demand or weather conditions including hurricanes, snowstorms, and abnormally low or high temperatures. Some of
these seasonal factors may cause some of our offices and projects to close or reduce activities temporarily. Accordingly, results
for any interim period may not necessarily be indicative of future operating results.
Material Sources and Availability
Steel plate and steel pipe are key materials used by the Company. Supplies of these materials are available throughout
the United States and globally from numerous sources. We anticipate that adequate amounts of these materials will be
available in the foreseeable future. However, the price, quantity, and the delivery schedules of these materials could change
rapidly due to various factors, including producer capacity, the level of imports, worldwide demand, tariffs on imported steel
and other market conditions.
Insurance
The Company maintains insurance coverage for various aspects of its operations. However, exposure to potential losses
is retained through the use of deductibles, self-insured retentions and coverage limits.
Typically our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of
our services and provide warranties for materials. The Company may also be required to name the customer as an additional
insured up to the limits of insurance available, or we may be required to purchase special insurance policies or surety bonds for
specific customers or provide letters of credit in lieu of bonds to satisfy performance and financial guarantees on some projects.
Matrix maintains a performance and payment bonding line sufficient to support the business. The Company generally
requires its subcontractors to indemnify the Company and the Company’s customer and name the Company as an additional
insured for activities arising out of the subcontractors’ work. We also require certain subcontractors to provide additional
insurance policies, including surety bonds in favor of the Company, to secure the subcontractors’ work. There can be no
assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against
a valid claim or loss under the contracts with our customers.
Employees
As of June 30, 2014, the Company had 4,491 employees of which 837 were employed in non-field positions and 3,654
were employed in field or shop positions. The number of employees varies significantly throughout the year because of the
number, type and size of projects we have in progress at any particular time.
The Company’s subsidiaries include both merit and union companies. The union businesses operate under collective
bargaining agreements with various unions representing different groups of our employees. Union agreements provide union
employees with benefits including health and welfare, pension, training programs and competitive compensation plans. We
have not experienced any strikes or work stoppages in recent years. We maintain health and welfare, retirement and training
programs for our merit employees and administrative personnel.
Patents and Proprietary Technology
Matrix Service Company’s subsidiaries have several patents and patents pending, and continues to pursue new idea and
innovations to better serve our customers in all areas of our business. The Flex-A-Span® and Flex-A-Seal® trademarks are
utilized to market the Company’s unique seals for floating roof tanks. The FastFroth® trademark is utilized to market the
Company’s unique industrial cleaning process. Our patented RS 1000 Tank Mixer controls sludge build-up in crude oil tanks
through resuspension. The Flexible Fluid Containment System patent relates to a flexible fluid containment system that
captures and contains flue leaking from pipe and valve connections. The Flex-A-Swivel patent refers to our unique pipe swivel
joint assembly. Our patent for Spacerless or Geocomposite Double Bottom for Storage Tanks relates to a replacement bottom
with leak detection and containment that allows for the retrofitting of an existing tank while minimizing the loss of capacity.
5
The patent for the Training Tank for Personnel Entry, Exit and Rescue relates to a training device that can be used to train
personnel on equipment that is made to simulate confined space scenarios.
The Company also holds a perpetual license to use various patents and technologies related to LNG storage tanks,
LIN/LOX storage tanks, LPG storage tanks and thermal vacuum chambers.
While the Company’s intellectual property is not its main business, we believe that the ability to use these patents and
technology enables us to expand our presence in the markets and minimizes the development costs typically associated with
organic growth.
Regulation
Health and Safety Regulations
Our operations are subject to regulation by the United States Occupational Safety and Health Administration (“OSHA”)
and Mine Safety and Health Administration (“MSHA”), and to regulation under state laws and by the Canadian Workers’
Compensation Board and its Workplace Health, Safety and Compensation Commission. Regulations promulgated by these
agencies require employers and independent contractors to implement work practices, medical surveillance systems and
personnel protection programs to protect employees from workplace hazards and exposure to hazardous chemicals and
materials. In recognition of the potential for accidents within various scopes of work, these agencies have enacted strict and
comprehensive safety regulations. The Company has established and consistently reinforces and monitors compliance with
comprehensive programs intended to insure that it complies with all applicable health and safety regulations to protect the
safety of its workers, subcontractors and customers. While the Company believes that it operates safely and prudently, there
can be no assurance that accidents will not occur or that the Company will not incur substantial liability in connection with the
operation of its businesses. In order to minimize the financial exposure resulting from potential accidents associated with the
Company's work, the Company maintains liability insurance to limit losses that could result from our work.
Environmental
The Company’s operations are subject to extensive and changing environmental laws and regulations. These laws and
regulations relate primarily to air and water pollutants and the management and disposal of hazardous materials. The Company
is exposed to potential liability for personal injury or property damage caused by any release, spill, exposure or other accident
involving such pollutants, substances or hazardous materials.
In order to limit costs incurred as a result of environmental exposure, the Company maintains contractor’s pollution
liability insurance that covers liability that may be incurred as a result of accidental releases of hazardous materials.
The Company believes that it is currently in compliance, in all material aspects, with all applicable environmental laws
and regulations. The Company does not expect any material charges in subsequent periods relating to environmental conditions
that currently exist and does not currently foresee any significant future capital spending relating to environmental matters.
6
Item 1A. Risk Factors
The following risk factors should be considered with the other information included in this Annual Report on Form 10-
K. As we operate in a continuously changing environment, other risk factors may emerge which could have a material
adverse effect on our results of operations, financial condition and cash flow.
Risk Factors Related to Our Business
Unsatisfactory safety performance may subject us to penalties, affect customer relationships, result in higher operating
costs, negatively impact employee morale and result in higher employee turnover.
Our projects are conducted at a variety of sites including construction sites and industrial facilities. With each location,
hazards are part of the day to day exposures that we must manage on a continuous basis to ensure our employees return home
from work the same way they arrived. We understand that everyone plays a role with safety and everyone can make a
difference with their active participation. With our proactive approach, our strategy is to identify the exposures and correct
them before they manifest into an incident whether that involves an injury, damage or destruction of property, plant and
equipment or environmental impact. We are intensely focused on maintaining a strong safety culture and continue our journey
to zero incidents.
Although we have taken what we believe are appropriate precautions to adequately train and equip our employees, we
have experienced serious accidents, including fatalities, in the past and may experience additional accidents in the future.
Serious accidents may subject us to penalties, civil litigation or criminal prosecution. Claims for damages to persons, including
claims for bodily injury or loss of life, could result in costs and liabilities, which could materially and adversely affect our
financial condition, results of operations or cash flows. Poor safety performance could also jeopardize our relationships with
our customers.
Demand for our products and services is cyclical and is vulnerable to the level of capital and maintenance spending of our
customers and to downturns in the industries and markets we serve, as well as conditions in the general economy.
The demand for our products and services depends upon the existence of construction and maintenance projects in the
downstream petroleum, power and other heavy industries in the United States and Canada. Therefore, it is likely that our
business will continue to be cyclical in nature and vulnerable to general downturns in the United States, Canadian and world
economies and changes in commodity prices, which could adversely affect the demand for our products and services.
The availability of engineering and construction projects is dependent upon economic conditions in the oil, gas, and
power industries, specifically, the level of capital expenditures on energy infrastructure. A prolonged period of sluggish
economic conditions in North America has had and may continue to have an adverse impact on the level of capital expenditures
of our customers and/or their ability to finance these expenditures. Our failure to obtain projects, the delay of project awards,
the cancellation of projects or delays in the execution of contracts may result in under-utilization of our resources, which could
adversely impact our revenue, operating results and cash flow. There are numerous factors beyond our control that influence
the level of maintenance and capital expenditures of our customers, including:
•
•
•
•
•
•
•
•
current or projected commodity prices, including oil, gas, power and mineral prices;
refining margins;
the demand for oil, gas and electricity;
the ability of oil, gas and power companies to generate, access and deploy capital;
exploration, production and transportation costs;
tax incentives, including those for alternative energy projects;
regulatory restraints on the rates that power companies may charge their customers; and
local, national and international political and economic conditions.
7
Our results of operations depend upon the award of new contracts and the timing of those awards.
Our revenues are derived primarily from contracts awarded on a project-by-project basis. Generally, it is difficult to
predict whether and when we will be awarded a new contract due to lengthy and complex bidding and selection processes,
changes in existing or forecasted market conditions, access to financing, governmental regulations, permitting and
environmental matters. Because our revenues are derived from contract awards, our results of operations and cash flows can
fluctuate materially from period to period.
The uncertainty associated with the timing of contract awards may reduce our short-term profitability as we balance our
current capacity with expectations of future contract awards. If an expected contract award is delayed or not received, we could
incur costs to maintain an idle workforce that may have a material adverse effect on our results of operations. Alternatively, we
may decide that our long-term interests are best served by reducing our workforce and incurring increased costs associated with
severance and termination benefits, which also could have a material adverse effect on our results of operations in the period
incurred. Reducing our workforce could also impact our results of operations if we are unable to adequately staff projects that
are awarded subsequent to a workforce reduction.
Acquisitions may result in significant transaction expenses, and unidentified liabilities and risks associated with entering
new markets. We may also be unable to profitably integrate and operate these businesses.
We may lack sufficient management, financial and other resources to successfully integrate future acquisitions, including
acquisitions in markets where we have not previously operated. Any future acquisitions may result in significant transaction
expenses, unexpected liabilities and other risks in addition to the integration and consolidation risks.
If we make any future acquisitions, we will likely assume liabilities of the acquired business or have exposure to
contingent liabilities that may not be adequately covered by insurance or indemnification, if any, from the former owners of the
acquired business. These potential liabilities could have a material adverse effect on our business.
We may need to raise additional capital in the future for working capital, capital expenditures and/or acquisitions, and we
may not be able to do so on favorable terms or at all, which would impair our ability to operate our business or achieve our
strategic plan.
To the extent that cash flow from operations, together with available borrowings under our credit facility, are insufficient
to make future investments, acquisitions or provide needed working capital, we may require additional financing from other
sources. Our ability to obtain such additional financing in the future will depend in part upon prevailing capital market
conditions, as well as conditions in our business and our operating results; and those factors may affect our efforts to arrange
additional financing on terms that are satisfactory to us. If adequate funds are not available, or are not available on acceptable
terms, we may not be able to make future investments, take advantage of acquisitions or other opportunities, or respond to
competitive challenges.
We face substantial competition in each of our business segments, which may have a material adverse effect on our
business.
We face competition in all areas of our business from regional, national and international competitors. Our competitors
range from small, family-owned businesses to well-established, well-financed entities, both privately and publicly held,
including many major equipment manufacturers, large engineering and construction companies and specialty contractors. We
compete primarily on the basis of price, customer satisfaction, safety performance and programs, quality of our products and
services, and schedule. As a result, an increase in the level of competition in one or more markets may result in lower
operating margins than we have recently experienced.
Our backlog is subject to unexpected fluctuations, adjustments and cancellations and does not include the full value of our
long-term maintenance contracts, and therefore, may not be a reliable indicator of our future earnings.
Backlog may not be a reliable indicator of our future performance. We cannot guarantee that the revenue projected in our
backlog will be realized or profitable. Projects may remain in our backlog for an extended period of time. In addition, project
cancellations or scope adjustments may occur from time to time with respect to contracts included in our backlog that could
reduce the dollar amount of our backlog and the revenue and profits that we actually earn. Many of our contracts have
termination rights. Therefore, project adjustments may occur from time to time to contracts in our backlog.
8
The loss of one or more of our significant customers could adversely affect us.
One or more customers have in the past and may in the future contribute a material portion of our revenues in any one
year. Because these significant customers generally contract with us for specific projects or for specific periods of time, we
may lose these customers from year to year as the projects or maintenance contracts are completed. The loss of business from
any one of these customers could have a material adverse effect on our business or results of operations.
The terms of our contracts could expose us to unforeseen costs and costs not within our control, which may not be
recoverable and could adversely affect our results of operations and financial condition.
A significant amount of our work is performed under fixed price contracts. Under fixed-price contracts, we agree to
perform the contract for a fixed-price and, as a result, can improve our expected profit by superior execution, productivity,
workplace safety and other factors resulting in cost savings. However, we could incur cost overruns above the approved
contract price, which may not be recoverable. Under certain incentive fixed-price contracts, we may agree to share with a
customer a portion of any savings we generate while the customer agrees to bear a portion of any increased costs we may incur
up to a negotiated ceiling. To the extent costs exceed the negotiated ceiling price, we may be required to absorb some or all of
the cost overruns.
Fixed-price contract prices are established based largely upon estimates and assumptions relating to project scope and
specifications, personnel and productivity, material needs, and site conditions. These estimates and assumptions may prove
inaccurate or conditions may change due to factors out of our control, resulting in cost overruns, which we may be required to
absorb and which could have a material adverse effect on our business, financial condition and results of operations. In
addition, our profits from these contracts could decrease or we could experience losses if we incur difficulties in performing the
contracts or are unable to secure fixed-pricing commitments from our manufacturers, suppliers and subcontractors at the time
we enter into fixed-price contracts with our customers.
Under cost-plus and time-and-material contracts, we perform our services in return for payment of our agreed upon
reimbursable costs plus a profit. The profit component is typically expressed in the contract either as a percentage of the
reimbursable costs we actually incur or is factored into the rates we charge for labor or for the cost of equipment and materials,
if any, we are required to provide. Our profit could be negatively impacted if our actual costs exceed the estimated costs
utilized to establish the billing rates included in the contracts.
We may incur significant costs in providing services in excess of original project scope without having an approved change
order.
After commencement of a contract, we may perform, without the benefit of an approved change order from the customer,
additional services requested by the customer that were not contemplated in our contract price for various reasons, including
customer changes or incomplete or inaccurate engineering, changes in project specifications and other similar information
provided to us by the customer. Our construction contracts generally require the customer to compensate us for additional
work or expenses incurred under these circumstances.
A failure to obtain adequate compensation for these matters could require us to record in the current period an adjustment
to revenue and profit recognized in prior periods under the percentage-of-completion accounting method. Any such
adjustments, if substantial, could have a material adverse effect on our results of operations and financial condition, particularly
for the period in which such adjustments are made. We can provide no assurance that we will be successful in obtaining,
through negotiation, arbitration, litigation or otherwise, approved change orders in an amount adequate to compensate us for
our additional work or expenses.
Our profitability could be negatively impacted if we are not able to maintain appropriate utilization of our workforce.
The extent to which we utilize our workforce affects our profitability. If we under utilize our workforce, our project gross
margins and overall profitability suffer in the short-term. If we over utilize our workforce, we may negatively impact safety,
employee satisfaction and project execution, which could result in a decline of future project awards. The utilization of our
workforce is impacted by numerous factors including:
• our estimate of the headcount requirements for various operating units based upon our forecast of the demand for our
products and services;
• our ability to maintain our talent base and manage attrition;
• productivity;
9
• our ability to schedule our portfolio of projects to efficiently utilize our employees and minimize downtime between
project assignments; and
• our need to invest time and resources into functions such as training, business development, employee recruiting, and
sales that are not chargeable to customer projects.
Our use of percentage-of-completion accounting for fixed-price contracts and our reporting of profits for cost-plus
contracts prior to contract completion could result in a reduction or elimination of previously reported profits.
Our revenues are recognized using the percentage-of-completion method of accounting. Under percentage-of-completion
accounting, contract revenues and earnings are recognized ratably over the contract term based on the proportion of actual costs
incurred to total estimated costs. In addition, some contracts contain penalty provisions for failure to achieve certain
milestones, schedules or performance standards. We review our estimates of contract revenues, costs and profitability on a
monthly basis. As a result, we may adjust our estimates on one or more occasions as a result of changes in cost estimates,
change orders to the original contract, or claims against the customer for increased costs incurred by us due to customer-
induced delays and other factors.
If estimates of costs to complete fixed price contracts indicate a loss, a provision is made through a contract write-down
for the total loss anticipated in the period the loss is determined. Contract profit estimates are also adjusted, on a percentage of
completion basis, in the fiscal period in which it is determined that an adjustment is required. No restatements are made to
prior periods. Further, a number of our contracts contain various cost and performance incentives and penalties that impact the
earnings we realize from our contracts, and adjustments related to these incentives and penalties are recorded on a percentage
of completion basis in the period when estimable and probable.
As a result of the requirements of the percentage-of-completion method of accounting, the possibility exists that we could
have estimated and reported a profit on a contract over several prior periods and later determine that all or a portion of such
previously estimated and reported profits were overstated. If this occurs, the full aggregate amount of the overstatement will be
reported for the period in which such determination is made.
We are exposed to credit risk from customers. If we experience delays and/or defaults in customer payments, we could
suffer liquidity problems or we could be unable to recover amounts owed to us.
Under the terms of our contracts, at times we commit resources to customer projects prior to receiving payments from
customers in amounts sufficient to cover expenditures on these projects as they are incurred. Many of our fixed-price or cost-
plus contracts require us to satisfy specified progress milestones or performance standards in order to receive a payment.
Under these types of arrangements, we may incur significant costs for labor, equipment and supplies prior to receipt of
payment. If the customer fails or refuses to pay us for any reason, there is no assurance we will be able to collect amounts due
to us for costs previously incurred. In some cases, we may find it necessary to terminate subcontracts with suppliers engaged
by us to assist in performing a contract, and we may incur costs or penalties for canceling our commitments to them. Delays in
customer payments require an investment in working capital. If we are unable to collect amounts owed to us under our
contracts, we may be required to record a charge against previously recognized earnings related to the project, and our liquidity,
financial condition and results of operations could be adversely affected.
Actual results could differ from the estimates and assumptions that we use to prepare our financial statements.
To prepare financial statements in conformity with generally accepted accounting principles, management is required to
make estimates and assumptions, as of the date of the financial statements, which affect the reported values of assets, liabilities,
revenues and expenses and disclosures of contingent assets and liabilities. Areas requiring significant estimation by our
management include:
•
contract costs and application of percentage-of-completion accounting;
• provisions for uncollectible receivables from customers for invoiced amounts;
•
the amount and collectability of unapproved change orders and claims against customers;
• provisions for income taxes and related valuation allowances;
•
recoverability of goodwill and intangible assets;
• valuation of assets acquired and liabilities assumed in connection with business combinations; and
10
•
accruals for estimated liabilities, including litigation and insurance reserves.
Our actual results could materially differ from these estimates.
An inability to attract and retain qualified personnel, and in particular, engineers, project managers, and skilled craft
workers, could impact our ability to perform on our contracts, which could harm our business and impair our future
revenues and profitability.
Our ability to attract and retain qualified engineers, project managers, skilled craftsmen and other experienced
professionals in accordance with our needs is an important factor in our ability to maintain profitability and grow our business.
The market for these professionals is competitive, particularly during periods of economic growth when the supply is limited.
We cannot provide any assurance that we will be successful in our efforts to retain or attract qualified personnel when needed.
Therefore, when we anticipate or experience growing demand for our services, we may incur additional cost to maintain a
professional staff in excess of our current contract needs in an effort to have sufficient qualified personnel available to address
this anticipated demand. If we do incur additional compensation and benefit costs, our customer contracts may not allow us to
pass through these costs.
Competent and experienced engineers, project managers, and craft workers are especially critical to the profitable
performance of our contracts, particularly on our fixed-price contracts where superior design and execution of the project can
result in profits greater than originally estimated or where inferior design and project execution can reduce or eliminate
estimated profits or even result in a loss.
Our project managers are involved in most aspects of contracting and contract execution including:
•
supervising the bidding process, including providing estimates of significant cost components, such as material and
equipment needs, and the size, productivity and composition of the workforce;
• negotiating contracts;
•
•
supervising project performance, including performance by our employees, subcontractors and other third-party
suppliers and vendors;
estimating costs for completion of contracts that is used to estimate amounts that can be reported as revenues and
earnings on the contract under the percentage-of-completion method of accounting;
• negotiating requests for change orders and the final terms of approved change orders; and
• determining and documenting claims by us for increased costs incurred due to the failure of customers, subcontractors
and other third-party suppliers of equipment and materials to perform on a timely basis and in accordance with
contract terms.
Work stoppages and other labor problems could adversely affect us.
Some of our employees are represented by labor unions. The Company has in excess of 50 collective bargaining
agreements with various labor unions. The most significant agreements include the following:
Trade
Boilermaker
Boilermaker
Electrician
Electrician
Electrician
Laborers
Iron Workers
Local #
28
13
351
102
164
81
395
Location
Bayonne, N.J.
Philadelphia, PA.
Hammonton, N.J.
Parsippany, N.J.
Paramus, N.J.
Gary, IN.
Gary, IN
Expires
12/31/2015
12/31/2015
09/27/2016
05/31/2015
05/31/2017
05/31/2017
05/31/2015
The Company is also working under a number of other collective bargaining agreements that cover a smaller number of
employees. These agreements expire within the next five years. For those agreements with upcoming expiration dates, the
Company is currently negotiating renewals and expects that the renewals will be successfully completed. To date, the
Company has not experienced any work stoppages or other significant labor problems in connection with its collective
11
bargaining agreements. A lengthy strike or other work stoppage on any of our projects could have a material adverse effect on
our business and results of operations due to an inability to complete contracted projects in a timely manner.
We contribute to multiemployer plans that could result in liabilities to us if those plans are terminated or if we withdraw
from those plans.
We contribute to several multiemployer pension plans for employees covered by collective bargaining agreements. These
plans are not administered by us and contributions are determined in accordance with provisions of negotiated labor contracts.
The Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of
1980, imposes certain liabilities upon employers who are contributors to a multiemployer plan in the event of the employer’s
withdrawal from, or upon termination of, such plan. If we terminate or withdraw from a multiemployer pension plan, we could
be required to make significant cash contributions to fund that plan's unfunded vested benefit, which could materially and
adversely affect our financial condition and results of operations; however, we are not currently able to determine the net assets
and actuarial present value of the multiemployer pension plans’ unfunded vested benefits allocable to us, if any, and we are not
presently aware of the amounts, if any, for which we may be contingently liable if we were to withdraw from any of these
plans. In addition, if the funding level of any of these multiemployer plans becomes classified as “critical status” under the
Pension Protection Act of 2006, we could be required to make significant additional contributions to those plans.
Future events, including those associated with our strategic plan, could negatively affect our liquidity position.
We can provide no assurance that we will have sufficient cash from operations or the credit capacity to meet all of our
future cash needs should we encounter significant working capital requirements or incur significant acquisition costs.
Insufficient cash from operations, significant working capital requirements, and contract disputes have in the past, and could in
the future, reduce availability under our credit facility.
We are involved, and are likely to continue to be involved in legal proceedings, which will increase our costs and, if
adversely determined, could have a material effect on our financial condition, results of operations, cash flows and liquidity.
We are currently a defendant in legal proceedings arising from the operation of our business, and it is reasonable to
expect that we would be named in future actions. Many of the actions against us arise out of the normal course of performing
services on project sites, and include workers’ compensation claims, personal injury claims and contract disputes with our
customers. From time to time, we are also named as a defendant for actions involving the violation of federal and state labor
laws related to employment practices, wages and benefits. We may also be a plaintiff in legal proceedings against customers
seeking to recover payment of contractual amounts due to us as well as claims for increased costs incurred by us resulting from,
among other things, services performed by us at the request of a customer that are in excess of original project scope that are
later disputed by the customer and customer-caused delays in our contract performance.
We maintain insurance against operating hazards in amounts that we believe are customary in our industry. However, our
insurance policies include deductibles and certain coverage exclusions, so we cannot provide assurance that we are adequately
insured against all of the risks associated with the conduct of our business. A successful claim brought against us in excess of,
or outside of, our insurance coverage could have a material adverse effect on our financial condition, results of operations, cash
flows and liquidity.
Litigation, regardless of its outcome, is expensive, typically diverts the efforts of our management away from operations
for varying periods of time, and can disrupt or otherwise adversely impact our relationships with current or potential customers,
subcontractors and suppliers. Payment and claim disputes with customers may also cause us to incur increased interest costs
resulting from incurring indebtedness under our revolving line of credit or receiving less interest income resulting from fewer
funds invested due to the failure to receive payment for disputed claims and accounts.
Our projects expose us to potential professional liability, product liability, warranty and other claims, which could be
expensive, damage our reputation and harm our business. We may not be able to obtain or maintain adequate insurance to
cover these claims.
We perform construction and maintenance services at large industrial facilities where accidents or system failures can be
disastrous and costly. Any catastrophic occurrence in excess of our insurance limits at locations engineered or constructed by
us or where our products are installed or services performed could result in significant professional liability, product liability,
warranty and other claims against us by our customers, including claims for cost overruns and the failure of the project to meet
contractually specified milestones or performance standards. Further, the rendering of our services on these projects could
expose us to risks and claims by third parties and governmental agencies for personal injuries, property damage and
environmental matters, among others. Any claim, regardless of its merit or eventual outcome, could result in substantial costs,
12
divert management’s attention and create negative publicity, particularly for claims relating to environmental matters where the
amount of the claim could be extremely large. We may not be able to or may choose not to obtain or maintain insurance
coverage for the types of claims described above. If we are unable to obtain insurance at an acceptable cost or otherwise
protect against the claims described above, we will be exposed to significant liabilities, which may materially and adversely
affect our financial condition and results of operations.
Employee, subcontractor or partner misconduct or our overall failure to comply with laws or regulations could harm our
reputation, damage our relationships with customers, reduce our revenues and profits, and subject us to criminal and civil
enforcement actions.
Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by one of our
employees, subcontractors or partners could have a significant negative impact on our business and reputation. Such
misconduct could include the failure to comply with safety standards, laws and regulations, customer requirements, regulations
pertaining to the internal controls over financial reporting, environmental laws and any other applicable laws or
regulations. The precautions we take to prevent and detect these activities may not be effective, since our internal controls are
subject to inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate
because of changed conditions, and fraud.
Our failure to comply with applicable laws or regulations or acts of misconduct could subject us to fines and penalties,
harm our reputation, damage our relationships with customers, reduce our revenues and profits and subject us to criminal and
civil enforcement actions.
We rely on internally and externally developed software applications and systems to support critical functions including
project management, estimating, scheduling, human resources, accounting, and financial reporting. Any sudden loss,
disruption or unexpected costs to maintain these systems could significantly increase our operational expense as well as
disrupt the management of our business operations.
We rely on various software systems to conduct our critical operating and administrative functions. We depend on our
software vendors to provide long-term software maintenance support for our information systems. Software vendors may
decide to discontinue further development, integration or long-term software maintenance support for our information systems,
in which case we may need to abandon one or more of our current information systems and migrate some or all of our project
management, human resources, estimating, scheduling, accounting and financial information to other systems, thus increasing
our operational expense as well as disrupting the management of our business operations.
Our business may be affected by difficult work sites and environments, which may adversely affect our overall business.
We perform our work under a variety of conditions, including, but not limited to, difficult terrain, difficult site conditions
and busy urban centers where delivery of materials and availability of labor may be impacted. Performing work under these
conditions can slow our progress, potentially causing us to incur contractual liability to our customers. These difficult
conditions may also cause us to incur additional, unanticipated costs that we might not be able to pass on to our customers.
We are susceptible to adverse weather conditions, which may harm our business and financial results.
Our business may be adversely affected by severe weather in areas where we have significant operations. Repercussions
of severe weather conditions may include:
•
•
•
curtailment of services;
suspension of operations;
inability to meet performance schedules in accordance with contracts;
• weather related damage to our facilities;
• disruption of information systems;
•
•
inability to receive machinery, equipment and materials at jobsites; and
loss of productivity.
13
Environmental factors and changes in laws and regulations could increase our costs and liabilities.
Our operations are subject to environmental laws and regulations, including those concerning emissions into the air;
discharges into waterways; generation, storage, handling, treatment and disposal of hazardous material and wastes; and health
and safety.
Our projects often involve highly regulated materials, including hazardous wastes. Environmental laws and regulations
generally impose limitations and standards for regulated materials and require us to obtain permits and comply with various
other requirements. The improper characterization, handling, or disposal of regulated materials or any other failure by us to
comply with federal, state and local environmental laws and regulations or associated environmental permits could subject us
to the assessment of administrative, civil and criminal penalties, the imposition of investigatory or remedial obligations, or the
issuance of injunctions that could restrict or prevent our ability to operate our business and complete contracted projects.
In addition, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”),
and comparable state laws, we may be required to investigate and remediate regulated materials. CERCLA and the comparable
state laws typically impose liability without regard to whether a company knew of or caused the release, and liability for the
entire cost of clean-up can be imposed upon any responsible party.
We are subject to numerous other laws and regulations including those related to business registrations and licenses,
environment, workplace, employment, health and safety. These laws and regulations are complex, change frequently and could
become more stringent in the future. It is impossible to predict the effect on us of any future changes to these laws and
regulations. We can provide no absolute assurance that our operations will continue to comply with future laws and regulations
or that the costs to comply with these laws and regulations and/or a failure to comply with these laws will not significantly
adversely affect our business, financial condition and results of operations.
We recorded an intangible asset impairment charge of $0.3 million in fiscal 2013 related to an acquisition. Earnings for
future periods may be affected by additional impairment charges.
Because we have grown in part through acquisitions, goodwill and other acquired intangible assets represent a substantial
portion of our assets. We perform annual goodwill and intangible asset impairment reviews in the fourth quarter of every fiscal
year. In addition, we perform an impairment review whenever events or changes in circumstances indicate the carrying value
of goodwill or an intangible or fixed asset may not be recoverable. At some future date, we may determine that significant
impairment has occurred, which could require us to write off an additional portion of our assets and could adversely affect our
financial condition or results of operations. As of June 30, 2014 the Company had $27.2 million of amortizing intangible assets
and $71.3 million of non amortizing intangibles including goodwill representing 4.8% and 12.5% of the Company's total
assets, respectively.
Our credit facility imposes restrictions that may limit business alternatives.
Our credit facility contains covenants that restrict or limit our ability to incur additional debt, acquire or dispose of assets,
repurchase equity, or make certain distributions, including dividends. In addition, our credit facility requires that we comply
with a number of financial covenants. These covenants and restrictions may impact our ability to effectively execute operating
and strategic plans and our operating performance may not be sufficient to comply with the required covenants.
Our failure to comply with one or more of the covenants in our credit facility could result in an event of default. We can
provide no assurance that a default could be remedied, or that our creditors would grant a waiver or amend the terms of the
credit facility. If an event of default occurs, our lenders could elect to declare all amounts outstanding under the facility to be
immediately due and payable, terminate all commitments, refuse to extend further credit, and require us to provide cash to
collateralize any outstanding letters of credit. If an event of default occurs and the lenders under the credit facility accelerate
the maturity of any loans or other debt outstanding, we may not have sufficient liquidity to repay amounts outstanding under
the existing agreement.
Risk Factors Related To The Acquisition of Kvaerner North American Construction ("KNAC")
We may not be able to successfully integrate our acquisition of KNAC, which could cause our business to suffer.
We may not be able to successfully complete integration of the operations, personnel and technology of KNAC. Because
of the size and complexity of KNAC’s business, if the remaining integration is not managed successfully, we may experience
interruptions in our business activities, a decrease in the quality of our services, a deterioration in our employee and customer
relationships, increased costs of integration and harm to our reputation, all of which could have a material adverse effect on our
business, financial condition and results of operations. The integration of KNAC with our operations will require significant
14
attention from management, which may decrease the time that management will have to serve existing customers, attract new
customers and develop new services and strategies. We may also experience difficulties in combining corporate cultures,
maintaining employee morale and retaining key employees. The continuing integration of KNAC may also impose substantial
demands on our operations or other projects. We will have to actively strive to demonstrate to our existing customers that the
acquisition has not resulted in adverse changes in our standards or business focus. The integration of KNAC will also involve a
significant capital commitment, and the return that we achieve on any capital invested may be less than the return achieved on
our other projects or investments. There will be challenges in consolidating and rationalizing information technology platforms
and administrative infrastructures. In addition, any delays or increased costs of integrating the companies could adversely affect
our operations, financial results and liquidity.
We may not realize the growth opportunities, operating margins and synergies that are anticipated from our acquisition of
KNAC.
The benefits we expect to achieve as a result of our acquisition of KNAC will depend, in part, on our ability to realize the
anticipated growth opportunities, operating margins and synergies. Our success in realizing these growth opportunities,
operating margins and synergies, and the timing of this realization, depends on the successful integration of KNAC’s business
and operations with our business and operations. Even if we are able to integrate our business with KNAC’s business
successfully, this integration may not result in the realization of the full benefits of the growth opportunities, operating margins
and synergies we currently expect from this integration within the anticipated time frame or at all. Accordingly, the benefits
from the acquisition may be offset by costs incurred or delays in integrating the companies, which could cause our revenue
assumptions and operating margin to be inaccurate.
The acquisition may expose us to unidentified liabilities.
As a result of the acquisition, we acquired KNAC subject to certain of its liabilities. If there are unknown KNAC
obligations, our business could be materially and adversely affected. We may learn additional information about KNAC’s
business that adversely affects us, such as unknown liabilities, issues that could affect our ability to comply with the Sarbanes-
Oxley Act or issues that could affect our ability to comply with other applicable laws. As a result, we cannot assure that the
acquisition of KNAC will be successful or will not, in fact, harm our business. Among other things, if KNAC’s liabilities are
greater than expected, or if there are material obligations of which we were not aware our business could be materially and
adversely affected. If we become responsible for liabilities not covered by indemnification rights or substantially in excess of
amounts covered through any indemnification rights, we could suffer severe consequences that would substantially reduce our
revenues, earnings and cash flows.
The steel industry is cyclical and sensitive to general economic conditions, which could have a material adverse effect on
our operating results and financial condition.
A significant percentage of KNAC’s revenues are derived from the steel industry. Demand for steel products is cyclical in
nature and sensitive to general economic conditions. The timing and magnitude of the cycles in the markets in which our
customers’ products are used, including automobiles and residential construction, are difficult to predict. The cyclical nature of
our customers’ operations tends to reflect and be amplified by changes in economic conditions, both domestically and
internationally, supply/demand imbalances and foreign currency exchange fluctuations. Economic downturns or a prolonged
period of slow growth in the U.S. and foreign markets or any of the industries in which our steel industry customers operate
could have a material adverse effect on our results of operations, financial condition and cash flows.
Increases in imports of foreign steel into the U.S. may reduce our customers’ profitability and capital spending plans.
Economic expansion in China and other countries has affected the supply and price of steel products. Expansions and
contractions in these economies can significantly affect the price of steel and of finished steel products. Additionally, in a
number of foreign countries, such as China, steel producers are generally government-owned and may therefore make
production decisions based on political or other factors that do not reflect market conditions. Disruptions in foreign markets
from excess steel production may encourage importers to target the U.S. with excess capacity at aggressive prices, and existing
trade laws and regulations may be inadequate to prevent unfair trade practices, which could have a material adverse effect on
our steel industry customers. Although trade regulations restrict the importation of certain products, if foreign steel production
significantly exceeds consumption in those countries, imports of steel products into the U.S. could increase, resulting in lower
volumes and selling prices for our customers’ steel products, which could result in a decline in the maintenance and
construction work we provide to these customers.
15
Risk Factors Related to Our Common Stock
Our common stock, which is listed on the NASDAQ Global Select Market, has experienced significant price and volume
fluctuations. These fluctuations could continue in the future, and our stockholders may not be able to resell their shares of
common stock at or above the purchase price paid.
The market price of our common stock may change significantly in response to various factors and events beyond our
control, including the following:
•
the risk factors described in this Item 1A;
• general conditions in our customers’ industries;
• general conditions in the security markets.
•
•
•
the significant concentration of ownership of our common stock in the hands of a small number of institutional
investors;
a shortfall in operating revenue or net income from that expected by securities analysts and investors; and
changes in securities analysts’ estimates of our financial performance or the financial performance of our competitors
or companies in our industry.
Some companies that have volatile market prices for their securities have been subject to security class action suits filed
against them. If a suit were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion
of our management’s attention and resources. This could have a material adverse effect on our business, results of operations
and financial condition.
Future sales of our common stock may depress our stock price.
Sales of a substantial number of shares of our common stock in the public market or otherwise, either by us, a member of
management or a major stockholder, or the perception that these sales could occur, could depress the market price of our
common stock and impair our ability to raise capital through the sale of additional equity securities.
We may issue additional equity securities, which could lead to dilution of our issued and outstanding stock.
The issuance of additional common stock, restricted stock units or securities convertible into our common stock could
result in dilution of the ownership interest held by existing stockholders. We are authorized to issue, without stockholder
approval 5,000,000 shares of preferred stock, par value $0.01 per share, in one or more series, which may give other
stockholders dividend, conversion, voting, and liquidation rights, among other rights, which may be superior to the rights of
holders of our common stock. In addition, we are authorized to issue, without stockholder approval, a significant number of
additional shares of our common stock and securities convertible into either common stock or preferred stock.
Item 1B. Unresolved Staff Comments
None
16
Item 2. Properties
The principal properties of Matrix Service Company are as follows:
Location
Tulsa, Oklahoma
Alton, Illinois
Bellingham, Washington
Description of Facility
Corporate headquarters and
regional office
Regional office
Regional office, fabrication facility
and warehouse
Canonsburg, Pennsylvania
Regional office
Catoosa, Oklahoma
Eddystone, Pennsylvania
Fabrication facility, regional offices
and warehouse
Regional office, fabrication facility
and warehouse
Hammond, Indiana
Regional office, fabrication facility,
and warehouse
Houston, Texas
Regional offices and warehouse
Orange, California
Fabrication facility, regional office
and warehouse
Parsippany, New Jersey
Regional office
Rahway, New Jersey
Regional office and warehouse
Segment
Corporate, Storage
Solutions
Oil Gas & Chemical
Oil Gas & Chemical,
Storage Solutions,
Industrial
Electrical
Infrastructure, Oil Gas
& Chemical, Industrial
Oil Gas & Chemical,
Storage Solutions,
Industrial
Electrical
Infrastructure, Oil Gas
& Chemical, Storage
Solutions, Industrial
Electrical
Infrastructure, Oil Gas
& Chemical, Industrial
Oil Gas & Chemical,
Storage Solutions
Oil Gas & Chemical,
Storage Solutions,
Industrial
Industrial
Electrical
Infrastructure, Oil Gas
& Chemical, Storage
Solutions, Industrial
Reserve, Louisiana
Sandy, Utah
Regional office and warehouse
Oil Gas & Chemical
Regional office and warehouse
Industrial
Sewickley, Pennsylvania
Regional office
Oil Gas & Chemical,
Storage Solutions,
Industrial
Temperance, Michigan
Tucson, Arizona
Regional office and warehouse
Storage Solutions
Regional office and warehouse
Industrial
Burlington, Ontario, Canada
Regional office
Edmonton, Alberta, Canada
Regional office
Leduc, Alberta, Canada
Regional office and warehouse
Saint John, New Brunswick, Canada
Regional office
Electrical
Infrastructure,
Industrial
Storage Solutions
Storage Solutions
Storage Solutions
Sarnia, Ontario, Canada
Regional office and warehouse
Storage Solutions
Interest
Leased
Leased
Owned
Leased
Owned (1)
Leased
Leased
Leased &
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Owned
Leased
Leased
Leased
Owned
(1) Facilities were constructed by the Company on land acquired through a ground lease with renewal options extending until 2042.
In addition to the locations listed above, Matrix has temporary office facilities at numerous customer locations throughout
the United States and Canada.
17
Item 3. Legal Proceedings
We are a party to a number of legal proceedings. We believe that the nature and number of these proceedings are typical
for a company of our size engaged in our type of business and that none of these proceedings will result in a material effect on
our business, results of operations, financial condition, cash flows or liquidity.
Item 4. Mine Safety Disclosures
Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires
domestic mine operators to disclose violations and orders issued under the Federal Mine Safety and Health Act of 1977 (the
"Mine Act") by the federal Mine Safety and Health Administration. We do not act as owner of any mines, but as a result of our
performing services or construction at mine sites as an independent contractor, we may be considered an "operator" within the
meaning of the Mine Act.
Information concerning mine safety violations or other regulatory matters required to be disclosed in this annual report under
Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K is included in Exhibit 95.
18
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Price Range of Common Stock
Our common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbol “MTRX”.
The following table sets forth the high and low sale prices for our common stock as reported by NASDAQ for the periods
indicated:
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
Fiscal Year 2014
Low
High
15.50
19.62
18.76
24.43
24.10
34.41
28.35
37.21
Fiscal Year 2013
Low
High
10.10
$ 11.88
10.09
11.64
14.01
11.74
17.00
17.62
$
As of August 29, 2014, there were 25 holders of record of our common stock. The number of beneficial owners of our
common stock is substantially greater than the number of holders of record.
Dividend Policy
We have never paid cash dividends on our common stock, and the terms of our Credit Agreement limit the amount of
cash dividends we can pay. Under our Credit Agreement, we may declare and pay dividends on our capital stock during any
fiscal year up to an amount which, when added to all other dividends paid during such fiscal year, does not exceed 50% of our
cumulative net income for such fiscal year to such date. While we currently do not intend to pay cash dividends, any future
dividend payments will depend on our financial condition, capital requirements and earnings as well as other relevant factors.
Issuer Purchases of Equity Securities
Our Credit Agreement limits the Company's purchases of its equity securities to $25 million in any calendar year. The
table below sets forth the information with respect to purchases made by the Company of its common stock during the fourth
quarter of the fiscal year ended June 30, 2014.
April 1 to April 30, 2014
Share Repurchase Program (A)
Employee Transactions (B)
May 1 to May 31, 2014
Share Repurchase Program (A)
Employee Transactions (B)
June 1 to June 30, 2014
Share Repurchase Program (A)
Employee Transactions (B)
Total Number
of Shares
Purchased
Average Price
Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number of
Shares That May Yet
Be Purchased
Under the Plans
or Programs
—
—
—
3,228
—
—
—
—
—
$30.41
—
—
—
—
—
—
—
—
2,113,497
2,113,497
2,113,497
(A) Represents shares purchased under our stock buyback program approved by the Company's Board of Directors on November 6, 2012. The plan
expires on December 31, 2014.
(B) Represents shares withheld to satisfy the employee’s tax withholding obligation that is incurred upon the vesting of deferred shares granted under the
Company’s stock incentive plans.
19
Item 6. Selected Financial Data
Selected Financial Data
(In thousands, except percentages and per share data)
Revenues
Gross profit
Gross margin %
Selling, general and administrative expenses
Selling, general and administrative %
Operating income
Net income
Earnings per share - basic
Earnings per share-diluted
Working capital
Total assets
Long-term debt
Capital expenditures
Cash flows provided by operations
Backlog
Twelve Months Ended
June 30,
2014
$ 1,263,089
136,473
June 30,
2013
$ 892,574
94,702
June 30,
2012
$ 739,046
79,618
June 30,
2011
$ 627,052
74,914
June 30,
2010
$ 550,814
52,922
10.8 %
10.6 %
10.8 %
11.9 %
9.6 %
77,866
57,988
47,983
44,014
45,169
6.2 %
6.5 %
6.5 %
7.0 %
8.2 %
58,607
36,877
1.36
1.33
105,687
568,932
11,621
23,589
76,988
915,826
36,714
24,008
0.92
0.91
131,908
409,978
—
23,231
57,084
626,737
31,635
17,188
0.66
0.65
124,553
323,135
—
13,534
2,941
497,452
30,900
18,982
0.72
0.71
115,374
306,436
—
10,416
22,749
405,118
7,753
4,876
0.19
0.18
95,740
284,808
259
5,302
4,399
353,216
20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”). GAAP represents a comprehensive set of accounting and disclosure rules and requirements, the application
of which requires management judgments and estimates including, in certain circumstances, choices between acceptable GAAP
alternatives. The preparation of these consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at
the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base
our estimates on historical experience and various other assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from these estimates under different assumptions or conditions. Note 1- Summary of
Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Part II, Item 8 - Financial
Statements and Supplementary Data in this Annual Report on Form 10-K, contains a comprehensive summary of our
significant accounting policies. The following is a discussion of our most critical accounting policies, estimates, judgments and
uncertainties that are inherent in our application of GAAP.
CRITICAL ACCOUNTING ESTIMATES
Revenue Recognition
Matrix records profits on fixed-price contracts on a percentage-of-completion basis, primarily based on costs incurred to
date compared to the total estimated cost. The Company records revenue on cost-plus and time-and-material contracts on a
proportional performance basis as costs are incurred. Contracts in process are valued at cost plus accrued profits less billings
on uncompleted contracts. Contracts are generally considered substantially complete when field construction is completed.
The elapsed time from award of a contract to completion of performance may be in excess of one year. Matrix includes pass-
through revenue and costs on cost-plus contracts, which are customer-reimbursable materials, equipment and subcontractor
costs, when Matrix determines that it is responsible for the procurement and management of such cost components.
Matrix has numerous contracts that are in various stages of completion, which require estimates to determine the
appropriate cost and revenue recognition. The Company has a history of making reasonably dependable estimates of the extent
of progress towards completion, contract revenues and contract costs, and accordingly, does not believe significant fluctuations
are likely to materialize. However, current estimates may be revised as additional information becomes available. If estimates
of costs to complete fixed-price contracts indicate a loss, a provision is made through a contract write-down for the total loss
anticipated. A number of our contracts contain various cost and performance incentives and penalties that impact the earnings
we realize from our contracts. Adjustments related to these incentives and penalties are recorded in the period on a percentage
of completion basis when estimable and probable.
Indirect costs, such as salaries and benefits, supplies and tools, equipment costs and insurance costs, are charged to
projects based upon direct labor hours and overhead allocation rates per direct labor hour or a percentage of cost incurred.
Warranty costs are normally incurred prior to project completion and are charged to project costs as they are incurred.
Warranty costs incurred subsequent to project completion were not material for the periods presented. Overhead allocation
rates are established annually during the budgeting process and evaluated for accuracy throughout the year based upon actual
direct labor hours and actual costs incurred.
Change Orders and Claims
Change orders are modifications of an original contract that effectively change the existing provisions of the contract.
Change orders may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites
and period of completion of the work. Matrix or our clients may initiate change orders. The client's agreement to the terms of
change orders is, in many cases, reached prior to work commencing; however, sometimes circumstances require that work
progress prior to obtaining client agreement. Costs related to change orders are recognized as incurred. Revenues attributable
to change orders that are unapproved as to price or scope are recognized to the extent that costs have been incurred if the
amounts can be reliably estimated and their realization is probable. Revenues in excess of the costs attributable to change
orders that are unapproved as to price or scope are recognized only when realization is assured beyond a reasonable doubt.
Change orders that are unapproved as to both price and scope are evaluated as claims.
Claims are amounts in excess of the agreed contract price that we seek to collect from customers or others for delays,
errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or
21
other causes of anticipated additional costs incurred by us. Recognition of amounts as additional contract revenue related to
claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be
reliably estimated. We must determine if:
•
•
•
•
there is a legal basis for the claim;
the additional costs were caused by circumstances that were unforeseen by the Company and are not the result of
deficiencies in our performance;
the costs are identifiable or determinable and are reasonable in view of the work performed; and
the evidence supporting the claim is objective and verifiable.
If all of the these requirements are met, revenue from a claim is recorded only to the extent that we have incurred costs
relating to the claim.
As of June 30, 2014 and June 30, 2013, costs and estimated earnings in excess of billings on uncompleted contracts
included revenues for unapproved change orders and claims of $13.1 million and $9.1 million, respectively. Historically, our
collections for unapproved change orders and claims have approximated the amount of revenue recognized.
Loss Contingencies
Various legal actions, claims, and other contingencies arise in the normal course of our business. Contingencies are
recorded in the consolidated financial statements, or are otherwise disclosed, in accordance with ASC 450-20, “Loss
Contingencies”. Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and
estimable. We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes
known. We believe that any amounts exceeding our recorded accruals should not materially affect our financial position,
results of operations or liquidity. However, the results of litigation are inherently unpredictable and the possibility exists that
the ultimate resolution of one or more of these matters could result in a material effect on our financial position, results of
operations or liquidity.
Legal costs are expensed as incurred.
Insurance Reserves
We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses
through the use of deductibles, coverage limits and self-insured retentions. We establish reserves for claims using a
combination of actuarially determined estimates and management judgment on a case-by-case basis and update our evaluations
as further information becomes known. Judgments and assumptions, including the assumed losses for claims incurred but not
reported, are inherent in our reserve accruals; as a result, changes in assumptions or claims experience could result in changes
to these estimates in the future. If actual results of claim settlements are different than the amounts estimated we may be
exposed to gains or losses that could be significant. A hypothetical ten percent unfavorable change in our claim reserves at
June 30, 2014 would have reduced fiscal 2014 pretax income by $0.6 million.
Goodwill
Goodwill represents the excess of the purchase price of acquisitions over the acquisition date fair value of the net
identifiable tangible and intangible assets acquired. In accordance with current accounting guidance, goodwill is not amortized
and is tested at least annually for impairment at the reporting unit level.
We perform our annual analysis during the fourth quarter of each fiscal year and in any other period in which indicators
of impairment warrant additional analysis. Goodwill impairment reviews involve a two step process. Goodwill is first
evaluated for impairment by comparing management's estimate of the fair value of a reporting unit with its carrying value,
including goodwill.
Management utilizes a discounted cash flow analysis, referred to as an income approach, to determine the estimated fair
value of our reporting units. Significant judgments and assumptions including the discount rate, anticipated revenue growth rate
and gross margins, estimated operating and interest expense, and capital expenditures are inherent in these fair value estimates,
which are based on our operating and capital budgets and on our strategic plan. As a result, actual results may differ from the
estimates utilized in our income approach. 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 result of
these uncertainties, we utilize multiple scenarios and assign probabilities to each of the scenarios in the income approach.
22
We also consider market-based approaches to assess the fair value of our reporting units. We compare market multiples
from our public peer companies in the engineering and construction industry, as well as the combined carrying values of our
reporting units with market capitalization.
If the carrying value of our reporting unit is higher than its fair value, there is an indication that impairment may exist and
the second step must be performed to measure the amount of impairment. The amount of impairment is determined by
comparing the implied fair value of the reporting unit's goodwill to the carrying value of the goodwill calculated in the same
manner as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill is less than
its carrying value, we would record an impairment charge for the difference.
Although we do not anticipate a future impairment charge, certain events could occur that would adversely affect the
reported value of goodwill. Such events could include, but are not limited to, a change in economic or competitive conditions,
a significant change in the project plans of our customers, a deterioration in the economic condition of the customers and
industries we serve, and a material negative change in the relationships with one or more of our significant customers. If our
judgments and assumptions change as a result of the occurrence of any of these events or other events that we do not currently
anticipate, our expectations as to future results and our estimate of the implied value of one or more of our reporting units also
may change.
We performed our annual impairment test in the fourth quarter to determine whether an impairment existed 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 amount of headroom varies by reporting unit. Approximately 62% of our goodwill balance is
attributable to one reporting unit. This unit had headroom of 94%. We have four additional reporting units with goodwill
representing 13%, 8%, 6% and 6% of the total goodwill balance with headroom of 182%, 165%, 193% and 137%, respectively.
Our significant assumptions, including revenue growth rates, gross margins, unanticipated operating and interest expense
and other factors may change in light of changes in the economic and competitive environment in which we operate. Assuming
that all other components of our fair value estimate remain unchanged, a change in the following assumptions would have the
following effect on headroom:
•
•
•
if the growth rate of estimated revenue decreases by one percentage point, the headroom of the reporting units
referenced above would be reduced from 94%, 182%, 165%, 193% and 137% to 87%, 172%, 157%, 185% and 129%,
respectively;
if our estimate of gross margins decreases one percentage point, the headroom of the reporting units referenced above
would be reduced from 94%, 182%, 165%, 193% and 137% to 69%, 146%, 131%, 161% and 108%, respectively; and
if the applicable discount rate increases one percentage point, the headroom of the reporting units referenced above
would be reduced from 94%, 182%, 165%, 193% and 137% to 79%, 166%, 145%, 172% and 119%, respectively.
Other Intangible Assets
Intangible assets that have finite useful lives are amortized by the straight-line method over their useful lives ranging from
1 to 15 years. Intangible assets that have indefinite useful lives are not amortized but are tested at least annually for
impairment. Each reporting period, we evaluate the remaining useful lives of intangible assets not being amortized to
determine whether facts and circumstances continue to support an indefinite useful life and review both amortizing and non-
amortizing intangible assets for impairment indicators. In fiscal 2013, we reclassified an intangible asset from an indefinite-
lived intangible to a finite-lived intangible resulting in an impairment charge of $0.3 million.
Recently Issued Accounting Standards
Accounting Standards Update 2014-09 (Topic 606), Revenue from Contracts with Customers
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
No. 2014-09, "Revenue from Contracts with Customers." The standard outlines a single comprehensive model for entities to
use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance,
including industry-specific guidance. 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.” In applying the revenue model to contracts within its scope, an entity:
• Identifies the contract(s) with a customer (step 1).
• Identifies the performance obligations in the contract (step 2).
• Determines the transaction price (step 3).
• Allocates the transaction price to the performance obligations in the contract (step 4).
23
• Recognizes revenue when (or as) the entity satisfies a performance obligation (step 5).
The ASU also requires entities to disclose both quantitative and qualitative information that enables users of financial
statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with
customers. The ASU’s disclosure requirements are significantly more comprehensive than those in existing revenue standards.
The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting
Standards Codification ("ASC"). For public entities, the ASU is effective for annual reporting periods (including interim
reporting periods within those periods) beginning after December 15, 2016. Early application is not permitted. We expect to
adopt this standard in fiscal 2018 and are currently evaluating its expected impact on our financial statements.
Accounting Standards Update 2014- 12 (Topic 718), Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging
Issues Task Force "EITF")
On June 19, 2014, the FASB issued ASU 2014-12, "Accounting for Share-Based Payments When the Terms of an
Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB
Emerging Issues Task Force)"in response to the EITF consensus on Issue 13-D. The ASU clarifies that entities should treat
performance targets that can be met after the requisite service period of a share-based payment award as performance
conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date
without taking into account the effect of the performance target) related to an award for which transfer to the employee is
contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met.
The ASU does not contain any new disclosure requirements. For all entities, this standard is effective for reporting periods
beginning after December 15, 2015. Early adoption is permitted. We expect to adopt this standard in fiscal 2016 and do not
expect the adoption of this standard to have a material impact on our consolidated financial statements.
Accounting Standards Update 2014-08 (Topics 205 and 360), Presentation of Financial Statements (Topic 205) and
Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components
of an Entity
On April 10, 2014, the FASB issued ASU 2014-08, " Reporting Discontinued Operations and Disclosures of Disposals
of Components of an Entity" which amends the definition of a discontinued operation in ASC 205-20 and requires entities to
provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued-
operations criteria. The FASB issued the ASU to provide more decision-useful information and to make it more difficult for a
disposal transaction to qualify as a discontinued operation (since the FASB believes that too many disposal transactions were
qualifying as discontinued operations under the old definition). Under the previous guidance in ASC 205-20-45-1, the results of
operations of a component of an entity were classified as a discontinued operation if all of the following conditions were met:
• "The component “has been disposed of or is classified as held for sale.”
• “The operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity
as a result of the disposal transaction.”
• “The entity will not have any significant continuing involvement in the operations of the component after the disposal
transaction.”
The new guidance eliminates the second and third criteria above and instead requires discontinued operations treatment for
disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an
entity’s operations or financial results. The ASU also expands the scope of ASC 205-20 to disposals of equity method
investments and businesses that, upon initial acquisition, qualify as held for sale.The ASU is effective prospectively for all
disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale
in periods beginning on or after December 15, 2014. Early adoption is permitted. We expect to adopt this standard in fiscal
2015 and do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
24
Results of Operations
Overview
We operate our business through four reportable segments: Electrical Infrastructure, Oil Gas & Chemical, Storage
Solutions, and Industrial.
The Electrical Infrastructure segment primarily encompasses construction and maintenance services to a variety of power
generation facilities, such as combined cycle plants, natural gas fired power stations, and renewable energy installations. We
also provide high voltage services to investor owned utilities, including construction of new substations, upgrades of existing
substations, short-run transmission line installations, distribution upgrades and maintenance, and storm restoration services.
The Oil Gas & Chemical segment includes our traditional turnaround activities, plant maintenance services and
construction in the downstream petroleum industry. Another key offering is industrial cleaning services, which include
hydroblasting, hydroexcavating, chemical cleaning and vacuum services. We also perform work in the petrochemical, natural
gas, gas processing and compression, and upstream petroleum markets.
The Storage Solutions segment includes new construction of crude and refined products ASTs, as well as planned and
emergency maintenance services. Also included in the Storage Solutions segment is work related to specialty storage tanks
including LNG, liquid nitrogen/liquid oxygen LIN/LOX, LPG tanks and other specialty vessels including spheres. We also
offer aboveground storage tank products including floating roof seals. Finally, the Storage Solutions segment includes balance
of plant work in storage terminals and tank farms.
The Industrial segment includes construction and maintenance work in the iron and steel and mining and minerals
industries, bulk material handling and fertilizer production facilities, as well as work for clients in other industrial markets.
The majority of the work for all segments is performed in the United States, with 9.0% of revenues generated in Canada
during fiscal 2014, 8.7% in fiscal 2013 and 8.5% in fiscal 2012. Significant period to period changes in revenues, gross profits
and operating results are discussed below on a consolidated basis and for each segment.
25
Fiscal Year 2014
Consolidated revenues
Gross profit
Selling, general and administrative expenses
Operating income
Fiscal Year 2013
Consolidated revenues
Gross profit
Selling, general and administrative expenses
Operating income (loss)
Fiscal Year 2012
Consolidated revenues
Gross profit
Selling, general and administrative expenses
Operating income (loss)
Variances Fiscal Year 2014 to Fiscal Year 2013
Increase/(Decrease)
Consolidated revenues
Gross profit
Selling, general and administrative expenses
Operating income
Variances Fiscal Year 2013 to Fiscal Year 2012
Increase/(Decrease)
Consolidated revenues
Gross profit
Selling, general and administrative expenses
Operating income
$
$
$
Matrix Service Company
Results of Operations
(In thousands)
Electrical
Infrastructure
Oil Gas &
Chemical
Storage
Solutions
Industrial
Total
$
205,570 $
239,690 $
610,896 $
20,629
12,926
7,703
26,912
16,973
9,939
68,448
34,138
34,310
206,933 $
20,484
13,829
6,655
1,263,089
136,473
77,866
58,607
$
171,204 $
273,848 $
393,201 $
21,754
10,569
11,185
32,879
17,464
15,415
37,455
25,551
11,904
135,086 $
16,676
9,067
7,609
205,823 $
20,070
11,936
8,134
378,154 $
42,393
24,900
17,493
54,321 $
2,614
4,404
(1,790 )
19,983 $
479
2,080
(1,601 )
892,574
94,702
57,988
36,714
739,046
79,618
47,983
31,635
370,515
41,771
19,878
21,893
153,528
15,084
10,005
5,079
34,366 $
(1,125)
2,357
(3,482)
(34,158) $
(5,967)
(491 )
(5,476)
217,695 $
30,993
8,587
22,406
152,612 $
17,870
9,425
8,445
36,118 $
5,078
1,502
3,576
68,025 $
12,809
5,528
7,281
15,047 $
(4,938)
651
(5,589)
34,338 $
2,135
2,324
(189 )
26
Fiscal 2014 Versus Fiscal 2013
Consolidated
Consolidated revenues were $1.263 billion in fiscal 2014, an increase of $370.6 million, or 41.5%, from consolidated
revenues of $892.6 million in fiscal 2013. As discussed in Note 2 - Acquisitions, the Company acquired Kvaerner North
American Construction, which we refer to as Matrix NAC, near the end of second quarter of fiscal 2014. Matrix NAC revenues
totaled $154.8 million in fiscal 2014. The remaining revenue increase of $215.8 million was attributable to our existing
business. Consolidated revenues on a segment basis increased in the Storage Solutions, Industrial and Electrical Infrastructure
segments by $217.7 million, $152.6 million and $34.4 million respectively, partially offset by a decrease in the Oil Gas &
Chemical segment of $34.1 million.
Consolidated gross profit increased to $136.5 million in fiscal 2014 from $94.7 million in fiscal 2013. The increase of
$41.8 million, or 44.1%, was due to higher revenues and higher gross margins which increased to 10.8% in fiscal 2014
compared to 10.6% a year earlier.
Consolidated SG&A expenses were $77.9 million in fiscal 2014 compared to $58.0 million in the same period a year
earlier. As discussed in Note 2 - Acquisitions, the Company acquired Matrix NAC near the end of the second quarter of fiscal
2014. Therefore, SG&A includes two full quarters of Matrix NAC operational expenses and $2.0 million of acquisition related
fees. These expenses, along with higher incentive compensation costs and increased support costs related to higher business
volumes caused SG&A expense to increase by $19.9 million, or 34.3%. SG&A expense as a percentage of revenue was 6.2%
in fiscal 2014 compared to 6.5% in the prior year.
Net interest expense was $1.4 million in fiscal 2014 and $0.8 million in fiscal 2013.
Other expense was $0.5 million in fiscal 2014 compared to less than $0.1 million in fiscal 2013.
The effective tax rates for fiscal 2014 and fiscal 2013 were 35.1% and 33.2%, respectively. We completed a fiscal 2013
R&D study in the second quarter of fiscal 2014 resulting in a significantly higher credit than previously estimated, therefore,
we recorded a discrete positive adjustment of approximately $1.0 million in the second quarter of fiscal 2014. In addition, we
increased our estimate of the fiscal 2014 R&D credit resulting in an additional benefit of approximately $0.7 million. The prior
year effective tax rate was positively impacted by the effect of retroactive tax legislation enacted in the third quarter of fiscal
2013 and a change in estimate related to an available tax credit.
Electrical Infrastructure
Revenues for the Electrical Infrastructure segment increased $34.4 million, or 20.1%, to $205.6 million in fiscal 2014
compared to $171.2 million in the same period a year earlier. The increased revenue volume in fiscal 2014 was primarily due
to the inclusion of six months of Matrix NAC activity partially offset by lower business volume in our existing business. The
lower business volumes were due to lack of storm restoration services and lower high voltage work due to delays in customer
spending. Gross margins were 10.0% in fiscal 2014 compared to 12.7% in the same period a year earlier. Fiscal 2014 margins
were negatively affected by the mix of work leading to lower direct margins and higher unrecovered overhead costs. Fiscal
2013 margins were positively affected by storm restoration work.
Oil Gas & Chemical
Revenues for the Oil Gas & Chemical segment decreased to $239.7 million in fiscal 2014 compared to $273.8 million in
the same period a year earlier. The decrease of $34.1 million, or 12.5%, was primarily due to a lower level of capital
construction projects and turnaround work, partially offset by higher industrial cleaning work. Gross margins were 11.2% in
fiscal 2014 compared to 12.0% in fiscal 2013.
Storage Solutions
Revenues for the Storage Solutions segment increased to $610.9 million in fiscal 2014 compared to $393.2 million in the
same period a year earlier. The increase of $217.7 million, or 55.4%, was primarily due to higher levels of work in our
domestic and Canada aboveground storage tank business and significant terminal balance of plant work. Fiscal 2014 gross
margins were reduced by 1.6% to 11.2% due to a loss of $8.4 million on one project. The fiscal 2013 margins of 9.5%
included a project charge of $3.7 million. The overall improvement in gross margins was due to strong project execution in
fiscal 2014, particularly on certain key strategic projects.
27
Industrial
Revenues for the Industrial segment totaled $206.9 million in fiscal 2014 compared to $54.3 million in the same period a
year earlier. The increase of $152.6 million was primarily due to the inclusion of six months of Matrix NAC activity, a higher
level of mining and material handling work and ongoing work on a previously announced project for the engineering,
procurement and construction of specialty tanks in a nitrogen fertilizer complex. Gross margins were 9.9% in fiscal 2014
compared to 4.8% in the same period a year earlier. The improvement in gross margins is due to improved execution and a
higher recovery of construction overhead costs in the legacy business, partially offset by lower margins on low risk time and
materials iron and steel work.
Fiscal 2013 Versus Fiscal 2012
Consolidated
Consolidated revenues were $892.6 million in fiscal 2013, an increase of $153.6 million, or 20.8%, from consolidated
revenues of $739.0 million in fiscal 2012. The increase in consolidated revenues was a result of increases in all four segments:
Oil Gas & Chemical, Electrical Infrastructure, Industrial and Storage Solutions which increased $68.0 million, $36.1 million,
$34.3 million and $15.0 million, respectively.
Consolidated gross profit increased from $79.6 million in fiscal 2012 to $94.7 million in fiscal 2013. The increase of
$15.1 million, or 19.0%, was due to higher revenues, partially offset by lower gross margins which decreased to 10.6% in fiscal
2013 compared to 10.8% a year earlier.
Consolidated SG&A expenses were $58.0 million in fiscal 2013 compared to $48.0 million in the same period a year
earlier. The increase of $10.0 million, or 20.8%, was primarily related to our planned investments in the branding initiative,
strategic growth areas and related support functions coupled with a higher business volume. The Company also incurred a bad
debt charge of $0.7 million in fiscal 2013. SG&A expense as a percentage of revenue was 6.5% in both fiscal 2013 and fiscal
2012.
Net interest expense was $0.8 million in both fiscal 2013 and fiscal 2012.
The effective tax rates for fiscal 2013 and fiscal 2012 were 33.2% and 43.6%, respectively. The current year effective tax
rate was positively impacted by the effect of retroactive tax legislation enacted in the third quarter of fiscal 2013 and a change
in estimate related to an available tax credit. The fiscal 2012 effective tax rate was higher than the statutory rate due to
cumulative non-deductible expenses totaling $3.1 million related to deductibility limitations applying to certain items that had
previously been fully deducted, of which $2.1 million was related to prior fiscal years (fiscal 2009 to fiscal 2011). The fiscal
2012 effective tax rate was positively impacted by the release of a valuation allowance on foreign tax credit carryovers of $0.5
million.
Electrical Infrastructure
Revenues for the Electrical Infrastructure segment increased $36.1 million, or 26.7%, to $171.2 million in fiscal 2013
compared to $135.1 million in the same period a year earlier. The higher revenue was primarily due to an increase in high
voltage work related primarily to storm restoration services and higher transmission and distribution work in the Northeast
United States. Gross margins were 12.7% in fiscal 2013 compared to 12.3% in fiscal 2012. The improvement in gross margins
in fiscal 2013 is due to higher margins related to storm restoration work and the improved recovery of overhead costs caused by
a higher business volume, partially offset by lower direct margins related to other electrical work.
Oil Gas & Chemical
Revenues for the Oil Gas & Chemical segment increased to $273.8 million in fiscal 2013 compared to $205.8 million in
the same period a year earlier. The increase of $68.0 million, or 33.0%, was primarily due to a higher level of turnaround work,
geographic expansion of turnaround services, and capital construction projects. Gross margins were 12.0% in fiscal 2013
compared to 9.8% in fiscal 2012. The improvement in gross margins is primarily due to the favorable effect of the improved
recovery of overhead costs caused by a higher business volume and improved project execution.
Storage Solutions
Revenues for the Storage Solutions segment increased to $393.2 million in fiscal 2013 compared to $378.2 million in the
same period a year earlier. The increase of $15.0 million, or 4.0%, was primarily due to higher levels of work in Canada in our
aboveground storage tank business. Gross margins decreased from 11.2% in fiscal 2012 to 9.5% in the same period in the
28
current year. The lower margins in fiscal 2013 was primarily due to unrecovered overhead costs, a legal charge of $1.0 million
and lower direct margins caused primarily by a $3.7 million charge on one project.
Industrial
Revenues for the Industrial segment totaled $54.3 million in fiscal 2013 compared to $20.0 million in the same period a
year earlier. The increase of $34.3 million, or 172.0%, was primarily due to higher revenues in our mining and minerals
business. Gross margins were 4.8% in fiscal 2013 compared to 2.4% in fiscal 2012. Although negatively impacted by lower
than anticipated business ramp up, gross margins improved throughout fiscal 2013 as the volume of business increased. We
also incurred a $0.4 million project charge in fiscal 2013 for this segment. Fiscal 2012 and fiscal 2013 margins were negatively
impacted by startup costs related to entry into the bulk material handling and mining and minerals markets.
Non-GAAP Financial Measure
EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense,
income taxes, depreciation and amortization. We have presented EBITDA because it is used by the financial community as a
method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses.
We believe that the line item on our Consolidated Statements of Income entitled “Net Income” is the most directly comparable
GAAP measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should
not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. EBITDA, as we
calculate it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure is not
necessarily a measure of our ability to fund our cash needs. As EBITDA excludes certain financial information compared with
net income, the most directly comparable GAAP financial measure, users of this financial information should consider the type
of events and transactions that are excluded. Our non-GAAP performance measure, EBITDA, has certain material limitations
as follows:
•
•
•
It does not include interest expense. Because we have borrowed money to finance our operations, pay
commitment fees to maintain our credit facility, and incur fees to issue letters of credit under the credit facility,
interest expense is a necessary and ongoing part of our costs and has assisted us in generating revenue. Therefore,
any measure that excludes interest expense has material limitations.
It does not include income taxes. Because the payment of income taxes is a necessary and ongoing part of our
operations, any measure that excludes income taxes has material limitations.
It does not include depreciation or amortization expense. Because we use capital and intangible assets to generate
revenue, depreciation and amortization expense is a necessary element of our cost structure. Therefore, any
measure that excludes depreciation or amortization expense has material limitations.
A reconciliation of EBITDA to net income follows:
Net income
Interest expense
Provision for income taxes
Depreciation and amortization
EBITDA
Twelve Months Ended
June 30,
2014
June 30,
2013
(in thousands)
June 30,
2012
$
$
36,877 $
1,436
19,934
18,518
76,765 $
24,008 $
800
11,908
12,782
49,498 $
17,188
814
13,302
11,485
42,789
29
FINANCIAL CONDITION AND LIQUIDITY
Overview
We define liquidity as the ability to pay our liabilities as they become due, fund business operations and meet all
contractual or financial obligations. Our primary sources of liquidity in fiscal 2014 were cash on hand at the beginning of the
year, capacity under our credit facility, and cash generated from operations. Cash on hand at June 30, 2014 totaled $77.1
million and availability under the credit facility totaled $165.4 million, resulting in total liquidity of $242.5 million. The United
States dollar equivalent of Canadian deposits totaled $12.6 million and is included in our consolidated cash balance. We expect
to fund our operations for the next twelve months through the use of cash generated from operations, existing cash balances and
borrowings under our credit facility, as necessary.
Factors that routinely impact our short-term liquidity and that may impact our long-term liquidity include, but are not
limited to:
• Changes in costs and estimated earnings in excess of billings on uncompleted contracts and billings on uncompleted
contracts in excess of costs due to contract terms that determine the timing of billings to customers and the collection
of those billings
• Some cost plus and fixed price customer contracts are billed based on milestones which may require us to incur
significant expenditures prior to collections from our customers.
• Time and material contracts are normally billed in arrears. Therefore, we are routinely required to carry these
costs until they can be billed and collected.
• Some of our large construction projects may require significant retentions or security in the form of letters of
credit.
• Other changes in working capital
• Capital expenditures
Other factors that may impact both short and long-term liquidity include:
• Acquisitions of new businesses
• Strategic investments in new operations
• Purchases of shares under our stock buyback program
• Contract disputes or collection issues
• Capacity constraints under our credit facility and remaining in compliance with all covenants contained in the credit
agreement
The acquisition discussed in Note 2 of the Notes to Consolidated Financial Statements included in Part 2, Item 8 of this
Annual Report on Form 10-K was funded with cash on hand and $15.0 million of borrowings under the senior credit facility
which was repaid in fiscal 2014. The Company believes that the remaining availability under the expanded credit facility, as
discussed under the caption "Senior Revolving Credit Facility" included in this Financial Condition and Liquidity section of the
Form 10-K, along with cash on hand and cash generated from operations will provide sufficient liquidity to achieve both our
short and long-term business objectives.
We have an effective shelf registration statement on file with the SEC under which we may issue, from time to time, up to
$400 million of senior debt securities, subordinated debt securities, common stock, preferred stock and warrants. This shelf
gives us additional flexibility, when capital market conditions are favorable, to grow our business, finance acquisitions or to
optimize our balance sheet in order to improve or maintain our financial flexibility. We may also elect to issue term debt or
further expand the size of our credit facility.
Cash Flows Provided by Operating Activities
Cash flows provided by operating activities for the twelve months ended June 30, 2014 totaled $77.0 million. Major
components of cash flows from operating activities for the year ending June 30, 2014 are as follows:
30
Net Cash Provided by Operating Activities
(In thousands)
Net income
Non-cash expenses
Deferred income tax
Cash effect of changes in operating assets and liabilities
Other
Net cash provided by operating activities
$
$
36,877
24,156
(3,852)
19,599
208
76,988
The cash effect of significant changes in operating assets and liabilities include the following, net of the effects from
acquisitions:
• Accounts receivable increased by $31.4 million. The accounts receivable increase is due to higher business volume
and the timing of billings particularly in the Electrical Infrastructure, Storage Solutions and Industrial segments. The
receivable aging categories have not deteriorated and we do not anticipate any unusual collection difficulties.
• The net change in the combined balances of costs and estimated earnings in excess of billings on uncompleted
contracts and billings on uncompleted contracts in excess of costs and estimated earnings caused an increase to cash of
$16.7 million in the twelve months ended June 30, 2014. This change was primarily attributable to improved working
capital management and our project portfolio permitting a higher degree of advanced billings.
• Accounts payable increased by $29.2 million primarily due to an increase in business activity.
Cash Flows Used for Investing Activities
Investing activities used $74.6 million of cash in the twelve months ended June 30, 2014 due to capital expenditures of
$23.6 million and the net purchase price of $51.6 million for the acquisition of KNAC as discussed in Note 2 - Acquisitions,
partially offset by proceeds from asset dispositions of $0.6 million. Capital expenditures included $11.7 million for the
purchase of construction equipment, $5.2 million for transportation equipment, $3.4 million for office equipment and software,
$1.0 million for land and buildings, and $2.3 million for fabrication equipment and small tools. The Company's known and
expected future purchase obligations relating to capital expenditures is approximately $7.3 million.
Cash Flows Used for Financing Activities
Financing activities provided $12.2 million of cash in the twelve months ended June 30, 2014 primarily due to
borrowings under our Credit Agreement of $87.8 million offset by borrowing payments of $76.2 million. The exercise of stock
options provided $1.2 million of cash. The excess tax benefit of exercised stock options and vesting of deferred shares
provided $1.7 million of cash. Other treasury share purchases used $1.8 million of cash.
Borrowings during fiscal 2014 under our Credit Agreement were used to fund a portion of the KNAC acquisition as
discussed in Note 2 - Acquisitions, for Canadian dollar advances required for short term working capital, including cross-border
purchases of materials and services.
Senior Revolving Credit Facility
The Company has a five-year, $200.0 million senior secured revolving credit facility under a credit agreement (the
“Credit Agreement”) that expires March 13, 2019. Advances under the credit facility may be used for working capital,
acquisitions, capital expenditures, issuance of letters of credit and other lawful purposes.
The credit agreement includes the following covenants and borrowing limitations:
• Our Senior Leverage Ratio, as defined in the agreement, may not exceed 2.50 to 1.00 determined as of the end of each
fiscal quarter.
• We are required to maintain a Fixed Charge Coverage Ratio, as defined in the agreement, greater than or equal to 1.25
to 1.00 determined as of the end of each fiscal quarter.
31
• Asset dispositions (other than inventory and obsolete or unneeded equipment disposed of in the ordinary course of
business) are limited to $20.0 million per 12-month period.
Amounts borrowed under the credit facility bear interest at LIBOR or an Alternate Base Rate, plus in each case, an
additional margin based on the Senior Leverage Ratio. The Credit Agreement includes additional margin ranges on Alternate
Base Rate loans between 0.25% and 1.0% and between 1.25% and 2.0% on LIBOR-based loans.
The Credit Agreement also permits us to borrow in Canadian dollars with a sublimit of U.S. $40.0 million. Amounts
borrowed in Canadian dollars will bear interest either at the CDOR Rate, plus an additional margin based on the Senior
Leverage Ratio ranging from 1.25% to 2.0%, or at the Canadian Prime Rate, plus an additional margin based on the Senior
Leverage Ratio ranging from 1.75% to 2.5%. The CDOR Rate is equal to the sum of the annual rate of interest, which is the
rate determined as being the arithmetic average of the quotations of all institutions listed in respect of the relevant CDOR
interest period for Canadian Dollar denominated bankers’ acceptances, plus 0.1%. The Canadian Prime Rate is equal to the
greater of (i) the rate of interest per annum most recently announced or established by JPMorgan Chase Bank, N.A., Toronto
Branch as its reference rate in effect on such day for determining interest rates for Canadian Dollar denominated commercial
loans in Canada and (ii) the CDOR Rate plus 1.0%.
The Unused Revolving Credit Facility Fee is between 0.20% and 0.35% based on the Senior Leverage Ratio.
The Credit Agreement includes a Senior Leverage Ratio covenant, which provides that Consolidated Funded
Indebtedness may not exceed 2.5 times Consolidated EBITDA, as defined in the Credit Agreement, over the previous four
quarters. For the four quarters ended June 30, 2014, Consolidated EBITDA, as defined in the Credit Agreement, was $87.8
million. Accordingly, at June 30, 2014, the Company had full availability of the $200.0 million credit facility. Consolidated
Funded Indebtedness at June 30, 2014 was $29.8 million.
Availability under the credit facility is as follows:
Credit facility availability
Borrowings outstanding
Letters of credit
Availability under the credit facility
June 30,
2014
June 30,
2013
(In thousands)
200,000 $
11,621
23,017
165,362 $
125,000
—
13,372
111,628
$
$
On September 2, 2014, the Company received a waiver relating to a non-financial technical covenant violation of the
Credit Agreement. The violation relates to a program, which the Company has terminated, that permitted the Company to
monetize certain trade receivables. The Company is in compliance with all other affirmative, negative, and financial covenants
under the Credit Agreement.
At June 30, 2014, the Company was at the lowest margin tier for the LIBOR, Alternate Base Rate, CDOR and Canadian
Prime Rate loans and the lowest tier for the Unused Revolving Credit Facility Fee.
Dividend Policy
We have never paid cash dividends on our common stock, and the terms of our Credit Agreement limit the amount of
cash dividends we can pay. Under our Credit Agreement, we may declare and pay dividends on our capital stock during any
fiscal year up to an amount which, when added to all other dividends paid during such fiscal year, does not exceed 50% of our
cumulative net income for such fiscal year to such date. While we currently do not intend to pay cash dividends, any future
dividend payments will depend on our financial condition, capital requirements and earnings as well as other relevant factors.
Treasury Shares
On November 6, 2012, our Board of Directors approved an extension of a stock buyback program that allows the
Company to purchase up to 2,113,497 shares provided that such purchases do not exceed $25.0 million in any calendar year
through the end of calendar year 2014 if sufficient liquidity exists and we believe that it is in the best interest of the
stockholders. The Company may elect to purchase shares under this program.
In addition to the stock buyback program, the Company may withhold shares of common stock to satisfy the tax
withholding obligations upon vesting of an employee’s deferred shares. Matrix withheld 80,096 shares during fiscal 2014 to
satisfy these obligations. These shares were returned to the Company’s pool of treasury shares.
32
The Company has 1,453,770 treasury shares as of June 30, 2014 and intends to utilize these treasury shares solely in
connection with equity awards under the Company’s stock incentive plans.
Commitments and Off-Balance Sheet Arrangements
As of June 30, 2014, the following commitments and off-balance sheet arrangements were in place to support our
ordinary course obligations:
Letters of credit (1)
Surety bonds
Total
Commitments by Expiration Period
Less than 1
Year
1–3 Years
3–5 Years
(In thousands)
More than 5
Years
Total
$
$
7,481 $
18,680
26,161 $
7,585 $
139,353
146,938 $
7,951 $
5
7,956 $
— $
—
— $
23,017
158,038
181,055
(1) All letters of credit issued under our credit facility are in support of our workers’ compensation insurance programs or certain construction contracts.
The letters of credit that support our workers’ compensation programs are expected to renew annually through the term of our Credit Facility. The
letters of credit that support construction contracts will expire when the related work is completed and the warranty period has passed; therefore, these
letters of credit are reported in the period that we expect the warranty period to end.
Contractual obligations at June 30, 2014 are summarized below:
Operating leases
Purchase obligations
Total contractual obligations
Contractual Obligations by Expiration Period
Less than 1
Year
1-3 Years
3-5 Years
(In thousands)
More than 5
Years
Total
$
$
4,862 $
1,105
5,967 $
4,795 $
1,169
5,964 $
260 $
—
260 $
— $
—
— $
9,917
2,274
12,191
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our interest rate risk results primarily from our variable rate indebtedness under our credit facility, which is influenced by
movements in short-term rates. Borrowings under our $200.0 million revolving credit facility are based on an Alternate Base
Rate, LIBOR, CDOR or Canadian Prime Rate as elected by the Company plus an additional margin based on our Senior
Leverage Ratio.
Financial instruments with interest rate risk at June 30, 2014 were as follows:
Long-term debt:
Variable rate debt (1)
Maturity by Fiscal Year
2015
2016
2017
2018
2019
Total
(In thousands)
Fair Value as
of June 30,
2014
$
— $
— $
— $
— $
11,621 $ 11,621 $
11,621
(1) Amounts borrowed under the Credit Agreement bear interest at LIBOR or an Alternate Base Rate, plus in each case, an additional margin based on
the Senior Leverage Ratio. The additional margin on Alternate Base Rate and LIBOR-based loans ranges between 0.25% and 1.0% and between
1.25% and 2.0% on LIBOR-based loans. The Credit Agreement also permits us to borrow in Canadian dollars with a sublimit of U.S. $40.0 million.
Amounts borrowed in Canadian dollars will bear interest either at the CDOR Rate, plus an additional margin based on the Senior Leverage Ratio
ranging from 1.25% to 2.0%, or at the Canadian Prime Rate, plus an additional margin based on the Senior Leverage Ratio ranging from 1.75% to
2.5%. The CDOR Rate is equal to the sum of the annual rate of interest, which is the rate determined as being the arithmetic average of the quotations
of all institutions listed in respect of the relevant CDOR interest period for Canadian Dollar denominated bankers’ acceptances, plus 0.1%. The
Canadian Prime Rate is equal to the greater of (i) the rate of interest per annum most recently announced or established by JPMorgan Chase Bank,
N.A., Toronto Branch as its reference rate in effect on such day for determining interest rates for Canadian Dollar denominated commercial loans in
Canada and (ii) the CDOR Rate plus 1.0%. The Unused Credit Facility Fee is between 0.20% and 0.35% based on the Senior Leverage Ratio.
33
Financial instruments with interest rate risk at June 30, 2013 were as follows:
Maturity by Fiscal Year
2014
2015
2016
2017
2018
Total
(In thousands)
Fair Value as
of June 30,
2013
Long-term debt:
Variable rate debt (1)
$
— $
— $
— $
— $
— $
— $
—
(1) There were no outstanding borrowings under our credit facility at June 30, 2013.
Foreign Currency Risk
Matrix Service Company has subsidiaries with operations in Canada with the Canadian dollar as their functional
currency. Historically, movements in the foreign currency exchange rate have not significantly impacted results. However,
further growth in our Canadian operations and significant fluctuations in the Canadian Dollar/U.S. Dollar exchange rate could
impact the Company’s financial results in the future. Management has not entered into derivative instruments to hedge foreign
currency risk, but periodically evaluates the materiality of our foreign currency exposure. To mitigate our risk, on occasion we
borrow Canadian dollars under our credit facility to settle U.S. dollar account balances. A 10% unfavorable change in the
Canadian dollar against the U. S. dollar would not have had a material impact on the financial results of the Company for the
fiscal year ended June 30, 2014.
Commodity Price Risk
The Company has no direct commodity exposure, but we do have exposure to materials derived from certain commodities
including steel plate, steel pipe, and copper which are key materials used by the Company. Supplies of these materials are
available throughout the United States and worldwide. We anticipate that adequate amounts of these materials will be available
in the foreseeable future. However, the price, quantity, and delivery schedules of these materials could change rapidly due to
various factors, including producer capacity, the level of foreign imports, worldwide demand, the imposition or removal of
tariffs on imported steel and other market conditions. We mitigate these risks primarily by procuring materials upon contract
execution to ensure that our purchase price approximates the costs included in the project estimate.
34
Item 8. Financial Statements and Supplementary Data
Financial Statements of the Company
Management’s Report on Internal Control Over Financial Reporting ………………………………..........
Reports of Independent Registered Public Accounting Firm …………………………………………........
Consolidated Statements of Income for the Years Ended June 30, 2014, June 30, 2013, and June 30,
2012 …………………………………………………………………………………………………..
Consolidated Statements of Comprehensive Income for the Years Ended June 30, 2014, June 30,
2013, and June 30, 2012 ……………………………………………………………………………...
Consolidated Balance Sheets as of June 30, 2014 and June 30, 2013 ………………………………..
Consolidated Statements of Cash Flows for the Years Ended June 30, 2014, June 30, 2013, and
June 30, 2012 …………………………………………………………………………………………
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended June 30,
2014, June 30, 2013, and June 30, 2012 ……………………………………………………………...
Notes to Consolidated Financial Statements …………………………………………………………
Quarterly Financial Data (Unaudited) ………………………………………………………………………….
Schedule II—Valuation and Qualifying Accounts ……………………………………………………………..
36
37
39
40
41
43
45
46
68
69
Financial Statement Schedules
The financial statement schedule is filed as a part of this report under Schedule II – Valuation and Qualifying Accounts
for the three fiscal years ended June 30, 2014, June 30, 2013 and June 30, 2012 immediately following Quarterly Financial
Data (Unaudited). All other schedules are omitted because they are not applicable or the required information is shown in the
financial statements, or notes thereto, included herein.
35
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 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. generally accepted accounting principles.
Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations and cannot provide absolute
assurance that all objectives will be met. Internal control over financial reporting is a process that involves diligence and is
subject to lapses in judgment and human error. Internal control over financial reporting can also be circumvented by collusion
or management override of controls. Because of these limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of
June 30, 2014. In making this assessment, the Company’s management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.
During fiscal year 2014, the Company acquired 100% of the stock of Kvaerner North American Construction Ltd. and
substantially all of the assets of Kvaerner North American Construction Inc., together referenced as "KNAC". The businesses
are now known as Matrix North American Construction Ltd. and Matrix North American Construction, Inc., together
referenced as "Matrix NAC". Refer to Note 2 of Notes to the Consolidated Financial Statements for additional information
regarding this event. Management has excluded this business from its evaluation of the effectiveness of the Company's internal
control over financial reporting as of June 30, 2014. The revenues attributable to this business represented approximately 12
percent of the Company's consolidated revenues for the year ended June 30, 2014 and its aggregate total assets represented
approximately 25 percent of the Company's consolidated total assets as of June 30, 2014.
Management’s assessment included an evaluation of such elements as the design and operating effectiveness of key
financial reporting controls, process documentation, accounting policies, overall control environment and information systems
control environment. Based on this assessment, the Company’s management has concluded that the Company’s internal
control over financial reporting as of June 30, 2014 was effective.
Deloitte & Touche LLP, an independent registered public accounting firm, has issued an attestation report on the
effectiveness of the Company’s internal control over financial reporting as of June 30, 2014. Deloitte & Touche LLP’s report
on the Company’s internal control over financial reporting is included herein.
John R. Hewitt
President and Chief Executive Officer
September 8, 2014
Kevin S. Cavanah
Vice President and Chief Financial Officer
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Matrix Service Company:
We have audited the internal control over financial reporting of Matrix Service Company and subsidiaries (“the
Company”) as of June 30, 2014 based on criteria established in Internal Control—Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal
Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at
Matrix North American Construction Ltd. And Matrix North American Construction, Inc., which were acquired during the year
ended 2014 and whose financial statements reflect total assets and revenues constituting 25% and 12% respectively, of the
related consolidated financial statement amounts as of and for the year ended June 30, 2014. Accordingly, our audit did not
include the internal control over financial reporting of these acquired entities. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
June 30, 2014, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements and financial statement schedule as of and for the year ended June 30, 2014 of the
Company and our report dated September 8, 2014 expressed an unqualified opinion on those financial statements and financial
statement schedule.
Tulsa, Oklahoma
September 8, 2014
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Matrix Service Company:
We have audited the accompanying consolidated balance sheets of Matrix Service Company and subsidiaries (the
“Company”) as of June 30, 2014 and June 30, 2013, and the related consolidated statements of income, comprehensive income,
changes in stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2014. Our audits also
included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Matrix Service Company and subsidiaries as of June 30, 2014 and 2013, and the results of their operations and their cash flows
for each of the three years ended June 30, 2014, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of June 30, 2014, based on the criteria established in Internal
Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated September 8, 2014 expressed an unqualified opinion on the Company’s internal control over financial
reporting.
Tulsa, Oklahoma
September 8, 2014
38
Matrix Service Company
Consolidated Statements of Income
(In thousands, except per share data)
Revenues
Cost of revenues
Gross profit
Selling, general and administrative expenses
Operating income
Other income (expense):
Interest expense
Interest income
Other
Income before income tax expense
Provision for federal, state and foreign income taxes
Net income
Less: Net income attributable to noncontrolling interest
Net income attributable to Matrix Service Company
Basic earnings per common share
Diluted earnings per common share
Weighted average common shares outstanding:
Basic
Diluted
Twelve Months Ended
$
$
$
$
$
June 30,
2014
1,263,089 $
1,126,616
136,473
77,866
58,607
(1,436)
112
(472)
56,811
19,934
36,877 $
1,067
35,810 $
1.36 $
1.33 $
26,288
26,976
June 30,
2013
June 30,
2012
892,574 $
797,872
94,702
57,988
36,714
(800 )
32
(30 )
35,916
11,908
24,008 $
—
24,008 $
0.92 $
0.91 $
25,962
26,358
739,046
659,428
79,618
47,983
31,635
(814)
26
(357)
30,490
13,302
17,188
—
17,188
0.66
0.65
25,921
26,298
See accompanying notes
39
Matrix Service Company
Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (net of tax of $116, $190 and $214)
Comprehensive income
Less: Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to Matrix Service Company
Twelve Months Ended
June 30,
2014
June 30,
2013
June 30,
2012
$
36,877 $
24,008 $
17,188
(409)
36,468
1,067
35,401 $
(544 )
23,464
—
23,464 $
(665)
16,523
—
16,523
$
See accompanying notes
40
Matrix Service Company
Consolidated Balance Sheets
(In thousands)
Current assets:
Assets
Cash and cash equivalents
Accounts receivable, less allowances (2014—$204; 2013—$795)
Costs and estimated earnings in excess of billings on uncompleted contracts
Inventories
Income taxes receivable
Deferred income taxes
Other current assets
Total current assets
Property, plant and equipment, at cost:
Land and buildings
Construction equipment
Transportation equipment
Office equipment and software
Construction in progress
Accumulated depreciation
Goodwill
Other intangible assets
Other assets
Total assets
June 30,
2014
June 30,
2013
$
$
77,115 $
204,692
73,008
3,045
2,797
5,994
8,897
375,548
31,737
82,745
42,087
26,026
9,892
192,487
(103,315 )
89,172
69,837
28,676
5,699
568,932 $
63,750
140,840
73,773
2,988
3,032
5,657
6,234
296,274
29,649
69,998
34,366
18,426
9,080
161,519
(90,218)
71,301
30,836
7,551
4,016
409,978
See accompanying notes
41
Matrix Service Company
Consolidated Balance Sheets (continued)
(In thousands, except share data)
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Billings on uncompleted contracts in excess of costs and estimated earnings
Accrued wages and benefits
Accrued insurance
Other accrued expenses
Total current liabilities
Deferred income taxes
Borrowings under senior credit facility
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Matrix Service Company stockholders' equity:
Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217
shares issued as of June 30, 2014 and June 30, 2013
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Less treasury stock, at cost— 1,453,770 and 1,779,593 shares as of June 30, 2014
and June 30, 2013
Total Matrix Service Company stockholders' equity
Noncontrolling interest
Total stockholders' equity
Total liabilities and stockholders’ equity
June 30,
2014
June 30,
2013
111,863 $
108,440
36,226
8,605
4,727
269,861
5,167
11,621
286,649
279
119,777
177,237
(182 )
297,111
(16,595 )
280,516
1,767
282,283
568,932 $
68,961
62,848
21,919
7,599
3,039
164,366
7,450
—
171,816
279
118,190
141,427
227
260,123
(21,961)
238,162
—
238,162
409,978
$
$
See accompanying notes
42
Matrix Service Company
Consolidated Statements of Cash Flows
(In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of acquisitions:
Depreciation and amortization
Stock-based compensation expense
Deferred income taxes
Allowance for uncollectible accounts
Impairment of intangible asset
(Gain) loss on sale of property, plant and equipment
Other
Changes in operating assets and liabilities increasing (decreasing)
cash, net of effects from acquisitions:
Accounts receivable
Costs and estimated earnings in excess of billings on
uncompleted contracts
Inventories
Other assets
Accounts payable
Billings on uncompleted contracts in excess of costs and
estimated earnings
Accrued expenses
Net cash provided by operating activities
Investing activities:
Acquisition of property, plant and equipment
Acquisitions, net of cash acquired (Note 2)
Acquisition related adjustment
Proceeds from asset sales
Net cash used for investing activities
Twelve Months Ended
June 30,
2014
June 30,
2013
June 30,
2012
$
36,877 $
24,008 $
17,188
18,518
5,688
(3,852)
(159)
—
109
208
12,782
3,831
1,932
714
255
(1 )
163
11,485
3,504
83
24
—
(158)
65
(31,395)
(32,408 )
(4,575)
13,540
(11)
(1,379)
29,234
3,142
6,468
76,988
(5,211 )
(1,394 )
(2,194 )
19,256
32,555
2,796
57,084
(23,589)
(51,607 )
—
553
(74,643) $
(23,231 )
(9,394 )
—
186
(32,439 ) $
$
(28,506)
(233 )
(1,888 )
12,862
(5,192)
(1,718)
2,941
(13,534)
—
241
598
(12,695)
See accompanying notes
43
Matrix Service Company
Consolidated Statements of Cash Flows (continued)
(In thousands)
Financing activities:
Exercise of stock options
Capital lease payments
Excess tax benefit of exercised stock options and vesting of deferred
shares
Advances under credit agreement
Repayments of advances under credit agreement
Payment of debt amendment fees
Treasury shares sold to Employee Stock Purchase Plan
Open market purchase of treasury shares
Other treasury share purchases
Net cash provided (used) for financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Other cash flow information:
Cash paid during the period for:
Income taxes
Interest
Non-cash investing:
Purchases of property, plant and equipment on account
Twelve Months Ended
June 30,
2014
June 30,
2013
June 30,
2012
1,175 $
—
1,730
87,826
(76,205)
(657)
136
—
(1,776)
12,229
(1,209)
13,365
63,750
77,115 $
875 $
(42 )
37
25,565
(25,565 )
—
54
—
(1,162 )
(238 )
(383 )
24,024
39,726
63,750 $
167
(258 )
—
9,105
(9,105)
(643)
47
(8,126)
(537)
(9,350)
(527)
(19,631 )
59,357
39,726
19,160 $
1,224 $
12,242 $
610 $
12,016
478
527 $
1,146 $
457
$
$
$
$
$
See accompanying notes
44
Matrix Service Company
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share data)
Common
Stock
Additional
Paid-In Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income(Loss)
Non-
Controlling
Interest
Total
Balances, June 30, 2011
$
279 $
113,686
$
100,231
$
(15,961)
$
1,436 $
— $ 199,671
Net income
Other comprehensive loss
Exercise of stock options (26,500
shares)
Tax effect of exercised stock options
and vesting of deferred shares
Issuance of deferred shares (184,149
shares)
Treasury Shares sold to Employee
Stock Purchase Plan (4,395 shares)
(Note 12)
Open market purchase of treasury
shares (886,503 shares)
Other treasury share purchases (52,992
shares)
Stock-based compensation expense
—
—
—
—
—
—
—
—
—
—
—
98
(152)
(479)
36
—
—
3,504
17,188
—
—
—
—
—
—
—
—
—
—
69
—
479
11
(8,126)
(537)
—
Balances, June 30, 2012
279
116,693
117,419
(24,065)
Net income
Other comprehensive loss
Exercise of stock options (97,840
shares)
Tax effect of exercised stock options
and vesting of deferred shares
Issuance of deferred shares (367,449
shares)
Treasury Shares sold to Employee
Stock Purchase Plan (4,452 shares)
(Note 12)
Other treasury share purchases
(107,344 shares)
Stock-based compensation expense
—
—
—
—
—
—
—
—
—
—
(662)
3
(1,667)
(8)
—
3,831
24,008
—
—
—
—
—
—
—
—
—
1,537
—
1,667
62
(1,162)
—
Balances, June 30, 2013
279
118,190
141,427
(21,961)
Net income
Other comprehensive loss
Consolidated joint venture included in
acquisition (Note 2)
Exercise of stock options (134,450
shares)
Tax effect of exercised stock options
and vesting of deferred shares
Issuance of deferred shares (266,209
shares)
Treasury Shares Sold to Employee
Stock Purchase Plan (5,440 shares)
(Note 12)
Other treasury share purchases (80,096
shares)
Stock-based compensation expense
—
—
—
—
—
—
—
—
—
—
—
—
(1,190)
1,730
(4,680)
39
—
5,688
35,810
—
—
—
—
—
—
—
—
—
—
—
2,365
—
4,680
97
(1,776)
—
—
(665)
—
—
—
—
—
—
—
771
—
(544)
—
—
—
—
—
—
227
—
(409)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,067
—
700
—
—
—
—
—
—
17,188
(665)
167
(152)
—
47
(8,126)
(537)
3,504
211,097
24,008
(544)
875
3
—
54
(1,162)
3,831
238,162
36,877
(409)
700
1,175
1,730
—
136
(1,776)
5,688
Balances, June 30, 2014
$
279 $
119,777
$
177,237
$
(16,595)
$
(182) $
1,767
$ 282,283
See accompanying notes
45
Matrix Service Company
Notes to Consolidated Financial Statements
Note 1—Summary of Significant Accounting Policies
Organization and Basis of Presentation
The consolidated financial statements include the accounts of Matrix Service Company (“Matrix” or the “Company”) and
its subsidiaries, all of which are wholly owned. Intercompany transactions and balances have been eliminated in consolidation.
The Company operates in the United States and Canada. The Company’s reportable segments are Electrical
Infrastructure, Oil Gas & Chemical, Storage Solutions and Industrial.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. We believe the most significant estimates and judgments are associated with revenue recognition, the
recoverability tests that must be periodically performed with respect to our goodwill and other intangible assets, valuation
reserves on our accounts receivable and deferred tax assets, and the estimation of loss contingencies, including liabilities
associated with litigation and with the self insured retentions on our insurance programs. Actual results could materially differ
from those estimates.
Revenue Recognition
Matrix records profits on fixed-price contracts on a percentage-of-completion basis, primarily based on costs incurred to
date compared to the total estimated contract cost. The Company records revenue on reimbursable and time and material
contracts on a proportional performance basis as costs are incurred. Contracts in process are valued at cost plus accrued profits
less billings on uncompleted contracts. Contracts are generally considered substantially complete when field construction is
completed. The elapsed time from award of a contract to completion of performance may be in excess of one year. Matrix
includes pass-through revenue and costs on cost-plus contracts, which are customer-reimbursable materials, equipment and
subcontractor costs, when Matrix determines that it is responsible for the procurement and management of such cost
components.
Matrix has numerous contracts that are in various stages of completion which require estimates to determine the
appropriate cost and revenue recognition. The Company has a history of making reasonably dependable estimates of the extent
of progress towards completion, contract revenues and contract costs, and accordingly, does not believe significant fluctuations
are likely to materialize. However, current estimates may be revised as additional information becomes available. If estimates
of costs to complete fixed-price contracts indicate a loss, provision is made through a contract write-down for the total loss
anticipated. A number of our contracts contain various cost and performance incentives and penalties that impact the earnings
we realize from our contracts, and adjustments related to these incentives and penalties are recorded in the period, on a
percentage-of-completion basis, when estimable and probable.
Indirect costs, such as salaries and benefits, supplies and tools, equipment costs and insurance costs, are charged to
projects based upon direct labor hours and overhead allocation rates per direct labor hour. Warranty costs are normally incurred
prior to project completion and are charged to project costs as they are incurred. Warranty costs incurred subsequent to project
completion were not material for the periods presented. Overhead allocation rates are established annually during the
budgeting process.
Precontract Costs
Precontract costs are expensed as incurred.
Change Orders and Claims Recognition
Change orders are modifications of an original contract that effectively change the existing provisions of the contract.
Change orders may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites
and period of completion of the work. Matrix or our clients may initiate change orders. The client's agreement to the terms of
change orders is, in many cases, reached prior to work commencing; however, sometimes circumstances require that work
progress prior to obtaining client agreement. Costs related to change orders are recognized as incurred. Revenues attributable
to change orders that are unapproved as to price or scope are recognized to the extent that costs have been incurred if the
46
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
amounts can be reliably estimated and their realization is probable. Revenues in excess of the costs attributable to change
orders that are unapproved as to price or scope are recognized only when realization is assured beyond a reasonable doubt.
Change orders that are unapproved as to both price and scope are evaluated as claims.
Claims are amounts in excess of the agreed contract price that we seek to collect from customers or others for delays,
errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or
other causes of anticipated additional costs incurred by us. Recognition of amounts as additional contract revenue related to
claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be
reliably estimated. We must determine if:
•
•
•
•
there is a legal basis for the claim;
the additional costs were caused by circumstances that were unforeseen by the Company and are not the result of
deficiencies in our performance;
the costs are identifiable or determinable and are reasonable in view of the work performed; and
the evidence supporting the claim is objective and verifiable.
If all of these requirements are met, revenue from a claim is recorded only to the extent that we have incurred costs
relating to the claim. Unapproved change orders and claims are more fully discussed in Note 7—Contingencies.
Cash Equivalents
The Company includes as cash equivalents all investments with original maturities of three months or less which are
readily convertible into cash. The Company had approximately $0.3 million of restricted cash related to a customer deposit at
June 30, 2014 and $0.3 million of restricted cash at June 30, 2013.
Accounts Receivable
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, 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. To mitigate this risk many of our contracts require
payment as projects progress or advance payment in some circumstances. In addition, in most cases the Company can place
liens against the property, plant or equipment constructed or terminate the contract if a material contract default occurs.
Management estimates the allowance for uncollectible accounts based on existing economic conditions, the financial condition
of its customers and the amount and age of past due accounts. Accounts are written off against the allowance for uncollectible
accounts only after all collection attempts have been exhausted.
Retentions
Accounts receivable at June 30, 2014 and June 30, 2013 included retentions to be collected within one year of $30.0
million and $19.9 million, respectively. Contract retentions collectible beyond one year are included in Other Assets on the
Consolidated Balance Sheets and totaled $4.3 million at June 30, 2014 and $3.1 million at June 30, 2013. Accounts payable
included retentions of $10.4 million at June 30, 2014 and $3.1 million at June 30, 2013.
Loss Contingencies
Various legal actions, claims and other contingencies arise in the normal course of our business. Contingencies are
recorded in the consolidated financial statements, or are otherwise disclosed, in accordance with ASC 450-20, “Loss
Contingencies”. Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and
estimable. We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes
known. We believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results
of operations or liquidity. However, the results of litigation are inherently unpredictable and the possibility exists that the
ultimate resolution of one or more of these matters could result in a material effect on our financial position, results of
operations or liquidity.
47
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Legal costs are expensed as incurred.
Inventories
Inventories consist primarily of steel plate and pipe and are stated at the lower of cost or net realizable value. Cost is
determined primarily using the average cost method.
Depreciation
Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets.
Depreciable lives are as follows: buildings—40 years, construction equipment—3 to 15 years, transportation equipment—3 to 5
years, and office equipment and software—3 to 10 years. Leasehold improvements are amortized over the shorter of the useful
life of the asset or the lease term.
Internal-Use Computer Software
We expense or capitalize costs associated with the development of internal-use software as follows:
Preliminary Project Stage: Both internal and external costs incurred during this stage are expensed as incurred.
Application Development Stage: Both internal and external costs incurred to purchase or develop computer software are
capitalized after the preliminary project stage is completed and management authorizes the computer software project.
However, training costs and data conversion costs, which includes purging or cleansing of existing data, reconciling or
balancing of data, are expensed as incurred.
Post-Implementation/Operation Stage: All training costs and maintenance costs incurred during this stage are expensed
as incurred.
Costs of upgrades and enhancements are capitalized if the expenditures will result in adding functionality to the software.
Capitalized software costs are depreciated using the straight-line method over the estimated useful life of the related software,
which may be up to ten years.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for impairment when events or changes in circumstances indicate, in
management’s judgment, that the carrying value of such assets used in operations may not be recoverable. The determination of
whether an impairment has occurred is based on management’s estimate of undiscounted future cash flows attributable to the
assets as compared to the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized
is determined by estimating the fair value of the assets and, to the extent the carrying value exceeds the fair value of the assets,
recording a loss provision.
For assets identified to be disposed of in the future, the carrying value of the assets are compared to the estimated fair
value less the cost of disposal to determine if an impairment has occurred. Until the assets are disposed of, an estimate of the
fair value is redetermined when related events or circumstances change.
Goodwill
Goodwill represents the excess of the purchase price of acquisitions over the acquisition date fair value of the net
identifiable tangible and intangible assets acquired. In accordance with current accounting guidance, goodwill is not amortized
and is tested at least annually for impairment at the reporting unit level.
We perform our annual analysis during the fourth quarter of each fiscal year and in any other period in which indicators
of impairment warrant additional analysis. Goodwill impairment reviews involve a two-step process. Goodwill is first
evaluated for impairment by comparing management’s estimate of the fair value of a reporting unit with its carrying value,
including goodwill.
48
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Management utilizes a discounted cash flow analysis, referred to as an income approach, to determine the estimated fair
value of our reporting units. Significant judgments and assumptions including the discount rate, anticipated revenue growth rate
and gross margins, estimated operating and interest expense, and capital expenditures are inherent in these fair value estimates,
which are based on our operating and capital budgets and on our strategic plan. As a result, actual results may differ from the
estimates utilized in our income approach. 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 result of
these uncertainties, we utilize multiple scenarios and assign probabilities to each of the scenarios in the income approach.
We also consider indications obtained from market-based approaches. We compare market multiples derived from
market prices of stock of companies that are engaged in a similar line of business to the corresponding measures of the
Company. We also consider the combined carrying values of our reporting units to our market capitalization.
If the carrying value of our reporting unit is higher than its fair value, there is an indication that impairment may exist and
the second step must be performed to measure the amount of impairment. The amount of impairment is determined by
comparing the implied fair value of the reporting unit's goodwill to the carrying value of the goodwill calculated in the same
manner as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill is less than
its carrying value, we would record an impairment charge for the difference.
Other Intangible Assets
Intangible assets that have finite useful lives are amortized by the straight-line method over their useful lives ranging
from 1 to 15 years. Intangible assets that have indefinite useful lives are not amortized but are tested at least annually for
impairment. Each reporting period, we evaluate the remaining useful lives of intangible assets not being amortized to determine
whether facts and circumstances continue to support an indefinite useful life. Intangible assets are considered impaired if the
fair value of the intangible asset is less than its net book value. If quoted market prices are not available, the fair values of the
intangible assets are based on present values of expected future cash flows or royalties avoided using discount rates
commensurate with the risks involved.
Insurance Reserves
We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses
through the use of deductibles, coverage limits and self-insured retentions. We establish reserves for claims using a combination
of actuarially determined estimates and case-by-case evaluations of the underlying claim data and update our evaluations as
further information becomes known. Judgments and assumptions are inherent in our reserve accruals; as a result, changes in
assumptions or claims experience could result in changes to these estimates in the future. 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.
Stock-Based Compensation
The Company has issued stock options and nonvested deferred share awards under its long-term incentive compensation
plans. The fair value of these awards is calculated at grant date. The fair value of time-based, nonvested deferred shares is the
value of the Company’s common stock at the grant date. The fair value of market-based nonvested deferred shares is based on
several factors, including the probability that the market condition specified in the grant will be achieved. The fair value of
stock options is determined based on the Black-Scholes option pricing model. The detailed assumptions used in the model are
included in Note 10—Stock Based Compensation.
For all stock-based awards, expense is recognized over the requisite service period, net of estimated forfeitures. The
expense related to performance based shares is recognized only if management believes it is probable that the performance
targets specified in the awards will be achieved.
Income Taxes
The Company complies with ASC 740, “Income Taxes”. Deferred income taxes are computed using the liability method
whereby deferred tax assets and liabilities are recognized based on temporary differences between the financial statement and
tax basis of assets and liabilities using presently enacted tax rates. Valuation allowances are established against deferred tax
assets to the extent management believes that it is not probable that the assets will be recovered.
49
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
The Company provides for income taxes regardless of whether it has received a tax assessment. Taxes are provided when
we consider it probable that additional taxes will be due in excess of the amounts included in our tax returns. We continually
review our exposure to additional income taxes due, and as further information is known or events occur, adjustments may be
recorded.
Foreign Currency
The functional currency of the Company’s operations in Canada is the Canadian dollar. The assets and liabilities are
translated at the year end exchange rate and the income statement accounts are translated at average exchange rates throughout
the year. Translation gains and losses are reported in Accumulated Other Comprehensive Income (Loss) in the Consolidated
Statements of Changes in Stockholders’ Equity and in Other Comprehensive Income (Loss) in the Consolidated Statements of
Comprehensive Income. Transaction gains and losses are reported as a component of Other income (expense) in the
Consolidated Statements of Income.
Recently Issued Accounting Standards
Accounting Standards Update 2014-09 (Topic 606), Revenue from Contracts with Customers
In May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2014-09, "Revenue from Contracts with Customers." The standard outlines a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance,
including industry-specific guidance. 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.” In applying the revenue model to contracts within its scope, an entity:
• Identifies the contract(s) with a customer (step 1).
• Identifies the performance obligations in the contract (step 2).
• Determines the transaction price (step 3).
• Allocates the transaction price to the performance obligations in the contract (step 4).
• Recognizes revenue when (or as) the entity satisfies a performance obligation (step 5).
The ASU also requires entities to disclose both quantitative and qualitative information that enables users of financial
statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with
customers. The ASU’s disclosure requirements are significantly more comprehensive than those in existing revenue standards.
The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting
Standards Codification ("ASC"). For public entities, the ASU is effective for annual reporting periods (including interim
reporting periods within those periods) beginning after December 15, 2016. Early application is not permitted. We expect to
adopt this standard in fiscal 2018 and are currently evaluating its expected impact on our financial statements.
Accounting Standards Update 2014- 12 (Topic 718), Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging
Issues Task Force "EITF")
On June 19, 2014, the FASB issued ASU 2014-12, "Accounting for Share-Based Payments When the Terms of an
Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB
Emerging Issues Task Force)" in response to the EITF consensus on Issue 13-D. The ASU clarifies that entities should treat
performance targets that can be met after the requisite service period of a share-based payment award as performance
conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date
without taking into account the effect of the performance target) related to an award for which transfer to the employee is
contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met.
The ASU does not contain any new disclosure requirements. For all entities, the ASU is effective for reporting periods
beginning after December 15, 2015. Early adoption is permitted. We expect to adopt this standard in fiscal 2016 and do not
expect the adoption of this standard to have a material impact on our consolidated financial statements.
Accounting Standards Update 2014-08 (Topics 205 and 360), Presentation of Financial Statements (Topic 205) and
Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components
of an Entity
On April 10, 2014, the FASB issued ASU 2014-08, " Reporting Discontinued Operations and Disclosures of Disposals
of Components of an Entity" which amends the definition of a discontinued operation in ASC 205-20 and requires entities to
50
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued-
operations criteria. The FASB issued the ASU to provide more decision-useful information and to make it more difficult for a
disposal transaction to qualify as a discontinued operation (since the FASB believes that too many disposal transactions were
qualifying as discontinued operations under the old definition). Under the previous guidance in ASC 205-20-45-1, the results of
operations of a component of an entity were classified as a discontinued operation if all of the following conditions were met:
• "The component “has been disposed of or is classified as held for sale.”
• “The operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity
as a result of the disposal transaction.”
• “The entity will not have any significant continuing involvement in the operations of the component after the disposal
transaction.”
The new guidance eliminates the second and third criteria above and instead requires discontinued operations treatment for
disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an
entity’s operations or financial results. The ASU also expands the scope of ASC 205-20 to disposals of equity method
investments and businesses that, upon initial acquisition, qualify as held for sale.The ASU is effective prospectively for all
disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale
in periods beginning on or after December 15, 2014. Early adoption is permitted. We expect to adopt this standard in fiscal
2015 and do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Note 2—Acquisitions
Purchase of Kvaerner North American Construction
Effective as of December 21, 2013, the Company acquired 100% of the stock of Kvaerner North American Construction Ltd.
and substantially all of the assets of Kvaerner North American Construction Inc,. together referenced as "KNAC". The
businesses are now known as Matrix North American Construction Ltd. and Matrix North American Construction, Inc.,
together referenced as "Matrix NAC". Matrix NAC is a premier provider of maintenance and capital construction services to
power generation, integrated iron and steel, and industrial process facilities. The acquisition significantly expands the
Company's presence in the Electrical Infrastructure and Industrial Segments, and to a lesser extent, the Oil Gas and Chemical
segment.
The Company purchased KNAC for $88.3 million The acquisition was funded through a combination of cash-on-hand and
borrowings under our senior revolving credit facility. The 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 preliminary purchase
price allocation (in thousands):
Current assets
Property, plant and equipment
Goodwill
Other intangible assets
Total assets acquired
Current liabilities
Deferred income taxes
Noncontrolling interest of consolidated joint venture
Net assets acquired
Cash acquired
Net purchase price
$
$
83,575
11,377
39,076
24,009
158,037
67,959
1,116
700
88,262
36,655
51,607
Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets.
This acquisition generated $39.1 million of goodwill, of which $30.7 million is tax deductible.
The equity in consolidated joint venture represents the acquired equity in KVPB Power Partners. KVPB Power Partners was
subsequently renamed MXPB Power Partners (the "Joint Venture"). The Joint Venture was formed by Kvaerner North
51
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
American Construction Inc. and an engineering firm to engineer and construct a combined cycle power plant in Dover,
Delaware. The Company now holds a 65% voting and economic interest in the Joint Venture. The total acquired equity of the
Joint Venture was $2.0 million of which the Company's portion was approximately $1.3 million and the other party's non-
controlling portion was approximately $0.7 million. At June 30, 2014, the noncontrolling interest holder's share of the equity
of the Joint Venture totaled $1.8 million. The Company's share at June 30, 2014 was $3.3 million.
For the twelve months ended June 30, 2014, Matrix NAC revenues of $154.8 million and operating income of $2.7 million are
included in the Company's results. The Company incurred approximately $2.0 million of expenses related to the acquisition in
the second quarter of fiscal 2014; therefore, such expenses are included in our results as selling, general and administrative
costs for the year ended June 30, 2014.
The unaudited financial information in the table below summarizes the combined results of operations of Matrix Service
Company and Matrix NAC for the for the twelve months ended June 30, 2014 and June 30, 2013, on a pro forma basis, as
though the companies had been combined as of July 1, 2012. The pro forma earnings for the twelve months ended June 30,
2014 and June 30, 2013 were adjusted to include incremental intangible amortization expense of $4.1 million, respectively and
depreciation expenses of $1.3 million, respectively. Additionally, $0.6 million of income from a one-time KNAC tax settlement
and $2.0 million of acquisition-related expenses were removed from the twelve months ended June 30, 2014. The $2.0 million
of acquisition-related expenses were included in the twelve months ended June 30, 2013 as if the acquisition occurred at July 1,
2012. The pro forma financial information is presented 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, 2012 nor should it be taken as indicative
of our future consolidated results of operations.
Revenues
Net income attributable to Matrix Service Company
Basic earnings per common share
Diluted earnings per common share
Purchase of Pelichem Industrial Cleaning Services, LLC
June 30,
2014
June 30,
2013
(In thousands, except per share data)
$
$
$
$
1,397,706 $
38,786 $
1.48 $
1.44 $
1,096,267
28,444
1.10
1.08
On December 31, 2012, the Company acquired substantially all of the assets of Pelichem Industrial Cleaning Services,
LLC (“Pelichem”). Pelichem is an industrial cleaning company based in Reserve, Louisiana that performs hydroblasting,
vacuum services, chemical cleaning and industrial services. Pelichem's operating results are included in the Oil Gas &
Chemical Segment.
The 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 final purchase price allocation:
Current assets
Property, plant and equipment
Tax deductible goodwill
Other intangible assets
Total assets acquired
Current liabilities
Net assets acquired
$
$
1,112
4,299
2,247
1,853
9,511
117
9,394
The operating data related to this acquisition was not material. The acquisition was funded with cash on hand.
52
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Note 3—Customer Contracts
Contract terms of the Company’s construction contracts generally provide for progress billings based on project
milestones. The excess of costs incurred and estimated earnings over amounts billed on uncompleted contracts is reported as a
current asset. The excess of amounts billed over costs incurred and estimated earnings on uncompleted contracts is reported as a
current liability. Gross and net amounts on uncompleted contracts are as follows:
Costs and estimated earnings recognized on uncompleted contracts
Billings on uncompleted contracts
Shown on balance sheet as:
Costs and estimated earnings in excess of billings on uncompleted contracts
Billings on uncompleted contracts in excess of costs and estimated earnings
June 30,
2014
June 30,
2013
(In thousands)
1,435,242 $
1,470,674
(35,432 ) $
73,008 $
108,440
(35,432 ) $
802,588
791,663
10,925
73,773
62,848
10,925
$
$
$
$
SME Receivables
The Company continues to pursue collection of a receivable acquired in connection with the purchase of S.M. Electric
Company, Inc. in February 2009. The recorded values at June 30, 2014 and June 30, 2013 include $0.7 million in claim
receivables, which represents the Company's best estimate of the amount to be collected under the claim, and an additional $2.9
million for amounts due under the related contract. Recovering the remaining receivables will require mediation or litigation
and the ultimate amount realized may be significantly different than the recorded amounts, which could result in a material
adjustment to future earnings.
Other
In the twelve months ended June 30, 2014 our results of operations were materially impacted by a charge resulting from a
change in estimate on an aboveground storage tank project. The charge resulted in an $8.4 million decrease in operating income
for the twelve months ended June 30, 2014. The project is a loss project; therefore, the entire projected loss has been recorded.
The charge reflects management's best estimate of the total contract revenues to be recognized and total costs at completion.
In the twelve months ended June 30, 2013, our gross profit was materially impacted by a $3.7 million charge resulting
from a change in estimate for a project to construct aboveground storage tanks. This project was completed in the fourth quarter
of fiscal 2013.
53
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Note 4—Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
Electrical
Infrastructure
Oil Gas &
Chemical
Storage
Solutions
(In thousands)
Industrial
Total
Goodwill
Cumulative impairment loss
$
Net balance at June 30, 2012
Purchase of Pelichem (Note 2)
Translation adjustment
Net balance at June 30, 2013
Purchase of Kvaerner North American
Construction (Note 2)
Translation adjustment
Net balance at June 30, 2014
$
29,666 $
(17,653)
12,013
—
—
12,013
31,259
(29)
43,243 $
5,841 $
(3,000)
2,841
2,247
—
5,088
5,855
—
10,943 $
11,071 $
(922 )
10,149
—
(86)
10,063
—
(36)
10,027 $
7,097 $
(3,425 )
3,672
—
—
3,672
1,962
(10 )
5,624 $
53,675
(25,000)
28,675
2,247
(86)
30,836
39,076
(75)
69,837
The translation adjustments relate to the periodic translation of Canadian Dollar denominated goodwill recorded as a part
of a prior Canadian acquisition as well as the periodic translation of the Canadian entity acquired with the purchase of Kvaerner
North American Construction (Note 2) through June 30, 2014. The cumulative impairment loss shown in the table above
occurred as a result of the Company’s operating performance in fiscal 2005.
Other Intangible Assets
Information on the carrying value of other intangible assets is as follows:
Intellectual property
Customer based
Non-compete agreements
Trade name
Total amortizing intangibles
Trade name
Total intangible assets
Gross
Carrying
Amount
At June 30, 2014
Accumulated
Amortization
(In thousands)
Net Carrying
Amount
2,460 $
27,662
1,312
165
31,599
1,450
33,049 $
(920 ) $
(2,949 )
(471 )
(33 )
(4,373 )
—
(4,373 ) $
1,540
24,713
841
132
27,226
1,450
28,676
Useful Life
(Years)
6 to 15
1.5 to 15
3 to 5
5
Indefinite
$
$
54
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Intellectual property
Customer based
Non-compete agreements
Trade name
Total amortizing intangibles
Trade name
Total intangible assets
Gross
Carrying
Amount
At June 30, 2013
Accumulated
Amortization
(In thousands)
Net Carrying
Amount
2,460 $
4,250
808
165
7,683
1,450
9,133 $
(753 ) $
(542 )
(287 )
—
(1,582 )
—
(1,582 ) $
1,707
3,708
521
165
6,101
1,450
7,551
Useful Life
(Years)
6 to 15
1.5 to 15
3 to 5
5
Indefinite
$
$
The increase in other intangible assets at June 30, 2014 compared to June 30, 2013 is due to the acquisition of Matrix
NAC. The Matrix NAC intangible assets consist of amortizing intangible assets including customer-based intangibles with a
fair value of $23.4 million and useful lives ranging from 1.5 to 15 years and a non-compete agreement with a fair value of $0.5
million and a useful life of 4 years. Please refer to Note 2 - Acquisitions for additional information.
Each reporting period, the Company evaluates the remaining useful lives of intangible assets not being amortized to
determine whether facts and circumstances continue to support an indefinite useful life. Based on this analysis, for the twelve
months ended June 30, 2013, Matrix revised its assumption of the useful life of the "EDC" trade name, which resulted in a
reclassification of the asset from an indefinite-lived intangible to a finite-lived intangible with a five year useful life. This
reclassification resulted in an impairment charge of $0.3 million which was recorded as a selling, general and administrative
cost in the Industrial segment.
Amortization expense totaled $2.8 million, $0.4 million, and $0.5 million in fiscal 2014, 2013, and 2012, respectively.
We estimate that future amortization of other intangible assets will be as follows (in thousands):
For year ending:
June 30, 2015
June 30, 2016
June 30, 2017
June 30, 2018
June 30, 2019
Thereafter
Total estimated amortization expense
Note 5—Debt
$4,726
2,854
2,769
2,670
2,545
11,662
$27,226
The Company has a five-year, $200.0 million senior secured revolving credit facility under a credit agreement (the
"Credit Agreement") that expires March 13, 2019. Advances under the credit facility may be used for working capital,
acquisitions, capital expenditures, issuance of letters of credit and other lawful corporate purposes.
The Credit Agreement includes the following covenants and borrowing limitations:
• Our Senior Leverage Ratio, as defined in the agreement, may not exceed 2.50 to 1.00 as of the end of each fiscal
quarter.
• We are required to maintain a Fixed Charge Coverage Ratio, as defined in the agreement, greater than or equal to 1.25
to 1.00 as of the end of each fiscal quarter.
• Asset dispositions (other than inventory and obsolete or unneeded equipment disposed of in the ordinary course of
business) are limited to $20.0 million per 12-month period.
55
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Amounts borrowed under the Credit Agreement bear interest at LIBOR or an Alternate Base Rate, plus in each case, an
additional margin based on the Senior Leverage Ratio. The additional margin on Alternate Base Rate and LIBOR-based loans
ranges between 0.25% and 1.0% and between 1.25% and 2.0% on LIBOR-based loans.
The Credit Agreement also permits us to borrow in Canadian dollars with a sublimit of U.S. $40.0 million. Amounts
borrowed in Canadian dollars will bear interest either at the CDOR Rate, plus an additional margin based on the Senior
Leverage Ratio ranging from 1.25% to 2.0%, or at the Canadian Prime Rate, plus an additional margin based on the Senior
Leverage Ratio ranging from 1.75% to 2.5%. The CDOR Rate is equal to the sum of the annual rate of interest, which is the
rate determined as being the arithmetic average of the quotations of all institutions listed in respect of the relevant CDOR
interest period for Canadian Dollar denominated bankers’ acceptances, plus 0.1%. The Canadian Prime Rate is equal to the
greater of (i) the rate of interest per annum most recently announced or established by JPMorgan Chase Bank, N.A., Toronto
Branch as its reference rate in effect on such day for determining interest rates for Canadian Dollar denominated commercial
loans in Canada and (ii) the CDOR Rate plus 1.0%.
The Unused Credit Facility Fee is between 0.20% and 0.35% based on the Senior Leverage Ratio.
The Credit Agreement includes a Senior Leverage Ratio covenant, which provides that Consolidated Funded
Indebtedness, as of the end of any fiscal quarter, may not exceed 2.5 times Consolidated EBITDA, as defined in the Credit
Agreement, over the previous four quarters. For the four quarters ended June 30, 2014, Consolidated EBITDA, as defined in the
Credit Agreement, was $87.8 million. Accordingly, at June 30, 2014, the Company had full availability of the $200.0 million
credit facility. Consolidated Funded Indebtedness at June 30, 2014 was $29.8 million.
Availability under the credit facility is as follows:
Credit facility availability
Borrowings outstanding
Letters of credit
Availability under the credit facility
June 30,
2014
June 30,
2013
(In thousands)
200,000 $
11,621
23,017
165,362 $
125,000
—
13,372
111,628
$
$
On September 2, 2014, the Company received a waiver relating to a non-financial technical covenant violation of the
Credit Agreement. The violation relates to a program, which the Company has terminated, that permitted the Company to
monetize certain trade receivables. The Company is in compliance with all other affirmative, negative, and financial covenants
under the Credit Agreement.
Note 6—Income Taxes
The sources of pretax income are as follows:
Domestic
Foreign
Total
Twelve Months Ended
June 30,
2014
June 30,
2013
(In thousands)
June 30,
2012
$
$
60,129 $
(3,318)
56,811 $
37,876 $
(1,960 )
35,916 $
27,346
3,144
30,490
56
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
The components of the provision for income taxes are as follows:
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Twelve Months Ended
June 30,
2014
June 30,
2013
(In thousands)
June 30,
2012
$
$
19,870 $
3,117
613
23,600
(3,951 )
(51)
336
(3,666)
19,934 $
8,260 $
1,268
449
9,977
1,801
126
4
1,931
11,908 $
11,320
1,129
762
13,211
(151)
283
(41)
91
13,302
The difference between the expected income tax provision applying the domestic federal statutory tax rate and the
reported income tax provision is as follows:
Expected provision for Federal income taxes at the statutory rate
State income taxes, net of Federal benefit
Charges without tax benefit
Change in valuation allowance
Cumulative non-deductible expenses
IRC S199 deduction
Research & Development Credit
Foreign tax differential
Other
Provision for income taxes
Twelve Months Ended
June 30,
2014
June 30,
2013
(In thousands)
June 30,
2012
$
$
19,887 $
2,275
1,405
—
—
(1,546)
(1,793)
(182)
(112)
19,934 $
12,570 $
1,252
1,231
(140 )
—
(844 )
(1,450 )
(160 )
(551 )
11,908 $
10,670
970
1,004
(544)
2,139
(687)
—
—
(250)
13,302
57
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Significant components of the Company’s deferred tax assets and liabilities are as follows:
Deferred tax assets:
Warranty reserve
Bad debt reserve
Paid-time-off accrual
Insurance reserve
Legal reserve
Net operating loss benefit and credit carryforwards
Valuation allowance
Accrued compensation and pension
Stock compensation expense on nonvested deferred shares
Accrued losses
Other—net
Total deferred tax assets
Deferred tax liabilities:
Tax over book depreciation
Tax over book amortization
Prepaid insurance
Other—net
Total deferred tax liabilities
Net deferred tax asset (liability)
As reported in the consolidated balance sheets:
Current deferred tax assets
Non-current deferred tax liabilities
Net deferred tax asset (liability)
June 30,
2014
June 30,
2013
(In thousands)
234 $
80
712
2,519
356
4,061
(90 )
2,187
1,969
1,488
314
13,830
8,537
1,903
2,104
459
13,003
827 $
—
310
602
2,227
462
3,885
(90)
850
943
232
204
9,625
9,064
1,137
1,217
—
11,418
(1,793)
June 30,
2014
June 30,
2013
(In thousands)
5,994 $
(5,167 )
827 $
5,657
(7,450)
(1,793)
$
$
$
$
The Company has state net operating loss carryforwards, state tax credit carryforwards, federal foreign tax credit
carryforwards, foreign net operating loss carryforwards and foreign tax credit carryforwards. The valuation allowance at June
30, 2014 and June 30, 2013 reduces the recognized tax benefit of these carryforwards to an amount that is more likely than not
to be realized. These carryforwards will generally expire as shown below:
Item
State net operating losses
State tax credits
Federal foreign tax credits
Foreign net operating losses
Foreign tax credits
Expiration Period
June 2023 to June 2030
No expiration
June 2016 to June 2024
June 2027 to June 2034
June 2033
In general, it is the practice and intention of the Company to reinvest the earnings of its Canadian subsidiaries in these
operations. Such amounts become subject to United States taxation upon the remittance of dividends and under certain other
58
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
circumstances. As of June 30, 2014, unremitted earnings of foreign subsidiaries, which have been or are intended to be
permanently invested, aggregated to approximately $5.1 million. We anticipate that any deferred tax liability related to the
investment in these foreign subsidiaries could be offset by foreign tax credits.
The Company files tax returns in several taxing jurisdictions in the United States and Canada. With few exceptions, the
Company is no longer subject to examination by taxing authorities through fiscal 2008. At June 30, 2014, the Company updated
its evaluation of its open tax years in all known jurisdictions. Based on this evaluation, the Company did not identify any
material uncertain tax positions.
Note 7—Contingencies
Insurance Reserves
The Company maintains insurance coverage for various aspects of its operations. However, exposure to potential losses is
retained through the use of deductibles, self-insured retentions and coverage limits.
Typically our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of
our services and provide warranties for materials and workmanship. The Company may also be required to name the customer
as an additional insured up to the limits of insurance available, or we may be required to purchase special insurance policies or
surety bonds for specific customers or provide letters of credit in lieu of bonds to satisfy performance and financial guarantees
on some projects. Matrix maintains a performance and payment bonding line sufficient to support the business. The Company
generally requires its subcontractors to indemnify the Company and the Company’s customer and name the Company as an
additional insured for activities arising out of the subcontractors’ work. We also require certain subcontractors to provide
additional insurance policies, including surety bonds in favor of the Company, to secure the subcontractors’ work or as required
by the subcontract.
There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will
fully protect us against a valid claim or loss under the contracts with our customers.
Unapproved Change Orders and Claims
As of June 30, 2014 and June 30, 2013, costs and estimated earnings in excess of billings on uncompleted contracts
included revenues for unapproved change orders and claims of $13.1 million and $9.1 million, respectively. Generally,
collection of amounts related to unapproved change orders and claims is expected within twelve months. However, customers
may not pay these amounts until final resolution of related claims, and accordingly, collection of these amounts may extend
beyond one year.
Other
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, 2014 total $9.9 million and are payable as follows: fiscal 2015—$4.9 million; fiscal 2016—$3.0
million; fiscal 2017—$1.4 million; fiscal 2018—$0.5 million; fiscal 2019—$0.3 million and thereafter—$0.0 million.
Operating lease expense was $5.3 million, $4.5 million and $4.1 million for the twelve months ended June 30, 2014, June 30,
2013 and June 30, 2012, respectively.
59
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Note 9—Stockholders’ Equity
Preferred Stock
The Company has 5.0 million shares of preferred stock authorized, none of which was issued or outstanding at June 30,
2014 or June 30, 2013.
Treasury Shares
On November 6, 2012 the Board of Directors approved an extension of a stock buyback program through calendar year
2014. The program allows the Company to purchase up to 2,113,497 shares of common stock provided that such purchases do
not exceed $25.0 million in any calendar year if sufficient liquidity exists and we believe that it is in the best interest of the
stockholders. The Company has not purchased any shares under this program since the Board of Directors approved the
extension.
In addition to the stock buyback program, the Company may withhold shares of common stock to satisfy the tax
withholding obligations upon vesting of an employee’s deferred shares. Matrix withheld 80,096 and 107,344 shares of common
stock during fiscal 2014 and fiscal 2013, respectively, to satisfy these obligations. These shares were returned to the Company’s
pool of treasury shares. The Company has 1,453,770 treasury shares as of June 30, 2014 and intends to utilize these treasury
shares solely in connection with equity awards under the Company’s stock incentive plans.
Note 10—Stock-Based Compensation
Total stock-based compensation expense for the twelve months ended June 30, 2014, June 30, 2013, and June 30, 2012
was $5.7 million, $3.8 million and $3.5 million, respectively. Measured but unrecognized stock-based compensation expense at
June 30, 2014 was $9.7 million, of which $9.5 million related to nonvested deferred shares and $0.2 million related to stock
options. These amounts are expected to be recognized as expense over a weighted average period of 1.8 years. The recognized
tax benefit related to the stock-based compensation expense for the 12 months ended June 30, 2014, June 30, 2013 and June 30,
2012 totaled $2.8 million, $1.6 million and $1.3 million, respectively.
Plan Information
Matrix Service Company's 2012 Stock and Incentive Compensation Plan ("2012 Plan") provides stock-based and cash-
based incentives for officers, other key employees and directors. Stock options, restricted stock, restricted stock units, stock
appreciation rights, performance shares and cash-based awards can be issued under this plan. All future grants of stock and
cash-based awards will be made through the 2012 Plan. Upon approval of the 2012 Plan by the Company's stockholders, the
2004 Stock Incentive Plan ("2004 Plan") was frozen with the exception of normal vesting, forfeiture and other activity
associated with awards previously granted under the 2004 Plan. Awards totaling 2,300,000 shares and 1,300,000 shares have
been authorized under the 2004 and 2012 Plans, respectively. At June 30, 2014 there were 713,223 shares available for grant
under the 2012 Plan.
Stock Options
Stock options are granted at the market value of the Company’s common stock on the grant date and expire after 10 years.
The Company’s policy is to issue shares upon the exercise of stock options from its treasury shares, if available. The Company
did not award any new stock options in fiscal years 2013 or 2014.
60
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Stock option activity and related information for the year ended June 30, 2014 is as follows:
Outstanding at June 30, 2013
Granted
Exercised
Cancelled
Outstanding at June 30, 2014
Vested or expected to vest at June 30, 2014
Exercisable at June 30, 2014
Number of
Options
392,000
Weighted-
Average
Remaining
Contractual Life
(Years)
5.5
—
(134,450)
(12,250)
245,300
243,477
37,000
6.4
6.4
1.0
Weighted-
Average
Exercise Price
Aggregate
Intrinsic Value
(In thousands)
$
$
$
$
$
$
$
9.38
—
8.78 $
10.19
9.68 $
9.68 $
6.84 $
2,394
5,669
5,627
960
The Company uses the Black-Scholes option pricing model to estimate grant date fair value for each stock option granted.
Expected volatility is based on the historic volatility of the Company’s stock. The risk-free rate is based on the applicable
United States Treasury Note rate. The expected life of the option is based on historical and expected future exercise behavior.
Assumptions used to calculate the fiscal 2012 grant date fair value and the fair value calculated was as follows:
Grant date fair value
Risk-free interest rate
Expected volatility
Expected life in years
Expected dividend yield
2012
$5.61
0.88%
66.19%
5.00
—
The total intrinsic value of stock options exercised during fiscal 2014, 2013, and 2012 was $2.4 million, $0.6 million and
$0.1 million, respectively.
The following table summarizes information about stock options at June 30, 2014:
Stock Options Outstanding
Stock Options Exercisable
Range of Exercise Price
Options
Outstanding
Weighted-
Average
Exercise Price
$4.60 – $ 5.49
8.93 – 12.20
$4.60 – $12.20
20,500 $
224,800
245,300 $
5.16
10.10
9.68
Weighted-
Average
Remaining
Contractual
Life
(Years)
1.0
6.9
6.4
Options
Exercisable
Weighted-
Average
Exercise Price
20,500 $
16,500
37,000 $
5.16
8.93
6.84
Weighted-
Average
Remaining
Contractual
Life
(Years)
1.0
1.3
1.0
Nonvested Deferred Shares
The Company has issued nonvested deferred shares under the following types of arrangements:
• Time-based awards—Employee awards generally vest in four or five equal annual installments beginning one year
after the grant date. Director awards cliff vest on the earlier of three years or upon retirement from the Board.
61
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
• Market-based awards—These awards are in the form of performance units which vest 3 years after the grant date only
if the Company’s common stock achieves certain levels when compared to the total shareholder return of a peer group
of companies as selected by the Compensation Committee of the Board of Directors. The payout is pro-rated and can
range from zero to 200% of the original award. These awards are settled entirely in stock. As of June 30, 2014, there
are approximately 218,000 and 154,000 performance units that are scheduled to vest in fiscal 2016 and fiscal 2017,
respectively.
All awards vest upon the death or disability of the participant or upon a change of control of the Company.
The grant date fair value of the time-based awards is determined by the market value of the Company's common stock on
the grant date. The grant date fair value of the market-based awards is calculated using a Monte Carlo model. For the fiscal
2014 grant, the model estimated the fair value of the award based on approximately 100,000 simulations of the future prices of
the Company's common stock compared to the future prices of the common stock of its peer companies based on historical
volatilities. The model also took into account the expected dividends over the performance period.
Nonvested deferred share activity for the twelve months ended June 30, 2014 is as follows:
Nonvested shares at June 30, 2013
Shares granted
Shares vested and released
Shares cancelled
Nonvested shares at June 30, 2014
Weighted Average
Grant
Date Fair Value per
Share
Shares
1,030,660 $
381,038 $
(266,029 ) $
(39,968 ) $
1,105,701 $
10.71
18.01
10.41
11.87
13.22
There were 503,268 and 364,600 deferred shares granted in fiscal 2013 and 2012 with average grant date fair values of
$10.96 and $9.99, respectively. There were 266,029, 367,449 and 184,149 deferred shares that vested and were released in
fiscal 2014, 2013 and 2012 with weighted average fair values of $22.38, $10.69 and $10.23 per share, respectively.
Note 11—Earnings per Common Share
Basic earnings per share (“EPS”) is calculated based on the weighted average shares outstanding during the period.
Diluted earnings per share includes the dilutive effect of employee and director stock options and nonvested deferred shares.
Stock options are considered dilutive whenever the exercise price is less than the average market price of the stock during the
period and antidilutive whenever the exercise price exceeds the average market price of the common stock during the period.
Nonvested deferred shares are considered dilutive (antidilutive) whenever the average market value of the shares during the
period exceeds (is less than) the sum or the related average unamortized compensation expense during the period plus the
related hypothetical estimated excess tax benefit that will be realized when the shares vest. Stock options and nonvested
deferred shares are considered antidilutive in the event we report a net loss.
62
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
The computation of basic and diluted EPS is as follows:
Basic EPS:
Net income attributable to Matrix Service Company
Weighted average shares outstanding
Basic EPS
Diluted EPS:
Weighted average shares outstanding—basic
Dilutive stock options
Dilutive nonvested deferred shares
Diluted weighted average shares
Diluted EPS
Twelve Months Ended
June 30,
2014
June 30,
2013
June 30,
2012
(In thousands, except per share data)
$
$
$
35,810 $
26,288
1.36 $
24,008 $
25,962
0.92 $
26,288
180
508
26,976
25,962
81
315
26,358
1.33 $
0.91 $
17,188
25,921
0.66
25,921
79
298
26,298
0.65
The following securities are considered antidilutive and have been excluded from the calculation of diluted earnings per
share:
Stock options
Nonvested deferred shares
Total antidilutive securities
Note 12—Employee Benefit Plans
Defined Contribution Plans
June 30,
2014
Twelve Months Ended
June 30,
2013
(In thousands)
193
2
195
—
—
—
June 30,
2012
267
3
270
The Company sponsors defined contribution savings plans for all eligible employees meeting length of service
requirements. Under the primary plan, participants may contribute an amount up to 25% of pretax annual compensation subject
to certain limitations. The Company matches 100% of the first 3% of employee contributions and 50% of the next 2% of
employee contributions. The Company matching contributions vest immediately.
The Company’s matching contributions were $4.1 million, $3.4 million and $3.3 million for the twelve months ended
June 30, 2014, 2013, and 2012, respectively.
Multiemployer Pension Plans
The Company contributes to various union sponsored multiemployer benefit plans in the U.S. and Canada. Benefits under
these plans are generally based on compensation levels and years of service.
For the Company, the financial risks of participating in multiemployer plans are different from single-employer plans in
the following respects:
• Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other
participating employers.
•
If a participating employer discontinues contributions to a plan, the unfunded obligations of the plan may be borne by
the remaining participating employers.
63
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
•
If a participating employer chooses to stop participating in a plan, a withdrawal liability may be created based on the
unfunded vested benefits for all employees in the plan.
Under federal legislation regarding multiemployer pension plans, in the event of a withdrawal from a plan or plan
termination, companies are required to continue funding their proportionate share of such plan’s unfunded vested benefits. We
are a participant in multiple union sponsored multiemployer plans, and, as a plan participant, our potential obligation could be
significant. The amount of the potential obligation is not currently ascertainable because the information required to determine
such amount is not identifiable or readily available.
Our participation in significant plans for the fiscal year ended June 30, 2014 is outlined in the table below. The
“EIN/Pension Plan Number” column provides the Employer Identification Number (“EIN”) and the three digit plan number.
The zone status is based on the latest information that the Company received from the plan and is certified by the plan’s actuary.
Plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are generally less than 80 percent
funded, and plans in the green zone are generally at least 80 percent funded. The “FIP/RP Status Pending/Implemented” column
indicates plans for which a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been
implemented. The “Surcharge Imposed” column includes plans in a red zone status that require a payment of a surcharge in
excess of regular contributions. The last column lists the expiration date of the collective-bargaining agreement to which the
plan is subject.
Pension Fund
EIN/Pension
Plan Number
Pension
Protection Act
Zone Status
2014
2013
FIP/RP
Status
Pending or
Implemented
Company Contributions
Fiscal Year
2014
2013
2012
Surcharge
Imposed
Expiration
Date of
Collective-
Bargaining
Agreement
(In thousands)
Joint Pension Fund
Local Union 164
IBEW (1)
Boilermaker-
Blacksmith
National Pension
Trust
Joint Pension Fund
of Local Union No
102
IBEW Local 456
Pension Plan
22-6031199/001
Yellow
Yellow
Yes
$
2,955
$
3,943
$
1,538
No
5/31/2017
48-6168020/001
Yellow
Yellow
Yes
3,271
2,882
2,845
No
Described
below (2)
22-1615726/001
Green
Green
Yes
2,381
2,387
1,608
No
5/31/2015
22-6238995/001
Yellow
Yellow
Yes
940
2,384
977
No
5/31/2017
Local 351 IBEW
Pension Plan
22-3417366/001
Described
below (3)
Yellow
Yes
2,218
2,281
1,140
No
9/27/2016
Steamfitters Local
Union No 420
Pension Plan
Indiana Laborers
Pension Fund
Iron Workers Mid-
America Pension
Plan
23-2004424/001
Red
Red
Yes
1,677
1,622
813
Yes
4/30/2017
35-6027150/001
Yellow
Yellow
Yes
1,268
36-6488227/001
Green
Green
N/A
1,156
—
—
—
No
5/31/2017
—
No
5/31/2015
Contributions to other multiemployer plans
14,503
8,966
Total contributions made
$
30,369
$
24,465
$
7,616
16,537
64
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
(1) Our contributions for the Joint Pension Fund Local Union 164 IBEW exceeded 5% of total contributions for the 2012 plan year. This information was
not available for the 2013 plan year.
(2) Our collective bargaining agreements with the Boilermaker-Blacksmith National Pension Trust are under a National Maintenance Agreement platform
which is evergreen in terms of expiration. However, the agreements allow for termination of the collective bargaining agreement by either party with a
predetermined written notice.
(3) For the Local 351 IBEW Pension Plan, the Company has not received a funding notification that covers the Company's fiscal year 2014 during the
preparation of this Form 10-K. 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 the Local 351 IBEW Pension Plan has not submitted any Critical or Endangered Status Notices to the
Department of Labor for 2014 (which can be accessed at http://www.dol.gov/ebsa/criticalstatusnotices.html).
Employee Stock Purchase Plan
The Matrix Service Company 2011 Employee Stock Purchase Plan (“ESPP”) was effective January 1, 2011. The ESPP
allows employees to purchase shares through payroll deductions and members of the Board of Directors to purchase shares
from amounts withheld from their cash retainers. Share purchases are limited to an aggregate market value of no greater than
$60,000 per calendar year per participant and are purchased at market value with no discount to the participant. Contributions
are with after tax earnings and are accumulated in non-interest bearing accounts for quarterly purchases of company stock.
Upon the purchase of shares, the participants receive all stockholder rights including dividend and voting rights, and are
permitted to sell their shares at any time. 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. Shares are issued from Treasury Stock under the
ESPP. There were 5,440 shares issued in fiscal 2014, 4,452 shares in fiscal 2013, and 4,395 shares in fiscal 2012.
Note 13—Segment Information
We operate our business through four reportable segments: Electrical Infrastructure, Oil Gas & Chemical, Storage
Solutions, and Industrial.
The Electrical Infrastructure segment primarily encompasses construction and maintenance services to a variety of power
generation facilities, such as combined cycle plants, natural gas fired power stations, and renewable energy installations. We
also provide high voltage services to investor owned utilities, including construction of new substations, upgrades of existing
substations, short-run transmission line installations, distribution upgrades and maintenance, and storm restoration services.
The Oil Gas & Chemical segment includes our traditional turnaround activities, plant maintenance services and
construction in the downstream petroleum industry. Another key offering is industrial cleaning services, which include
hydroblasting, hydroexcavating, chemical cleaning and vacuum services. We also perform work in the petrochemical, natural
gas, gas processing and compression, and upstream petroleum markets.
The Storage Solutions segment includes new construction of crude and refined products ASTs, as well as planned and
emergency maintenance services. Also included in the Storage Solutions segment is work related to specialty storage tanks
including LNG, liquid nitrogen/liquid oxygen LIN/LOX, LPG tanks and other specialty vessels including spheres. We also
offer aboveground storage tank products including floating roof seals. Finally, the Storage Solutions segment includes balance
of plant work in storage terminals and tank farms.
The Industrial segment includes construction and maintenance work in the iron and steel and mining and minerals
industries, bulk material handling and fertilizer production facilities, as well as work for clients in other industrial markets.
The Company evaluates performance and allocates resources based on operating income. The accounting policies of the
reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and
transfers are recorded at cost; therefore, no intercompany profit or loss recognized.
Segment assets consist primarily of accounts receivable, costs and estimated earnings in excess of billings on
uncompleted contracts, property, plant and equipment and goodwill.
65
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Results of Operations
(In thousands)
Electrical
Infrastructure
Oil Gas &
Chemical
Storage
Solutions
Industrial
Unallocated
Corporate
Total
$
$
$
Twelve months ended June 30, 2014
Gross revenues
Less: inter-segment revenues
Consolidated revenues
Gross profit
Operating income
Segment assets
Capital expenditures
Depreciation and amortization expense
Twelve months ended June 30, 2013
Gross revenues
Less: inter-segment revenues
Consolidated revenues
Gross profit
Operating income (loss)
Segment assets
Capital expenditures
Depreciation and amortization expense
Twelve months ended June 30, 2012
Gross revenues
Less: inter-segment revenues
Consolidated revenues
Gross profit
Operating income (loss)
Segment assets
Capital expenditures
Depreciation and amortization expense
205,570 $
—
205,570
20,629
7,703
120,264
9,055
3,292
171,204 $
—
171,204
21,754
11,185
64,771
2,129
2,167
135,086 $
—
135,086
16,676
7,609
51,998
2,581
1,823
240,131 $
441
239,690
26,912
9,939
72,406
5,421
3,768
273,979 $
131
273,848
32,879
15,415
75,591
2,942
2,943
206,031 $
208
205,823
20,070
8,134
53,567
2,346
2,838
611,826 $ 206,933 $
930
610,896
68,448
34,310
200,493
2,519
7,707
206,933
20,484
6,655
105,049
1,157
3,751
— $ 1,264,460
1,371
—
1,263,089
—
136,473
—
58,607
—
568,932
70,720
23,589
5,437
18,518
—
395,794 $
2,593
393,201
37,455
11,904
159,149
9,929
6,740
380,488 $
2,334
378,154
42,393
17,493
150,543
3,929
6,309
54,321 $
—
54,321
2,614
(1,790 )
27,347
1,645
932
19,983 $
—
19,983
479
(1,601 )
14,018
741
515
— $
—
—
—
—
83,120
6,586
—
— $
—
—
—
—
53,009
3,937
—
895,298
2,724
892,574
94,702
36,714
409,978
23,231
12,782
741,588
2,542
739,046
79,618
31,635
323,135
13,534
11,485
66
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Geographical information is as follows:
Domestic
International
Domestic
International
June 30,
2014
Revenues
Twelve Months Ended
June 30,
2013
(In thousands)
June 30,
2012
1,149,262 $
113,827
1,263,089 $
814,879 $
77,695
892,574 $
674,496
64,550
739,046
June 30,
2014
Long-Lived Assets
June 30,
2013
(In thousands)
June 30,
2012
164,894 $
28,490
193,384 $
101,581 $
12,378
113,959 $
85,290
6,132
91,422
$
$
$
$
Information about Significant Customers
In fiscal 2014, two customers accounted for 17.3% and 12.7% of our consolidated revenue and 35.8% and 26.3% of our
Storage Solutions revenue, respectively. Four other customers accounted for 20.8%, 17.5%, 17.0%, and 10.8% of our Electrical
Infrastructure revenue, respectively. An additional three customers accounted for 18.3%, 14.0%, and 10.2% of our Oil Gas &
Chemical revenue, respectively. Five more customers accounted for 23.3%, 15.1%, 13.0%, 12.7%, and 11.3% of our Industrial
revenue, respectively.
In fiscal 2013, one customer accounted for 10.7% of our consolidated revenue and 24.3% of our Storage Solutions
revenue and an additional customer accounted for 10.6% of our Storage Solutions revenue. Four other customers accounted for
24.9%, 19.6%, 12.6% and 11.1% of our Electrical Infrastructure revenue, respectively. An additional three customers
accounted for 20.7%, 16.1% and 10.0% of our Oil Gas & Chemical revenue, respectively. Three more customers accounted for
23.3%, 20.5% and 16.4% of our Industrial revenue, respectively.
In fiscal 2012, one customer accounted for 11.0% of our consolidated revenue and 35.1% of our Oil Gas & Chemical
revenue and an additional customer accounted for 16.2% of our Oil Gas & Chemical revenue. Another customer accounted for
10.7% of our consolidated revenue and 20.9% of our Storage Solutions revenue. Three other customers accounted for 18.6%,
11.8% and 11.2% of our Electrical Infrastructure revenue, respectively. An additional four customers accounted for 25.7%,
18.1%, 15.3% and 12.2% of our Industrial revenue, respectively.
Note 14—Subsequent Event
On August 22, 2014 the Company purchased substantially all of the assets of HDB Ltd. Limited Partnership ("HDB").
HDB, with an office in Bakersfield, California provides construction, fabrication and turnaround services to energy companies
throughout California’s central valley. The acquisition advances a strategic goal of the Company's to expand into the upstream
energy market. The acquisition purchase price was $5.25 million and was funded with cash on hand. The accounting for this
acquisition is incomplete; however, the Company does not expect the impact of the acquisition to be material to the financial
statements.
67
Matrix Service Company
Quarterly Financial Data (Unaudited)
Fiscal Years Ended June 30, 2014 and June 30, 2013
Fiscal Year 2014
Revenues
Gross profit
Operating income
Net income
Earnings per common share:
Basic
Diluted
Fiscal Year 2013
Revenues
Gross profit
Operating income
Net income
Earnings per common share:
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share amounts)
$
$
226,217 $
25,476
10,762
6,552
310,998 $
34,150
14,817
10,306
0.25
0.25
0.39
0.38
209,608 $
22,244
7,924
4,684
221,436 $
22,333
8,722
5,436
0.18
0.18
0.21
0.21
381,516 $
39,944
18,819
11,396
0.43
0.42
225,970 $
23,126
8,431
6,521
0.25
0.25
344,358
36,903
14,209
7,556
0.29
0.28
235,560
26,999
11,587
7,367
0.28
0.28
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.
68
Matrix Service Company
Schedule II—Valuation and Qualifying Accounts
June 30, 2014, June 30, 2013, and June 30, 2012
(In thousands)
COL. A
COL. B
COL. C
ADDITIONS
Balance at
Beginning of
Period
Charged to
Costs and
Expenses
Charged to
Other
Accounts—
Describe
COL. D
COL. E
Deductions—
Describe
Balance at
End of
Period
Fiscal Year 2014
Deducted from asset accounts:
Allowance for doubtful accounts
Valuation reserve for deferred tax assets
$
Total
Fiscal Year 2013
Deducted from asset accounts:
$
Allowance for doubtful accounts
Valuation reserve for deferred tax assets
$
Total
Fiscal Year 2012
Deducted from asset accounts:
$
795 $
90
885 $
121
—
121
1,201 $
230
1,431 $
725
(140) (B)
585
Allowance for doubtful accounts
Valuation reserve for deferred tax assets
$
Total
$
1,428 $
774
2,202 $
23
(544 )
(521)
$
$
$
$
$
$
—
—
—
$
(712 ) (A) $
—
(712 )
$
(666) (C) $
—
(666 )
$
(465 )
—
(465 )
(250)
—
$
(250)
$
—
—
—
204
90
294
795
90
885
1,201
230
1,431
$
$
$
$
$
(A) Receivables written off against allowance for doubtful accounts.
(B) Release of the valuation allowance on foreign tax credit carryovers which have now been determined to be utilizable
(C) Collection of a fully reserved receivable recognized as revenue
69
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in
our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on
the definition of “disclosure controls and procedures” in Rule 13a-15(e).
The disclosure controls and procedures are designed to provide reasonable, not absolute, assurance of achieving the
desired control objectives. The Company’s management, including the Chief Executive Officer and Chief Financial Officer,
does not expect that the disclosure controls and procedures or our internal controls over financial reporting will prevent or
detect all errors or fraud. The design of our internal control system takes into account the fact that there are resource constraints
and the benefits of controls must be weighed against the costs. Additionally, controls can be circumvented by the acts of key
individuals, collusion or management override.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls
and procedures as of June 30, 2014. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective at the reasonable assurance level at June 30, 2014.
Management’s Report on Internal Control over Financial Reporting
See “Management’s Report on Internal Control over Financial Reporting” set forth in Item 8, Financial Statements and
Supplementary Data of this Annual Report on Form 10-K. During fiscal year 2014, the Company acquired 100% of the stock of
Kvaerner North American Construction Ltd. and substantially all of the assets of Kvaerner North American Construction Inc,.
together referenced as "KNAC". The businesses are now known as Matrix North American Construction Ltd. and Matrix North
American Construction, Inc., together referenced as "Matrix NAC". Refer to Note 2 of Notes to the Consolidated Financial
Statements for additional information regarding this event. Management has excluded this business from its evaluation of the
effectiveness of the Company's internal control over financial reporting as of June 30, 2014. The revenues attributable to this
business represented approximately 12 percent of the Company's consolidated revenues for the year ended June 30, 2014 and
its aggregate total assets represented approximately 25 percent of the Company's consolidated total assets as of June 30, 2014.
Changes in Internal Control Over Financial Reporting
Except as described below, there have been no changes during the fourth fiscal quarter that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. We have completed the acquisition of Matrix
NAC effective December 21, 2013. We are in the process of assessing and, to the extent necessary, making changes to the
internal control over financial reporting of Matrix NAC to conform such internal control to that used on our other operations.
However, we are not yet required to evaluate, and have not yet fully evaluated, changes in Matrix NAC's internal control over
financial reporting. Subject to the foregoing, there have been no changes in our internal controls over financial reporting that
have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting during the
quarter ended June 30, 2014.
Item 9B. Other Information
None
70
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item with respect to the Company’s directors and corporate governance is incorporated
herein by reference to the sections entitled “Proposal Number 1: Election of Directors” and “Corporate Governance and Board
Matters” in the Company’s definitive Proxy Statement for the 2014 Annual Meeting of Stockholders (“Proxy Statement”). The
information required by this item with respect to the Company’s executive officers is incorporated herein by reference to the
section entitled “Executive Officer Information” in the Proxy Statement. The information required by this item with respect to
the Section 16 ownership reports is incorporated herein by reference to the section entitled “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement.
The Company has adopted a Code of Business Conduct and Ethics applicable to all directors, officers and employees,
including the principal executive officer, principal financial officer and principal accounting officer of the Company. In
addition, we have adopted Corporate Governance Guidelines for the Board of Directors and Charters for the Audit,
Compensation and Nominating and Corporate Governance Committees of the Board of Directors. The current version of these
corporate governance documents is publicly available in the “Investors” section of the Company’s website at
matrixservicecompany.com under “Corporate Governance.” If we make any substantive amendments to the Code of Business
Conduct and Ethics, or grant any waivers, including implicit waivers, from the Code of Business Conduct and Ethics applicable
to the principal executive officer, principal financial officer or principal accounting officer, or any person performing similar
functions, we will disclose such amendment or waiver on our website or in a report on Form 8-K.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the sections entitled “Director
Compensation” and “Executive Officer Compensation” in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the sections entitled “Securities Authorized
for Issuance Under Executive Compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management”
in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the section entitled “Proposal Number 1:
Election of Directors” and “Certain Relationships and Related Transactions” in the Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the sections entitled “Fees of Independent
Registered Public Accounting Firm” and “Audit Committee Pre-Approval Policy” in the Proxy Statement.
71
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements of the Company
PART IV
The following financial statements and supplementary data are filed as a part of this report under “Item 8—Financial
Statements and Supplementary Data” in this Annual Report on Form 10-K:
Financial Statements of the Company
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm (Deloitte & Touche LLP)
Consolidated Statements of Income for the Years Ended June 30, 2014, June 30, 2013 and June 30,
2012
Consolidated Statements of Comprehensive Income for the Years Ended June 30, 2014, June 30,
2013 and June 30, 2012
Consolidated Balance Sheets as of June 30, 2014 and June 30, 2013
Consolidated Statements of Cash Flows for the Years Ended June 30, 2014, June 30, 2013 and
June 30, 2012
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended June 30,
2014, June 30, 2013 and June 30, 2012
Notes to Consolidated Financial Statements
Quarterly Financial Data (Unaudited)
Schedule II—Valuation and Qualifying Accounts
(2) Financial Statement Schedules
36
37
39
40
41
43
45
46
68
69
The financial statement schedule is filed as a part of this report under Schedule II—Valuation and Qualifying Accounts
for the three fiscal years ended June 30, 2014, June 30, 2013 and June 30, 2012, immediately following Quarterly Financial
Data (Unaudited). All other schedules are omitted because they are not applicable or the required information is shown in the
financial statements, or notes thereto, included herein.
(3) The following documents are included as exhibits to this Annual Report on Form 10-K:
2.0
3.1
3.2
3.3
3.4
Sales and Purchase Agreement dated December 8, 2013 between Matrix North America Construction, Inc. and
Matrix Canadian Holdings, Inc., as Buyers, Matrix Service Company as a Buyer Party, Kvaerner North
American Construction Inc. and Kvaerner AS, as Sellers and Kvaerner ASA, as Seller's Guarantor (Exhibit 2.1
to the Company's Current Report on Form 8-K (File No. 1-15461) filed December 27, 2013, is hereby
incorporated by reference).
Amended and Restated Certificate of Incorporation (Exhibit 4.1 to the Company’s Registration Statement on
Form S-3 (File No. 333-156814) filed January 21, 2009, is hereby incorporated by reference).
Certification of Designations, Preferences and Rights of Series B Junior Preferred Stock dated November 12,
1999 (Exhibit 3.2 to the Company’s Registration Statement on Form S-3 (File No. 333-117077) filed July 1,
2004, is hereby incorporated by reference).
Certificate of Increase of Authorized Number of Shares of Series B Junior Participating Preferred Stock pursuant
to Section 151 of the General Corporation Law of the State of Delaware dated July 11, 2005 (Exhibit 3.5 to the
Company’s Annual Report on Form 10-K (File No. 1-15461) filed August 17, 2005, is hereby incorporated by
reference).
Certificate of Increase of Authorized Number of Shares of Series B Junior Participating Preferred Stock pursuant
to Section 151 of the General Corporation Law of the State of Delaware dated October 23, 2006 (Exhibit 3.7 to
the Company’s Annual Report on Form 10-K (File No. 1-15461) filed August 14, 2007, is hereby incorporated
by reference).
72
3.5
Amended and Restated Bylaws (Exhibit 3 to the Company’s Current Report on Form 8-K (File No. 1-15461)
filed April 9, 2009, is hereby incorporated by reference).
4
Specimen Common Stock Certificate (Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (File
No. 33-36081) filed July 26, 1990, is hereby incorporated by reference).
+10.1
Matrix Service Company 1990 Incentive Stock Option Plan (Exhibit 10.14 to the Company’s Registration
Statement on Form S-1 (File No. 33-36081) filed June 12, 1990, is hereby incorporated by reference).
+10.2
Matrix Service Company 1991 Incentive Stock Option Plan (Exhibit 10.1 to the Company’s Registration
Statement on Form S-8 (File No. 333-56945) filed June 16, 1998, is hereby incorporated by reference).
+10.3
Matrix Service Company 1995 Nonemployee Directors’ Stock Option Plan (Exhibit 4.3 to the Company’s
Registration Statement on Form S-8 (File No. 333-02771) filed April 23, 1996, is hereby incorporated by
reference).
+10.4
Amendment No. 1 to the Matrix Service Company 1995 Nonemployee Directors’ Stock Option Plan (Exhibit B
to the Company’s 2005 Proxy Statement filed September 16, 2005 (File No. 1-15461), is hereby incorporated by
reference).
+10.5
Form of Stock Option Award Agreement (1995 Directors' Plan) (Exhibit 10.6 to the Company’s Annual Report
on Form 10-K (File No. 1-15461) filed August 4, 2006, is hereby incorporated by reference).
+10.6
Matrix Service Company 2004 Stock Incentive Plan (Appendix B to the Company’s Proxy Statement filed
September 15, 2006 (File No. 1-15461), is hereby incorporated by reference).
+10.7
Amendment 1 to Matrix Service Company 2004 Stock Incentive Plan (Exhibit 10 to Amended Schedule 14A
filed October 4, 2006 (File No. 1-15461), is hereby incorporated by reference).
+10.8
Amendment 2 to Matrix Service Company 2004 Stock Incentive Plan (Exhibit 10.6 to the Company’s Annual
Report on Form 10-K (File No. 1-15461) filed August 5, 2008, is hereby incorporated by reference).
+10.9
Amendment 3 to Matrix Service Company 2004 Stock Incentive Plan (Exhibit A to the Company’s Proxy
Statement filed September 11, 2009 (File No. 1-15461), is hereby incorporated by reference).
+10.10
Form of Restricted Stock Unit Award Agreement for non-employee directors (2004 Stock Incentive Plan)
(Exhibit 10.8 to the Company’s Annual Report on Form 10-K (File No. 1-15461) filed September 28, 2010 (the
“2010 10-K”), is hereby incorporated by reference).
+10.11
Form of Restricted Stock Unit Award Agreement for employees (2004 Stock Incentive Plan - time-based)
(Exhibit 10.11 to the Company's Annual Report on Form 10-K (File No. 1-15461) filed September 6, 2012 (the
"2012 10-K"), is hereby incorporated by reference).
+10.12
Form of Restricted Stock Unit Award Agreement for executive management (2004 Stock Incentive Plan –
performance based) (Exhibit 10.10 to the 2010 10-K is hereby incorporated by reference).
+10.13
Form of Stock Option Award Agreement (2004 Stock Incentive Plan – Incentive Stock Options) (Exhibit 10.13
to the 2012 10-K is hereby incorporated by reference).
+10.14
Form of Stock Option Award Agreement (2004 Stock Incentive Plan – Non-qualified) (Exhibit 10.14 to the 2012
10-K is hereby incorporated by reference).
+10.15
Matrix Service Company 2012 Stock and Incentive Compensation Plan (Attachment A to the Company's Proxy
Statement (File No. 1-15461) filed October 10, 2012, is hereby incorporated by reference).
73
+10.16
Long-Term Incentive Award Agreement (2012 Stock and Incentive Compensation Plan) (Exhibit 10 to the
Company's Quarterly Report on Form 10-Q (File No. 1-15461) filed February 7, 2013, is hereby incorporated by
reference).
+10.17
Form of Severance Agreement (Exhibit 10.6 to the Company’s Current Report on Form 8-K (File No. 1-15461)
filed October 27, 2006, is hereby incorporated by reference).
+10.18
Form of Amendment to Severance Agreement, (Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
(File No. 1-15461) filed January 8, 2009, is hereby incorporated by reference).
+10.19
Amended and Restated Deferred Compensation Plan for Members of the Board of Directors (Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q (File No. 1-15461) filed January 8, 2009, is hereby incorporated by
reference).
+10.20
Amendment 1 to Amended and Restated Deferred Compensation Plan for Members of the Board of Directors
(Exhibit 10 to the Company's Quarterly Report on Form 10-Q (File No. 1-15461) filed November 9, 2012, is
hereby incorporated by reference).
10.21
Third Amended and Restated Credit Agreement dated as of November 7, 2011, among the Company, as
Borrower, JPMorgan Chase Bank, N.A., as Administrative Agent, Swingline Lender and Issuing Bank, J.P.
Morgan Securities LLC, as Sole Bookrunner and Sole Lead Arranger and the Lenders party thereto (Exhibit 10
to the Company’s Quarterly Report on Form 10-Q (File No. 1-15461) filed November 8, 2011, is hereby
incorporated by reference).
10.22
First Amendment effective as of March 13, 2014 to the Third Amended and Restated Credit Agreement (Exhibit
10 to the Company's Current Report on Form 8-K (File No. 1-5461) filed March 19, 2014, is hereby
incorporated by reference).
+*10.23
Separation Agreement and Release of Claims effective as of June 23, 2014 between Matthew J. Petrizzo and
Matrix Service Company
*21 Subsidiaries.
*23 Consent of Independent Registered Public Accounting Firm—Deloitte & Touche LLP.
*31.1 Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002—CEO.
*31.2 Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002—CFO.
*32.1 Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002)—CEO.
*32.2 Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002)—CFO.
*95 Mine Safety Disclosure.
*101.INS XBRL Instance Document.
*101.SCH XBRL Taxonomy Schema Document.
*101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
*101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
*101.LAB XBRL Taxonomy Extension Labels Linkbase Document.
*101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
*Filed herewith
+Management Contract or Compensatory Plan.
74
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Matrix Service
Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date : September 8, 2014
Matrix Service Company
By:
John R. Hewitt, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
John R. Hewitt
President, Chief Executive Officer and Director
(Principal Executive Officer)
September 8, 2014
Kevin S. Cavanah
Michael J. Hall
I. Edgar Hendrix
Paul K. Lackey
Tom E. Maxwell
Jim W. Mogg
James H. Miller
Vice President
and Chief Financial Officer
(Principal Accounting and
Principal Financial Officer)
September 8, 2014
Director
September 8, 2014
Director
September 8, 2014
Director
September 8, 2014
Director
September 8, 2014
Director
September 8, 2014
Director
September 8, 2014
EXHIBIT 21
Matrix Service Company
Subsidiaries
Matrix Service Inc., an Oklahoma corporation
Matrix Service Inc. Canada, an Ontario, Canada corporation
Matrix Service Canada ULC, an Alberta, Canada unlimited liability corporation
Matrix North American Holdings, Inc., a Delaware corporation
Matrix North American Construction, Inc., a Delaware corporation
Matrix North American Construction, Ltd., a Canadian corporation
Matrix SME, Inc., an Oklahoma corporation
Matrix SME Canada, Inc., a Delaware corporation
Matrix SME Canada ULC, a Nova Scotia, Canada unlimited liability corporation
Matrix PDM Engineering, Inc., a Delaware corporation
Matrix PDM, LLC, an Oklahoma limited liability corporation
Matrix Applied Technologies, Inc., a Delaware corporation
Mobile Aquatic Solutions, Inc., an Oklahoma corporation
I, John R. Hewitt, certify that:
1.
I have reviewed this annual report on Form 10-K of Matrix Service Company;
CERTIFICATIONS
EXHIBIT 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date : September 8, 2014
John R. Hewitt
President and Chief Executive Officer
I, Kevin S. Cavanah, certify that:
1.
I have reviewed this annual report on Form 10-K of Matrix Service Company;
CERTIFICATIONS
EXHIBIT 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date : September 8, 2014
Kevin S. Cavanah
Vice President and Chief Financial Officer
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant
Section 906 of Sarbanes-Oxley Act of 2002
EXHIBIT 32.1
In connection with the Annual Report of Matrix Service Company (the “Company”) on Form 10-K for the period ending
June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John R. Hewitt,
President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934 as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: September 8, 2014
John R. Hewitt
President and Chief Executive Officer
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant
Section 906 of Sarbanes-Oxley Act of 2002
EXHIBIT 32.2
In connection with the Annual Report of Matrix Service Company (the “Company”) on Form 10-K for the period ending
June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kevin S.
Cavanah, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934 as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: September 8, 2014
Kevin S. Cavanah
Vice President and Chief Financial Officer
Shareholder Information
Corporate Offices
5100 E. Skelly Drive – Suite 700
Tulsa, Oklahoma 74135
Ph: (918) 838 – 8822
Fax: (918) 838 – 8810
Website: matrixservicecompany.com
Common Stock Data
Matrix Service Company’s Common
Stock is traded on NASDAQ
Global Select Market under the
Ticker Symbol: “MTRX”
Notice of Annual Meeting
The Annual Meeting of Stockholders
will be at the Matrix Service Company Office located at:
5100 E. Skelly Drive – Suite 100
Tulsa, Oklahoma
November 13, 2014 at 2:00 p.m. CDT
Independent Registered Public Accountants
Deloitte & Touche LLP
100 S. Cincinnati Ave.
Suite 700
Tulsa, Oklahoma 74103
Stock Transfer Agent & Registrar
Computershare Trust Company, N.A.
250 Royall Street
Canton, Massachusetts 02021
Investor and Media Relations
Kevin S. Cavanah
Vice President and Chief Financial Officer
Matrix Service Company
5100 E. Skelly Drive – Suite 700
Tulsa, OK 74135
Stockholder Relations & Available Information
Matrix Service Company’s Annual Report on Form
10-K filed with the Securities and Exchange
Commission may be obtained without charge by
writing to:
Kevin S. Cavanah
Vice President and Chief Financial Officer
Matrix Service Company
5100 E. Skelly Drive – Suite 700
Tulsa, OK 74135
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Matrix Service Company, the NASDAQ Composite Index,
and the S&P Construction & Engineering Index
$300
$250
$200
$150
$100
$50
$0
6/09
6/10
6/11
6/12
6/13
6/14
Matrix Service Company
NASDAQ Composite
S&P Construction & Engineering
*$100 invested on 6/30/09 in stock or index, including reinvestment of dividends.