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5100 E. SKELLY DR., STE. 100 | TULSA, OK 74135
MATRIXSERVICECOMPANY.COM
NASDAQ: MTRX
ANNUAL
REPORT
2019
OUR VISION
To be the company of choice for
engineering, constructing and maintaining
the energy and industrial infrastructure
that people rely on around the world.
BOARD OF DIRECTORS
Jim W. Mogg
Chairman of the Board
John R. Hewitt
President and Chief Executive Officer
Martha Z. Carnes
Audit Committee Chair
John D. Chandler
Director
John W. Gibson
Compensation Committee Chair
Liane K. Hinrichs
Nominating and Corporate Governance Chair
James H. Miller
Director
OUR VALUES
COMMITMENT TO SAFETY
Put safety first for yourself and others.
Create a zero-incident environment
through leadership.
INTEGRITY
Do the right thing every time,
ethically and honestly.
POSITIVE RELATIONSHIPS
Be respectful, promote collaboration
and build lasting relationships.
STEWARDSHIP
Safeguard all that is entrusted to us.
COMMUNITY INVOLVEMENT
Make a difference in the communities
where we live and work.
DELIVER THE BEST
Strive for excellence in all we do.
MATRIX SERVICE COMPANY LEADERSHIP TEAM
John R. Hewitt
President and Chief Executive
Officer and Director
Joseph F. Montalbano
Chief Operating Officer
Kevin S. Cavanah
Vice President and
Chief Financial Officer
Alan R. Updyke
President, Operations
Nancy E. Austin
Vice President and Chief
Administrative Officer
D. Quinton Beasley
Vice President, Accounting
Rick J. Bennett
Vice President and
Chief Information Officer
Jack Frost
Vice President, Health,
Safety and Environmental
Melissa K. Gilliland
Vice President, Human Resources
Justin D. Sheets
Vice President and General Counsel
SUBSIDIARY LEADERSHIP TEAM
Bradley J. Rinehart
President, Matrix Service
Daniel T. Blair
Vice President, Matrix NAC
Jeffrey A. Hermann
Vice President, Matrix NAC
Glyn A. Rodgers
Frank M. Capristo
President, Matrix PDM Engineering
Vice President, Matrix Service
Bradley C. Killmer
Vice President, Matrix Service
Jason W. Turner
President, Matrix NAC
Kenneth L. Erdmann, P.E.
Senior Vice President,
Matrix PDM Engineering
Shawn P. Payne
Senior Vice President,
Matrix Service
Terry D. Stewart
Senior Vice President,
Matrix NAC
Patrick M. Chambers
Vice President, Matrix Service
Kevin A. Durkin
Vice President, Matrix Service
James C. Faroh
Vice President, Matrix NAC
Michael E. Formaini
Vice President, Matrix NAC
Karen A. McDonald
Vice President, Matrix Service
Douglas J. Montalbano
Vice President, Matrix NAC
Vicki R. Reese
Vice President, Matrix NAC
Matrix Service Company is an Equal Opportunity/Affirmative Action employer and does not discriminate against any employee or applicant for employment because of race,
color, religion, gender, sexual orientation, national origin, age, genetic information, disability, veteran status, marital status, or any other legally protected characteristic or category.
TO OUR SHAREHOLDERS
In April 2019, Matrix Service Company celebrated its 35th year
in business, providing an opportunity to reflect on the many
achievements made by our people over the years. Through their
hard work and commitment, our Company has been transformed
from a regional provider of tank repair and maintenance services
to a leading EPC contractor to North America’s energy and industrial
markets — one whose work makes life’s daily necessities possible
and improves quality of life for people all over the world.
Together, we have taken a disciplined approach to growth that has allowed us to acquire new skillsets
and expertise, significantly increase our project capabilities and capacity, diversify our markets, and
expand our geographic reach. This controlled approach has also protected our business during times
when end market conditions have created considerable challenges for our customers and, in turn, for us.
In this fiscal year, with continued improvement in our
customers’ end markets, we saw a return of larger-scale
capital construction and turnaround and plant services
projects across the oil and gas, power, iron and steel,
and other industrial markets. This shift, along with strong
performance by our people across the Company, is
reflected in our results.
For Matrix, fiscal 2019 has
been a year characterized
by increasing momentum.
Our end markets are strong, our project pipeline is
robust, our people are best-in-class, and our vision and
strategy are clear. We are well-positioned for continued
revenue growth, improved profitability, and creation of
sustainable long-term value for our shareholders, our
customers, and our employees.
THE YEAR IN REVIEW
As we look back on fiscal 2019, we improved our
performance quarter over quarter, preserved backlog
supported by solid project awards, maintained a
strong balance sheet, and delivered on earnings —
achievements made possible because of the resolve of
our employees, the support of our Board of Directors,
and the trust of our shareholders.
REVENUE
$1.4B
up 30% over the prior year
BACKLOG
$1.1B
on project awards of $1.3B
EPS
$1.01
improved earnings performance
LIQUIDITY
$242M
up 76% in the fiscal year
We also made good progress on our multi-year strategy,
focused on four key areas: Safety, People and Communication,
Clients and Growth, and Execution Excellence.
FOCUSED GROWTH AREA
Our world-class EPC storage and terminal capabilities in crude oil, LNG, and NGLs are in
high demand for projects that support North America’s energy abundance and the United
States’ leading position in the global energy market. This expertise is also advancing our
position as the leading contractor of choice for mid-size LNG facilities, where significant
opportunities exist for peak shaving, bunkering, and feedstock for off-grid and remote
electrical generation.
SAFETY
CLIENTS
& GROWTH
Our mission to achieve and maintain a zero-
As we take on increasing volumes of work and more complex
incident work environment is a never-ending
projects, we continue to make necessary investments in people,
journey that we believe is both a moral
obligation and a business imperative. We
continue to invest in our people, training,
and processes to drive down our total
recordable incident rate. We focused on
processes, and technology.
Our world-class EPC storage and terminal capabilities in crude
oil, LNG, and NGLs are in high demand for projects that support
North America’s energy abundance and the United States’
leading position in the global energy market. This expertise is
engineered solutions to mitigate safety risk and
also advancing our position as the leading contractor of choice
implemented a world-class HSE management
for mid-size LNG facilities, where significant opportunities
system that will provide better, more real time
exist for peak shaving, bunkering, and feedstock for off-grid
data to focus our actions to effectively improve
and remote electrical generation. Our progress to build brand
our performance and advance our objective of
awareness and expand our service territory in midstream natural
zero incidents.
gas processing is gaining traction.
PEOPLE &
COMMUNICATION
Ultimately, our performance is a reflection
of our commitment to our culture and core
We continue to build on our strong position in North America’s
refineries, providing onsite maintenance and repair as well as
ongoing turnarounds, capital projects, and plant services. We are
also focused on extending our expertise in capital construction,
turnarounds, and plant services to the petrochemical industry as
it invests in new and existing facilities, primarily along the U.S.
Gulf Coast.
values which emphasize safety, building
We remain the leading contractor of choice for maintenance and
positive relationships, acting with stewardship
repair services inside North America’s integrated iron and steel
and integrity, giving back to the communities
facilities and for new capital projects supporting advanced high-
where we live and work, and always delivering
our best. As such, we continue to invest
heavily in our people and in developing strong
communication channels that will flow openly
across our organization. Our executive and
strength steel and other next-generation processes. Our position
in mining and minerals and material handling also positions us
for improving opportunities when the industrial commodity
demand and pricing strengthens for copper and other non-
ferrous metals including gold and other rare earth minerals.
senior leadership, directors, and managers
Finally, significant opportunity exists in power delivery as
are actively engaged in key people initiatives
a result of aging infrastructure; the need for more reliable,
focused on:
• Developing current and future workforce
• Improving hiring and selection processes
• Strengthening our learning culture
• Building an inclusive and diverse workplace
efficient, secure, and interconnected distribution. Demand for
environmentally compliant power generation fueled by low
cost and abundant natural gas, is continuing to create unique
opportunities to support our strategy of smaller, well-defined
package work.
• Ensuring a harassment-free environment
We will also pursue strategic and opportunistic acquisitions that
• Doing all we can to promote health
are a good cultural and strategic fit.
and wellness
EXECUTION EXCELLENCE
We are actively engaged in initiatives that will allow for greater efficiencies and consistent,
sustainable earnings. These initiatives include, among others, implementation of an enterprise-
wide quality management system, enhanced engineering tools, improved business and project
management processes, and continued strong cash management.
We are also actively at work formalizing our Sustainability Strategy to tell our story about
initiatives already in place, and to expand our efforts even further. We want to thoughtfully
ensure that we embed a strong Corporate Social Responsibility culture into our business
strategy and processes, and that we communicate the results of our efforts to all stakeholders.
LOOKING AHEAD
As we look ahead to fiscal 2020 and beyond,
I am confident in our ability to deliver continued
growth and sustainable shareholder value.
• We are working in
• We are focused. We have a clear
• We know how to execute. We
strong, diversified markets
vision and strategy with experienced
put safety first, deliver on our
where our services are in
leadership, best-in-class people, and
promises, and conservatively
high demand.
a solid culture and core values.
manage our capital.
These elements — demand, focus, and execution — create significant momentum for higher backlog,
revenue, earnings, and free cash flow.
In closing, I would like to thank our shareholders, customers, employees, and Board of Directors
for your continued trust, confidence, and support.
Respectfully,
John R. Hewitt
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☑ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
□ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2019
or
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 500
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 each class
Common Stock, par value $0.01 per share
Trading Symbol(s)
MTRX
Name of each exchange on which registered
NASDAQ Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes □ No ☑
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 □ No ☑
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 ☑ No □
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☑ No □
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See definitions of ‘‘large accelerated filer’’, ‘‘accelerated filer’’, ‘‘smaller reporting company’’, and
‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.
Large accelerated filer □
Emerging growth company □
Accelerated filer ☑
Non-accelerated filer □
Smaller reporting company □
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. □
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes □ No ☑
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 $472 million.
The number of shares of the registrant’s common stock outstanding as of August 30, 2019 was 27,131,446 shares.
Certain sections of the registrant’s definitive proxy statement relating to the registrant’s 2019 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.
Documents Incorporated by Reference
[THIS PAGE INTENTIONALLY LEFT BLANK]
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 and Management and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13.
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . .
Item 14.
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part IV
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16.
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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1
PART I
Item 1.
Business
FORWARD-LOOKING STATEMENTS
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:
•
•
•
•
•
•
•
•
our ability to generate sufficient cash from operations, access our credit facility, or raise cash in order to
meet our short and long-term capital requirements;
the impact to our business of changes in crude oil, natural gas and other commodity prices;
amounts and nature of future revenues and margins from each of our segments;
trends in the industries we serve;
the likely impact of new or existing regulations or market forces on the demand for our services;
expansion and other trends of the industries we serve;
our expectations with respect to the likelihood of a future impairment; 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;
economic, market or business conditions in general and in the oil, natural gas, power, iron and steel,
agricultural and mining industries in particular;
the under-utilization of our work force;
delays in the commencement of major projects, whether due to permitting issues or other factors;
reduced creditworthiness of our customer base and the higher risk of non-payment of receivables due to
volatility of crude oil, natural gas, steel and other commodity prices to which our customers’ businesses are
affected;
the inherently uncertain outcome of current and future litigation;
the adequacy of our reserves for claims and contingencies;
changes in laws or regulations, including the imposition, cancellation or delay of tariffs on imported goods;
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.
2
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, agricultural, mining and minerals markets. We also sell products for crude oil and refined product
aboveground storage tanks. We maintain regional offices throughout
the United States, Canada and other
international locations, and operate through separate union and merit subsidiaries.
The Company is licensed to operate in all 50 states, in four Canadian provinces and in other international locations.
Our principal executive offices are located at 5100 E. Skelly Drive, Suite 500, 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.
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. Investors should monitor such
portions of our website for press releases, SEC filings and public conference calls and webcasts.
While not our primary means of communication, investors can also learn more about the Company by visiting our
social media channels. We encourage investors, the media, and others interested in Matrix to review the information
posted by the Company on its 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.
OPERATING SEGMENTS
We operate our business through four reportable segments: Electrical Infrastructure; Oil Gas & Chemical; Storage
Solutions; and Industrial.
The Electrical Infrastructure segment consists of power delivery services provided to investor owned utilities,
including construction of new substations, upgrades of existing substations, short-run transmission line installations,
distribution upgrades and maintenance, as well as emergency and storm restoration services. We also provide
construction and maintenance services to a variety of power generation facilities, such as combined cycle plants and
other natural gas fired power stations.
The Oil Gas & Chemical segment serves customers primarily in the downstream and midstream petroleum industries
who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas
liquids. We also perform work in the petrochemical, upstream petroleum, and sulfur extraction, recovery and
processing markets. Our services include plant maintenance, turnarounds, engineering and capital construction. We
also offer industrial cleaning services, including hydro-blasting, hydro-excavating, advanced chemical cleaning and
vacuum services.
The Storage Solutions segment consists of work related to aboveground storage tanks (‘‘AST’’) and terminals. Also
included in this segment are cryogenic and other specialty storage tanks and terminals including liquefied natural gas,
liquid nitrogen/liquid oxygen, liquid petroleum and other specialty vessels such as spheres as well as marine
structures and truck and rail
loading/offloading facilities. Our services include engineering, fabrication and
construction, and maintenance and repair, which includes planned and emergency services for both tanks and full
terminals. Finally, we offer AST products, including geodesic domes, aluminum internal floating roofs, floating
suction and skimmer systems, roof drain systems and floating roof seals.
3
The Industrial segment consists of work for integrated iron and steel companies, major mining and minerals
companies engaged primarily in the extraction of copper, as well as companies in other industries, including
aerospace and defense, cement, and agriculture and grain. Our services include engineering, fabrication and
construction, and maintenance and repair, which includes planned and emergency services. We also design
instrumentation and control systems and offer specialized expertise in the design and construction of bulk material
handling systems.
OTHER BUSINESS MATTERS
Customers and Marketing
The Company provided services to approximately 500 customers in fiscal 2019. Most of our revenue comes from
long-term customer relationships. None of our customers individually accounted for more than 10% of our
consolidated revenue in fiscal 2019. However, within our operating segments we do have customer concentrations
of varying degrees. See Part II, Item 8. Financial Statement and Supplementary Data, Note 13 - Segment Information
for more information about concentration of revenues by segment.
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.
Competition
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 price, quality, safety performance, schedule, experience and
customer satisfaction.
Backlog
We define backlog as the total dollar amount of revenue that we expect to recognize as a result of performing work
that has been awarded to us through a signed contract, limited 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 amounts.
For long-term maintenance contracts with no minimum commitments and other established customer agreements, we
include only the amounts that we expect to recognize as revenue over the next 12 months. For arrangements in which
we have received a limited notice to proceed, we include the entire scope of work in our backlog if we conclude that
the likelihood of the full project proceeding as high. 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 2019:
Electrical
Infrastructure
Oil Gas &
Chemical
Storage
Solutions
(In thousands)
Industrial
Total
Backlog as of June 30, 2018. . . . . . . . . . . . .
Project awards . . . . . . . . . . . . . . . . . . . . . . . .
Revenue recognized. . . . . . . . . . . . . . . . . . . .
$ 113,957
177,343
(217,417)
$ 227,452
226,978
(319,867)
$ 613,360
549,867
(521,932)
$ 263,827
342,245
(357,464)
$ 1,218,596
1,296,433
(1,416,680)
Backlog as of June 30, 2019. . . . . . . . . . . . .
Book-to-bill ratio(1) . . . . . . . . . . . . . . . . . . . .
$ 73,883
$ 134,563
$ 641,295
$ 248,608
$ 1,098,349
0.8
0.7
1.1
1.0
0.9
(1)
Calculated by dividing project awards by revenue recognized.
4
Project awards in all segments are cyclical and are typically the result of a sales process that can take several months
to complete. Backlog volatility may increase for some segments from time to time when individual project awards
are less frequent, but more significant. We expect to recognize approximately 85% of our total backlog reported as
of June 30, 2019 as revenue within the next year.
Seasonality and Other Factors
Our 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.
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. In addition to
the above noted factors, the general timing of project starts and completions could exhibit significant fluctuations.
Accordingly, results for any interim period may not necessarily be indicative of operating results for the full year.
Other factors impacting operating results in all segments come from decreased work volumes during holidays, work
site permitting delays or customers accelerating or postponing work. The differing types, sizes, and durations of our
contracts, combined with their geographic diversity and stages of completion, often results in fluctuations in the
Company’s 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 goods 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, 2019, the Company had approximately 5,000 employees of which approximately 1,050 were
employed in non-field positions and 3,950 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.
5
Patents and Proprietary Technology
Matrix Service Company’s subsidiaries have several patents and patents pending, and continue to pursue new ideas
and innovations to better serve our customers in several 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 covers a
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. 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,
liquid nitrogen/liquid oxygen storage tanks, liquid petroleum gas 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 we serve and minimizes the development costs
typically associated with organic growth.
Regulation
Health and Safety Regulations
Our operations are subject to regulation by the U.S. Occupational Safety and Health Administration (‘‘OSHA’’) and
Mine Safety and Health Administration (‘‘MSHA’’), the U.S. Department of Transportation, 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 ensure 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 and the operations of its customers 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.
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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 result in an incident whether that involves an injury, damage or
destruction of property, plant and equipment or an environmental impact. We are intensely focused on maintaining
a strong safety culture and strive for 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 and increase our insurance premiums.
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 in future project awards.
The utilization of our workforce is impacted by numerous factors including:
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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;
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.
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.
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Our project managers are involved in most aspects of contracting and contract execution including:
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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.
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, customers’ 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.
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
primarily in the midstream and 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,
petrochemical, industrial, iron and steel and power industries, and specifically, the level of capital expenditures on
energy infrastructure. A prolonged period of relatively low commodity prices in North America has had 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 has resulted and may continue to result in under-utilization of our resources, which could adversely impact
our revenue, margins, 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:
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current or projected commodity prices, including oil, gas, power, steel and mineral prices;
refining margins;
the demand for oil, gas and electricity;
the ability of oil, gas, industrial and power companies to generate, access and deploy capital;
exploration, production and transportation costs;
interest rates;
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.
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Our revenue and profitability may be adversely affected by a reduced level of activity in the hydrocarbon industry.
In recent years, demand from the worldwide hydrocarbon industry has been a significant generator of our revenue.
Numerous factors influence capital expenditure decisions in the hydrocarbon industry, including, but not limited to,
the following:
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current and projected oil and gas prices;
exploration, extraction, production and transportation costs;
refining margins;
the discovery rate, size and location of new oil and gas reserves;
technological challenges and advances;
ability to export hydrocarbon products;
demand for hydrocarbon production;
competition from alternative energy sources, including wind and solar; and
changing taxes, price controls, and laws and regulations.
The aforementioned factors are beyond our control and could have a material adverse effect on our results of
operations and on our financial position or cash flow, particularly in the Storage Solutions and Oil Gas & Chemical
segments.
The operations of our Storage Solutions segment are influenced by the overall forward market for crude oil, and
certain market conditions may adversely affect that segment’s financial and operating results.
The results of our Storage Solutions segment may be influenced by the overall forward market for crude oil.
A ‘‘contango’’ market (meaning that the price of crude oil for future delivery is higher than the current price) is
associated with greater demand for crude oil storage capacity, because a party can simultaneously purchase crude oil
at current prices for storage and sell at higher prices for future delivery. A ‘‘backwardated’’ market (meaning that the
price of crude oil for future delivery is lower than the current price) is associated with lower demand for crude oil
storage capacity, because a party can capture a premium for prompt delivery of crude oil rather than storing it for
future sale. A prolonged backwardated market or other adverse market conditions could have an adverse impact on
demand for new construction in our Storage Solutions segment. Finally, higher absolute levels of crude oil prices
increase the costs of financing and insuring crude oil in storage, which negatively affects storage economics. As a
result, the overall forward market for crude oil may have an adverse effect on our Storage Solution segment’s
business, results of operations and financial condition.
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.
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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 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, as a result of additional
information, 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 change in estimate occurs.
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:
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contract costs and application of percentage-of-completion accounting;
provisions for uncollectible receivables from customers for invoiced amounts;
the amount and collectibility of unpriced 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
accruals for estimated liabilities, including litigation and insurance reserves.
Our actual results could materially differ from these estimates.
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 our Industrial segment’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
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in the markets in which our customers’ products are used, including automobiles and construction, are difficult to
predict. The cyclical nature of our customers’ operations tends to reflect and be amplified by changes in economic
foreign currency exchange
conditions, both domestically and internationally,
fluctuations, and foreign and domestic import tariffs on steel. 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.
supply/demand imbalances,
Domestic and Foreign trade tariffs could have a material adverse effect on our customers’ businesses and could
raise the price and reduce the availability of raw materials to us, which could negatively impact our operating
results and financial condition.
Domestic and foreign trade tariffs could have a material adverse impact on our customers’ businesses, which could
cause our customers to reduce spending on capital and maintenance projects. This reduction in spending could lead
to fewer project awards and/or more competition. Fewer project awards and more competition could reduce our
revenues and gross margins.
In addition, domestic and foreign trade tariffs could raise the price and reduce the availability of raw materials such as steel
plate and steel pipe, which 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, if trade tariffs should significantly impact the price and availability of these
materials, we could experience lower gross margins, operational inefficiencies and project delays.
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.
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 not be able to successfully integrate our acquisitions, which could cause our business to suffer.
We may not be able to successfully complete our ongoing integration of the operations, personnel and technology from our
acquisitions. Because of their size and complexity, if we fail to complete our integration efforts 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, and harm to our reputation, all of which could have a material adverse effect on our business,
financial condition and results of operations. Our integration activities have required significant attention from
management, which potentially decreases the time that management may devote 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 integration efforts may also impose substantial demands
on our operations or other projects. We will have to actively strive to demonstrate to our existing customers that these
integrations have not resulted in adverse changes in our standards or business focus. Our acquisitions have involved 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
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platforms and administrative infrastructures. In addition, any delays or increased costs of integrating acquired 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
acquisitions.
The benefits we expect to achieve as a result of an acquisition 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 the acquired business and operations with our existing business and operations. Even if we are able to
integrate existing and acquired businesses successfully, this integration may not result in the realization of the full
benefits of the growth opportunities, operating margins and synergies we currently expect within the anticipated time
frame or at all. Accordingly, the benefits from an 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.
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 senior secured revolving
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 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.
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.
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 earnings 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 earnings from operations, significant working capital requirements, and contract disputes have in
the past, and could in the future, reduce availability under our senior secured revolving credit facility.
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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:
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curtailment of services;
suspension of operations;
inability to meet performance schedules in accordance with contracts and potential liability for liquidated
damages;
injuries or fatalities;
weather related damage to our facilities;
disruption of information systems;
inability to receive machinery, equipment and materials at jobsites; and
loss of productivity.
Our senior secured revolving credit facility imposes restrictions that may limit business alternatives.
Our senior secured revolving 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
senior secured revolving 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. Additionally, availability under
the credit facility is dependent upon profitable operating results. If results deteriorate, availability under the credit
facility is reduced.
Our failure to comply with one or more of the covenants in our senior secured revolving 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 senior secured revolving 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 senior secured revolving 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.
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.
13
Earnings for future periods may be affected by 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 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. As of June 30, 2019, the Company
had $19.5 million of amortizing intangible assets and $93.4 million of non-amortizing goodwill representing 3.1%
and 14.7% of the Company’s total assets, respectively.
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, pollution 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, 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.
14
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.
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.
laws and
Our projects often involve highly regulated materials,
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.
including hazardous wastes. Environmental
In addition, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980
(‘‘CERCLA’’), and comparable state and foreign 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.
Climate change legislation or regulations restricting emissions of ‘‘greenhouse gases’’ could result in reduced
demand for our services and products.
There has been an increased focus in the last several years on climate change in response to findings that emissions
of carbon dioxide, methane and other greenhouse gases present an endangerment
to public health and the
environment. As a result, there have been a variety of regulatory developments, proposals or requirements and
legislative initiatives that have been introduced in the U.S. (and other parts of the world) that are focused on
restricting the emission of greenhouse gases. The adoption of new or more stringent legislation or regulatory
programs limiting greenhouse gas emissions from customers for whom we provide services could affect demand for
our products and services. Further, some scientists have concluded that increasing greenhouse gas concentrations in
the atmosphere may produce physical effects, such as increased severity and frequency of storms, droughts, floods
and other climate events. Such climate events have the potential to adversely affect our operations or those of our
customers, which in turn could have a negative effect on us.
A failure or outage in our operational systems or cyber security attacks on any of our systems, or those of third
parties, may adversely affect our financial results.
We have become more reliant on technology to help increase efficiency in our business. We use numerous technologies
to help run our operations, and this may subject our business to increased risks. Any cyber security attack that affects our
facilities, our systems, our customers and any of our financial data could have a material adverse effect on our business.
15
In addition, a cyber-attack on our customer and employee data may result in a financial loss, including potential fines for
failure to safeguard data, and may negatively impact our reputation. Third-party systems on which we rely could also suffer
system failure. Any of these occurrences could disrupt our business, result in potential liability or reputational damage or
otherwise have an adverse effect on our financial results.
We have experienced cybersecurity threats to our information technology infrastructure and have experienced
cyber-attacks, attempts to breach our systems and other similar incidents. Such prior events have not had a material
impact on our financial condition, results of operations or liquidity. However, future threats could cause harm to our
business and our reputation, as well as negatively impact our results of operations materially. Our insurance coverage
may not be adequate to cover all the costs related to cyber-attacks or disruptions resulting from such events.
Any security breach resulting in the unauthorized use or disclosure of certain personal information could put individuals
at risk of identity theft and financial or other harm and result in costs to the Company in investigation, remediation, legal
defense and in liability to parties who are financially harmed. We may incur significant costs to protect against the threat
of information security breaches or to respond to or alleviate problems caused by such breaches. For example, laws may
require notification to regulators, clients or employees and enlisting credit monitoring or identity theft protection in the
event of a privacy breach. A cybersecurity attack could also be directed at our systems and result in interruptions in our
operations or delivery of services to our clients and their customers. Furthermore, a material security breach could cause
us to lose revenues, lose clients or cause damage to our reputation.
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.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide
anti-bribery laws.
The U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions generally prohibit companies
and their intermediaries from making improper payments to officials or others for the purpose of obtaining or retaining
business. Our policies mandate compliance with these anti-bribery laws. We operate in parts of the world that have
experienced corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict
with local customs and practices. We train our personnel concerning anti-bribery laws and issues, and we also inform our
customers, vendors, and others who work for us or on our behalf that they must comply with anti-bribery law requirements.
We also have procedures and controls in place to monitor compliance. We cannot assure that our internal controls and
procedures always will protect us from the possible reckless or criminal acts committed by our employees or agents. If we
are found to be liable for anti-bribery law violations (either due to our own acts or our inadvertence, or due to the acts or
inadvertence of others including our partners, agents, subcontractors or suppliers), we could suffer from criminal or civil
penalties or other sanctions, including contract cancellations or debarment, and loss of reputation, any of which could have
a material adverse effect on our business. Litigation or investigations relating to alleged or suspected violations of
anti-bribery laws, even if ultimately such litigation or investigations demonstrate that we did not violate anti-bribery laws,
could be costly and could divert management’s attention away from other aspects of our business.
Economic, political and other risks associated with international operations could adversely affect our business.
A portion of our operations are conducted outside the United States, and accordingly, our business is subject to risks
associated with doing business internationally, including changes in foreign currency exchange rates, instability in
political or economic conditions, difficulty in repatriating cash proceeds, differing employee relations, differing
regulatory environments, trade protection measures, and difficulty in administering and enforcing corporate policies
which may be different than the normal business practices of local cultures.
16
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.
Shareholder activists could cause a disruption to our business.
An activist investor may indicate disagreement with our strategic direction or capital allocation policies and may seek
representation on our Board of Directors. Our business, operating results or financial condition could be adversely
affected and may result in, among other things:
•
•
•
increased operating costs, including increased legal expenses, insurance, administrative expenses and
associated costs incurred in connection with director election contests;
uncertainties as to our future direction, which could result in the loss of potential business opportunities and
could make it more difficult to attract, retain, or motivate qualified personnel, and strain relationships with
investors and customers; and
reduction or delay in our ability to effectively execute our current business strategy and to implement new
strategies.
Item 1B. Unresolved Staff Comments
None
17
Item 2.
Properties
The principal properties of Matrix Service Company are as follows:
Description of Facility
Segment
Location
United States:
Tulsa, Oklahoma
Bakersfield, California
Bellingham, Washington
Corporate headquarters and
regional office
Regional office
Regional office, fabrication
facility and warehouse
Canonsburg, Pennsylvania
Regional office
Catoosa, Oklahoma
Columbus, Ohio
Eddystone, Pennsylvania
Hammond, Indiana
Houston, Texas
Metairie, Louisiana
Norco, California
Orange, California
Fabrication facilities, regional
office and warehouse
Regional office
Regional office, fabrication
facility and warehouse
Regional office, fabrication
facility, and warehouse
Regional offices and warehouse
Regional office
Regional office and warehouse
Fabrication facility, regional
office and warehouse
Pittsburgh, Pennsylvania
Regional office
Rahway, New Jersey
Regional office and warehouse
Sewickley, Pennsylvania
Regional office
Temperance, Michigan
Tucson, Arizona
Regional office and warehouse
Regional office and warehouse
International:
Burlington, Ontario, Canada
Regional office
Calgary, Alberta, Canada
Leduc, Alberta, Canada
Sarnia, Ontario, Canada
Paju-si, Gyeonggi-do,
South Korea
Sydney, New South Wales,
Australia
Regional office
Regional office and warehouse
Regional office and warehouse
Fabrication facility, regional
office and warehouse
Regional office
All segments
All segments
Oil Gas & Chemical,
Storage Solutions,
Industrial
Electrical Infrastructure,
Oil Gas & Chemical,
Industrial
Oil Gas & Chemical,
Storage Solutions,
Industrial
All segments
All segments
Oil Gas & Chemical,
Industrial
Oil Gas & Chemical,
Storage Solutions,
Industrial
All segments
Storage Solutions, Oil
Gas & Chemical
Oil Gas & Chemical,
Storage Solutions,
Industrial
Oil Gas & Chemical,
Storage Solutions,
Industrial
Electrical Infrastructure,
Oil Gas & Chemical,
Industrial
Oil Gas & Chemical,
Storage Solutions,
Industrial
Storage Solutions
Industrial, Storage
Solutions, Oil Gas &
Chemical
Electrical Infrastructure,
Industrial, Storage
Solutions
Storage Solutions
Storage Solutions
Storage Solutions
Storage Solutions
Storage Solutions
Interest
Leased
Leased
Owned
Leased
Leased &
Owned(1)
Leased
Leased
Leased
Leased &
Owned
Leased
Leased
Leased &
Owned
Leased
Leased
Leased
Owned
Leased
Owned
Leased
Leased
Owned
Owned
Leased
(1)
Certain facilities were constructed by the Company on land acquired through ground leases with renewal options.
In addition to the locations listed above, Matrix has smaller regional locations and temporary office facilities at
numerous customer locations throughout the United States and Canada.
18
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 to this
Annual Report on Form 10-K.
19
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Our common stock trades on the NASDAQ Global Select Market under the trading symbol ‘‘MTRX’’. Substantially
all of our stockholders maintain their shares in ‘‘street name’’ accounts and are not individually stockholders of
record. As of July 31, 2019, there were 20 holders of record of our common stock.
Dividend Policy
We have never paid cash dividends on our common stock, and the terms of our Credit Agreement (see Item 8.
Financial Statements and Supplementary Data, Note 5 - Debt for more information about our Credit Agreement) limit
the amount of cash dividends we can pay. Under our Credit Agreement, we may declare and pay cash dividends on
our capital stock during any fiscal year up to an amount which, when added to all other cash dividends paid during
such fiscal year, does not exceed 50% of our cumulative net income for such fiscal year to 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 $30.0 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, 2019:
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(C)
April 1 to April 30, 2019
Share Repurchase Program(A) . . . . . . . . . . . .
Employee Transactions(B). . . . . . . . . . . . . . . .
May 1 to May 31, 2019
Share Repurchase Program(A) . . . . . . . . . . . .
Employee Transactions(B). . . . . . . . . . . . . . . .
June 1 to June 30, 2019
Share Repurchase Program(A) . . . . . . . . . . . .
Employee Transactions(B). . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,396,643
2,396,643
2,396,643
(A) Represents shares purchased under our stock buyback program.
(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.
(C) On November 6, 2018, the Board of Directors approved a new stock buyback program (the ‘‘November 2018 Program’’), which replaced
the December 2016 Program. Under the November 2018 Program, the Company may repurchase common stock of the Company up to a
maximum of $30.0 million per calendar year provided that the aggregate number of shares repurchased may not exceed 10%, or
approximately 2.7 million, of the Company’s shares outstanding as of November 6, 2018. The November 2018 Program will continue unless
and until it is modified or revoked by the Board of Directors.
20
Item 6.
Selected Financial Data
Selected Financial Data
(In thousands, except percentages and per share data)
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues. . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin % . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . .
Selling, general and administrative %. . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . .
Operating income (loss) % . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to
June 30,
2019
June 30,
2018(1)
Fiscal Years Ended
June 30,
2017
June 30,
2016
June 30,
2015
$1,416,680
1,284,729
131,951
$1,091,553
999,617
91,936
$1,197,509
1,116,506
81,003
$1,311,917
1,185,926
125,991
$1,343,135
1,255,765
87,370
9.3%
94,021
6.6%
37,930
8.4%
84,417
7.7%
(10,479)
2.7%
(1.0)%
27,982
(11,480)
6.8%
9.6%
76,144
85,109
6.4%
4,859
0.4%
138
6.5%
40,882
3.1%
25,537
6.5%
78,568
5.8%
8,802
0.7%
(1,898)
noncontrolling interest . . . . . . . . . . . . . . . . . .
—
—
321
(3,326)
(19,055)
Net income (loss) attributable to Matrix
Service Company . . . . . . . . . . . . . . . . . . . . . .
Earnings (loss) per share-basic . . . . . . . . . . . . .
Earnings (loss) per share-diluted . . . . . . . . . . . .
Working capital . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . .
Cash flows provided (used) by operations . . . .
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,982
1.04
1.01
141,811
633,394
5,347
19,558
41,394
1,098,349
(11,480)
(0.43)
(0.43)
118,581
558,033
—
8,711
74,671
1,218,596
(183)
(0.01)
(0.01)
139,654
586,030
44,682
11,908
(18,746)
682,273
28,863
1.09
1.07
129,416
564,967
—
13,939
33,587
868,672
17,157
0.64
0.63
114,209
561,689
8,804
15,773
26,240
1,420,598
(1)
Intangible asset impairment charges totaling $18.0 million were included in the Company’s fiscal 2018 operating results.
Refer to the Results of Operations section included in Part II, Item 7 of this Annual Report on Form 10-K for a
discussion of the impacts of business combinations and contract charges that materially impacted the comparability
of information in the Selected Financial Data table above, particularly for the fiscal year ended 2019 in comparison
to the fiscal year ended 2018, and the fiscal year ended 2018 in comparison to the fiscal year ended 2017.
21
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 POLICIES
Revenue Recognition
General Information about our Contracts with Customers
Our revenues come from contracts to provide engineering, procurement, fabrication and construction, repair and
maintenance and other services. Our engineering, procurement and fabrication and construction services are usually
provided in association with capital projects, which commonly are fixed price contracts and are billed based on
project milestones. Our repair and maintenance services typically are cost reimbursable or time and material based
contracts and are billed monthly or, for projects of short duration, at the conclusion of the project. The elapsed time
from award to completion of performance may be in excess of one year for capital projects.
Step 1: Contract Identification
We do not recognize revenue unless we have identified a contract with a customer. A contract with a customer exists
when it has approval and commitment from both parties, the rights and obligations of the parties are identified,
payment terms are identified, the contract has commercial substance, and collectibility is probable. We also evaluate
whether a contract should be combined with other contracts and accounted for as one single contract. This evaluation
requires judgment and could change the timing of the amount of revenue and profit recorded for a given period.
Step 2: Identify Performance Obligations
Next, we identify each performance obligation in the contract. A performance obligation is a promise to provide a
distinct good or service or a series of distinct goods or services to the customer. Revenue is recognized separately
for each performance obligation in the contract. Many of our contracts have one clearly identifiable performance
obligation. However, many of our contracts provide the customer an integrated service that includes two or more of
the following services: engineering, procurement, fabrication, construction, repair and maintenance services.
For these contracts, we do not consider the integrated services to be distinct within the context of the contract when
the separate scopes of work combine into a single commercial objective or capability for the customer. Accordingly,
we generally identify one performance obligation in our contracts. The determination of the number of performance
obligations in a contract requires significant judgment and could change the timing of the amount of revenue recorded
for a given period.
Step 3: Determine Contract Price
After determining the performance obligations in the contract, we determine the contract price. The contract price is
the amount of consideration we expect to receive from the customer for completing the performance obligation(s).
In a fixed price contract, the contract price is a single lump-sum amount. In reimbursable and time and materials
based contracts, the contract price is determined by the agreed upon rates or reimbursements for time and materials
expended in completing the performance obligation(s) in the contract.
22
A number of our contracts contain various cost and performance incentives and penalties that can either increase or
decrease the contract price. These variable consideration amounts are generally earned or incurred based on certain
performance metrics, most commonly related to project schedule or cost targets. We estimate variable consideration
at the most likely amount of additional consideration to be received (or paid in the case of penalties), provided that
meeting the variable condition is probable. We include estimated amounts of variable consideration in the contract
price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the
uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and
determination of whether to include estimated amounts in the contract price are based largely on an assessment of
our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.
We reassess the amount of variable consideration each accounting period until the uncertainty associated with the
variable consideration is resolved. Changes in the assessed amount of variable consideration are accounted for
prospectively as a cumulative adjustment to revenue recognized in the current period.
Step 4: Assign Contract Price to Performance Obligations
After determining the contract price, we assign such price to the performance obligation(s) in the contract. If a
contract has multiple performance obligations, we assign the contract price to each performance obligation based on
the stand-alone selling prices of the distinct services that comprise each performance obligation.
Step 5: Recognize Revenue as Performance Obligations are Satisfied
We record revenue for contracts with our customers as we satisfy the contracts’ performance obligations.
We recognize revenue on performance obligations associated with fixed price contracts for engineering, procurement
and construction services over time since these services create or enhance assets the customer controls as they are
being created or enhanced. We measure progress of satisfying these performance obligations by using the
percentage-of-completion method, which is based on costs incurred to date compared to the total estimated costs at
completion, since it best depicts the transfer of control of assets being created or enhanced to the customer.
We recognize revenue over time for reimbursable and time and material based repair and maintenance contracts since
the customer simultaneously receives and consumes the benefit of those services as we perform work under the
contract. As a practical expedient allowed under the revenue accounting standards, we record revenue for these
contracts in the amount to which we have a right to invoice for the services performed provided that we have a right
to consideration from the customer in an amount that corresponds directly with the value of the performance
completed to date.
Costs incurred may include direct labor, direct materials, subcontractor costs and indirect costs, such as salaries and
benefits, supplies and tools, equipment costs and insurance costs. Indirect costs are charged to projects based upon
direct costs and overhead allocation rates per dollar of direct costs incurred or direct labor hours worked. Typically,
customer contracts will include standard warranties that provide assurance that products and services will function
as expected. The Company does not sell separate warranties.
We have numerous contracts that are in various stages of completion which require estimates to determine the
forecasted costs at completion. Due to the nature of the work left to be performed on many of our contracts, the
estimation of total cost at completion for fixed price contracts is complex, subject to many variables and requires
significant judgment. Estimates of total cost at completion are made each period and changes in these estimates are
accounted for prospectively as cumulative adjustments to revenue recognized in the current period. 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.
Change Orders
Contracts are often modified through change orders, which are changes to the agreed upon scope of work. Most of
our change orders, which may be priced or unpriced, are for goods or services that are not distinct from the existing
contract due to the significant integration of services provided in the context of the contract and are accounted for
as if they were part of that existing contract. The effect of a change order on the contract price and our measure of
progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative
catch-up basis. For unpriced change orders, we estimate the increase or decrease to the contract price using the
variable consideration method described in the Step 3: Determine Contract Price paragraph above. Unpriced change
orders are more fully discussed in Note 7 - Commitments and Contingencies.
23
Claims
Sometimes we seek claims for amounts in excess of the contract price for delays, errors in specifications and designs,
contract terminations, change orders in dispute or other causes of additional costs incurred by us. Recognition of
amounts as additional contract price related to claims is appropriate only if there is a legal basis for the claim. The
determination of our legal basis for a claim requires significant judgment. We estimate the change to the contract
price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above.
Claims are more fully discussed in Note 7 - Commitments and Contingencies.
Unpriced Change Orders and Claims
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change
orders and claims of $10.1 million at June 30, 2019 and $15.0 million at June 30, 2018. The amounts ultimately
realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings.
Generally, collection of amounts related to unpriced 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.
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 Accounting Standard
Codification (‘‘ASC’’) Topic 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.
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, which is a level below our
reportable segments.
We perform our annual test during the fourth quarter of each fiscal year and in any other period in which indicators
of impairment warrant additional tests. The goodwill impairment test involves comparing management’s estimate of
the fair value of a reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit
exceeds its carrying value, then goodwill is not impaired. If the fair value of a reporting unit is less than its carrying
value, then goodwill is impaired to the extent of the difference, but the impairment may not exceed the balance of
goodwill assigned to that reporting unit. We performed our annual goodwill impairment test as of May 31, 2019,
which indicated no impairment.
We utilize a discounted cash flow analysis, referred to as an income approach, and market multiples, referred to as
a market approach, to determine the estimated fair value of our reporting units. For the income approach, significant
judgments and assumptions, including forecasted project awards, discount rate, anticipated revenue growth rate, gross
margins, operating expenses, working capital needs and capital expenditures, are inherent in the 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. For the market approach, significant judgments and assumptions
include the selection of guideline companies and our forecasted EBITDA. The use of alternate judgments and/or
assumptions could result in a fair value that differs from our estimate and could result in the recognition of an
impairment charge in the financial statements. As a test for reasonableness, we also consider the combined estimated
fair values of our reporting units to our market capitalization.
We also consider the amount of headroom for each reporting unit when determining whether an impairment existed.
We define ‘‘headroom’’ as the percentage difference between the fair value of a reporting unit and its carrying value.
The amount of headroom varies by reporting unit. Our significant assumptions, including revenue growth rates, gross
24
margins, discount rate 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:
Goodwill as of
June 30, 2019 (in
thousands)(1)
Reporting Unit 1 . . . . . . . . . .
Reporting Unit 2 . . . . . . . . . .
Reporting Unit 3 . . . . . . . . . .
Reporting Unit 4 . . . . . . . . . .
All other reporting units . . . .
$24,904
$16,892
$ 7,981
$ 6,112
$37,479
Headroom Sensitivity Analysis
Headroom if
Revenue
Growth Rate
Declines by 100
Basis Points
Headroom if
Gross Margin
Declines by 100
Basis Points
Baseline
Headroom
21%
11%
10%
38%
18%
5%
6%
30%
-5%
-4%
-17%
-1%
Headroom if
Discount Rate
Increases by 100
Basis Points
8%
1%
1%
24%
43% to 987% 35% to 941% 25% to 812% 28% to 860%
(1)
In August 2018, the Company disposed of a business that marketed process heating equipment, which reduced goodwill by $2.8 million.
The business disposed of constituted its own reporting unit and the amount of goodwill written off was all of the goodwill assigned to that
reporting unit. None of the goodwill was considered impaired since the Company recorded a gain on the disposal. See Item 8. Financial
Statements and Supplementary Data, Note 3 - Acquisitions and Disposals for more information about the disposal.
The fiscal 2019 test indicated that some reporting units were at higher risk of future impairment than others. If the
market view of project opportunities or gross margins deteriorates next year prior to the annual test, an interim test
may be required, particularly for the higher risk reporting units, which could result in a material impairment of
goodwill.
Income Taxes
We use the asset and liability approach for financial accounting and reporting for income taxes. Deferred income tax
assets and liabilities are computed annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances based
on our judgments and estimates are established when necessary to reduce deferred tax assets to the amount expected
to be realized in future operating results. Company management believes that realization of deferred tax assets in
excess of the valuation allowance is more likely than not. Our estimates are based on facts and circumstances in
existence as well as interpretations of existing tax regulations and laws applied to the facts and circumstances, with
the help of professional tax advisors. Therefore, we estimate and provide for amounts of additional income taxes that
may be assessed by the various taxing authorities.
Recently Issued Accounting Standards
Accounting Standards Update 2016-02, Leases (Topic 842)
On February 25, 2016, the FASB issued ASU 2016-02 that amends accounting for leases. Under the new guidance,
lessees will recognize the following for all
the lease
commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease,
measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use,
or control the use of, a specified asset for the lease term. The Company plans to apply the new leases standard using
the modified retrospective method, which recognizes a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption. The ASU is effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years.
leases (with the exception of short-term leases) at
We currently expect to recognize between $23 million and $28 million of operating right-of-use lease assets and
liabilities upon adoption during the first quarter of fiscal 2020. We are not expecting the modified retrospective
adjustment to retained earnings upon adoption to be material, and we do not expect the ASU will have a material
impact on our future operating results or cash flows. Our conclusions are preliminary and could change once we
finalize the implementation during the first fiscal quarter of fiscal 2020.
25
Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments
On June 16, 2016, the FASB issued ASU 2016-13, which will change how the Company accounts for credit losses,
including those related to its trade accounts receivable. The amendments in this update require a financial asset (or
a group of financial assets) to be presented at the net amount expected to be collected. The income statement will
reflect any increases or decreases of expected credit losses that have taken place during the period. The measurement
of expected credit losses is based on relevant information about past events, including historical experience, current
conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount.
Current GAAP delays the recognition of the full amount of credit losses until the loss is probable of occurring. The
amendments in this update eliminate the probable initial recognition threshold and, instead, reflect the Company’s
current estimate of all expected credit losses. In addition, current guidance limits the information the Company may
consider in measuring a credit loss to its past events and current conditions.
The amendments in this update broaden the information the Company may consider in developing its expected credit
loss estimate to include forecasted information. The Company will adopt these amendments on July 1, 2020. The
Company must apply the amendments in this update through a cumulative-effect adjustment to retained earnings as
of the beginning of the first reporting period in which the guidance is effective. At this time, the Company does not
expect this update will have a material impact on its estimate of the allowance for uncollectible accounts.
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 consists of power delivery services provided to investor owned utilities,
including construction of new substations, upgrades of existing substations, short-run transmission line installations,
distribution upgrades and maintenance, as well as emergency and storm restoration services. We also provide
construction and maintenance services to a variety of power generation facilities, such as combined cycle plants and
other natural gas fired power stations.
The Oil Gas & Chemical segment serves customers primarily in the downstream and midstream petroleum industries
who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas
liquids. We also perform work in the petrochemical, upstream petroleum, and sulfur extraction, recovery and
processing markets. Our services include plant maintenance, turnarounds, engineering and capital construction.
We also offer industrial cleaning services, including hydro-blasting, hydro-excavating, advanced chemical cleaning
and vacuum services.
The Storage Solutions segment consists of work related to aboveground storage tanks (‘‘AST’’) and terminals. Also
included in this segment are cryogenic and other specialty storage tanks and terminals including liquefied natural gas,
liquid nitrogen/liquid oxygen, liquid petroleum and other specialty vessels such as spheres as well as marine
structures and truck and rail
loading/offloading facilities. Our services include engineering, fabrication and
construction, and maintenance and repair, which includes planned and emergency services for both tanks and full
terminals. Finally, we offer AST products, including geodesic domes, aluminum internal floating roofs, floating
suction and skimmer systems, roof drain systems and floating roof seals.
The Industrial segment consists of work for integrated iron and steel companies, major mining and minerals
companies engaged primarily in the extraction of copper, as well as companies in other industries, including
aerospace and defense, cement, and agriculture and grain. Our services include engineering, fabrication and
construction, and maintenance and repair, which includes planned and emergency services. We also design
instrumentation and control systems and offer specialized expertise in the design and construction of bulk material
handling systems.
The majority of the work for all segments is performed in the United States, with 3.4% of revenues generated
internationally during fiscal 2019, 10.1% in fiscal 2018 and 19.7% in fiscal 2017. The percentage of revenues
generated internationally decreased in fiscal 2019 compared to fiscal 2018 and fiscal 2017 due to the completion of
a significant Canadian power generation project in our Electrical Infrastructure segment in fiscal 2018.
26
Significant period to period changes in revenues, gross profits and operating results are discussed below on a
consolidated basis and for each segment:
Matrix Service Company
Results of Operations
(In thousands)
Fiscal Year 2019
Consolidated revenues . . . . . . . . . . . . . . . . . . . .
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit % . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . .
Operating income %. . . . . . . . . . . . . . . . . . . . . .
Fiscal Year 2018
Consolidated revenues . . . . . . . . . . . . . . . . . . . .
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit % . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . .
Operating income (loss) . . . . . . . . . . . . . . . . . . .
Operating income (loss) % . . . . . . . . . . . . . . . .
Fiscal Year 2017
Consolidated revenues . . . . . . . . . . . . . . . . . . . .
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit % . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . .
Operating income (loss) . . . . . . . . . . . . . . . . . . .
Operating income (loss) % . . . . . . . . . . . . . . . .
Variances Fiscal Year 2019 to Fiscal Year
2018 Increase/(Decrease)
Consolidated revenues . . . . . . . . . . . . . . . . . . . .
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . .
Variances Fiscal Year 2018 to Fiscal Year
2017 Increase/(Decrease)
Electrical
Infrastructure
Oil Gas &
Chemical
Storage
Solutions
Industrial
Total
$ 217,417
15,470
$319,867
35,987
$ 521,932
56,011
$357,464
24,483
$1,416,680
131,951
7.1%
11.3%
10.7%
6.8%
9.3%
11,802
3,668
23,003
12,984
41,914
14,097
17,302
7,181
94,021
37,930
1.7%
4.1%
2.7%
2.0%
2.7%
$ 255,931
18,300
$322,772
33,423
$ 314,696
25,778
$198,154
14,435
$1,091,553
91,936
7.2%
10.4%
8.2%
7.3%
8.4%
17,550
(16,531)
23,908
8,798
31,685
(5,907)
11,274
3,161
84,417
(10,479)
(6.5)%
2.7%
(1.9)%
1.6%
(1.0)%
$ 373,384
7,137
$240,523
12,675
$ 481,696
55,651
$101,906
5,540
$1,197,509
81,003
1.9%
5.3%
11.6%
15,446
(8,309)
21,458
(8,783)
32,723
22,928
(2.2)%
(3.7)%
4.8%
5.4%
6,517
(977)
(1.0)%
6.8%
76,144
4,859
0.4%
$ (38,514)
(2,830)
(5,748)
20,199
$ (2,905) $ 207,236
30,233
10,229
20,004
2,564
(905)
4,186
$159,310
10,048
6,028
4,020
$ 325,127
40,015
9,604
48,409
Consolidated revenues . . . . . . . . . . . . . . . . . . . .
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . .
$(117,453)
11,163
2,104
(8,222)
$ 82,249
20,748
2,450
17,581
$(167,000) $ 96,248
8,895
4,757
4,138
(29,873)
(1,038)
(28,835)
$ (105,956)
10,933
8,273
(15,338)
Fiscal 2019 Versus Fiscal 2018
Consolidated
Consolidated revenue was $1.417 billion for the fiscal year ended June 30, 2019, compared to $1.092 billion in fiscal
2018. On a segment basis, consolidated revenue increased in the Storage Solutions and Industrial segments by
$207.2 million and $159.3 million, respectively. These increases were partially offset by decreases in consolidated
revenue for the Electrical Infrastructure and Oil Gas & Chemical segments of $38.5 million and $2.9 million,
respectively.
Consolidated gross profit was $132.0 million in fiscal 2019 compared to $91.9 million in fiscal 2018. Gross margin
increased to 9.3% in fiscal 2019 compared to 8.4% in fiscal 2018. Fiscal 2019 was positively impacted by higher
revenue volumes, which led to improved recovery of construction overhead costs. Additionally, during the first half
27
of fiscal 2019, the gross margin was negatively impacted by the wind down of lower margin work awarded in a highly
competitive environment. In the second half of fiscal 2019, the gross margin was positively impacted by increased
volumes of higher margin capital work awarded in an improved business environment.
Consolidated SG&A expenses were $94.0 million in fiscal 2019 compared to $84.4 million in fiscal 2018. The
increase in fiscal 2019 was primarily due to improved operating results, which led to higher incentive compensation
expense, investment in personnel to support increased revenue, and higher stock compensation expense. These
increases were partially offset by lower amortization expense on intangible assets that fully amortized in fiscal 2018.
Interest expense was $1.3 million in fiscal 2019 and $2.6 million in fiscal 2018. The decrease in interest expense was
primarily due to a lower average debt balance during fiscal 2019. Interest income was $1.2 million during fiscal 2019
compared to $0.4 million in fiscal 2018 due to an increase in our average cash balance and higher short-term interest
rates.
Our effective tax rate for fiscal 2019 was 27.2% compared to 5.5% in fiscal 2018. The effective tax rate in fiscal 2019
was negatively impacted by $4.5 million of valuation allowances placed on net operating loss carryforwards and
foreign tax credits generated by our branch operations in Canada, which we believe will not be utilized prior to their
expiration, and $1.2 million of non-deductible expenses. These negative impacts were largely offset by the reversal
of $3.5 million of branch liabilities associated with the valuation allowances placed on our Canadian branch net
operating loss carryforwards and foreign tax credits, $2.0 million of research and development and other tax credits
and $0.3 million of excess tax benefits related to the vesting of stock-based compensation. A full analysis of the
Company’s provision for income taxes is included in Item 8. Financial Statements and Supplementary Data, Note 6
- Income Taxes. The rate for fiscal 2018 was negatively impacted by the impairment of $8.3 million of non-deductible
goodwill and by a $0.8 million valuation allowance recorded on a deferred tax asset in connection with stock-based
compensation. In fiscal 2020, we expect our effective income tax rate to be 27.0%.
In fiscal 2019, net income was $28.0 million, or $1.01 per fully diluted share, compared to a net loss of $11.5 million,
or $0.43 per fully diluted share, in fiscal 2018.
Electrical Infrastructure
Revenue for the Electrical Infrastructure segment decreased $38.5 million to $217.4 million in fiscal 2019 compared
to $255.9 million in fiscal 2018. The decrease is primarily due to the strategic shift away from EPC power generation
projects and lower volumes of power delivery work, partially offset by higher volumes of power generation package
work. The segment gross margin was 7.1% in fiscal 2019 compared to 7.2% in the same period last year. The segment
gross margins in both fiscal 2019 and 2018 were negatively impacted by lower than previously forecasted margins
on a limited number of power delivery projects. In fiscal 2019, we expanded our power delivery business
geographically, however, the margins on this work did not meet our expectations. The fiscal 2019 segment margin
was also negatively impacted when the proceeds from the settlement of a customer dispute were less than previously
anticipated. The negative impacts to the fiscal 2019 segment gross margin were partially offset by strong project
execution on power generation package work. The fiscal 2018 segment gross margin was also negatively impacted
by higher construction overhead costs.
Oil Gas & Chemical
Revenue for the Oil Gas & Chemical segment was $319.9 million in fiscal 2019 compared to $322.8 million in the
same period a year earlier. The decrease of $2.9 million is primarily due to lower volumes of engineering and capital
work, largely offset by higher volumes of turnaround and maintenance work. The segment gross margin was 11.3%
in fiscal 2019 compared to 10.4% in the same period last year. Project execution was strong in both fiscal 2019 and
2018. Fiscal 2019 was also positively impacted by improved recovery of overhead costs.
Storage Solutions
Revenue for the Storage Solutions segment was $521.9 million in fiscal 2019 compared to $314.7 million in fiscal
2018, an increase of $207.2 million. The increase in segment revenue is primarily a result of increased tank and
terminal construction work, and higher levels of repair and maintenance spending by our customers. The segment
gross margin was 10.7% in fiscal 2019 compared to 8.2% in fiscal 2018. During the first half of fiscal 2019, the
segment gross margin was negatively impacted by the wind down of lower margin work awarded in a highly
competitive environment and lower than previously forecasted margins on a limited number of those projects. In the
28
second half of fiscal 2019, the segment gross margin was positively impacted by increased volumes of higher margin
work on capital projects awarded in an improved business environment, which also led to improved recovery of
construction overhead costs. The fiscal 2018 segment gross margin was negatively impacted by lower margin work
awarded in a highly competitive environment and lower volumes, which led to the under recovery of construction
overhead costs.
Industrial
Revenue for the Industrial segment was $357.5 million in fiscal 2019 compared to $198.2 million in fiscal 2018, an
increase of $159.3 million. The increase in revenue is primarily attributable to higher volumes of iron and steel
spending and increased thermal vacuum chamber work. The segment gross margin was 6.8% in fiscal 2019 compared
to 7.3% in fiscal 2018. The fiscal 2019 segment gross margin was negatively impacted by a lower than previously
forecasted margin on a thermal vacuum chamber project nearing completion, partially offset by improved gross
margins on iron and steel work.
Fiscal 2018 Versus Fiscal 2017
Consolidated
Consolidated revenue was $1.092 billion for the fiscal year ended June 30, 2018, compared to $1.198 billion in fiscal
2017. On a segment basis, consolidated revenue decreased in the Storage Solutions and Electrical Infrastructure
segments by $167.0 million and $117.5 million, respectively. These decreases were partially offset by increases in
consolidated revenue for the Industrial and Oil Gas & Chemical segments of $96.3 million and $82.3 million,
respectively.
Consolidated gross profit was $91.9 million in fiscal 2018 compared to $81.0 million in fiscal 2017. Gross margin
increased to 8.4% in fiscal 2018 compared to 6.8% in fiscal 2017. The increase in gross margin in fiscal 2018 is
primarily attributable to the financial impact of a large power generation project in the Electrical Infrastructure
segment in fiscal 2017 and better recovery of overhead costs in fiscal 2018.
Consolidated SG&A expenses were $84.4 million in fiscal 2018 compared to $76.1 million in fiscal 2017. The
increase in fiscal 2018 is primarily attributable to overhead associated with a mid-year fiscal 2017 acquisition (see
Note 3 - Acquisitions and Disposals, Item 8. Financial Statements and Supplementary Data) that expanded the
Company’s engineering business, as well as higher project pursuit costs.
We performed our annual goodwill impairment test as of May 31, 2018. The test indicated that the carrying amount
of our Electrical Infrastructure reporting unit exceeded its estimated fair value, resulting in an impairment to goodwill
of $17.3 million. The impairment was triggered by lower financial projections as a result of the Company’s decision
to shift its strategy away from EPC power generation projects to smaller, individual packages that better fit the
Company’s strategy and risk profile, and the recent trend of sluggish maintenance and capital spending by some key
clients in our Northeast and Mid-Atlantic high voltage markets. We also recorded an impairment of $0.7 million
associated with the customer relationships of a previous acquisition. This impairment was recorded in the Oil Gas
& Chemical segment.
Net interest expense was $2.2 million in fiscal 2018 and $2.1 million in fiscal 2017. Interest expense in both fiscal
years is primarily attributable to borrowings used to fund a mid-year fiscal 2017 acquisition, borrowings used to fund
working capital requirements for a major project in the Electrical Infrastructure segment, and an increase in the
unused senior secured revolving credit facility fee. The Company repaid all of its outstanding debt under its senior
secured revolving credit facility in the fourth quarter of fiscal 2018.
As a result of the Tax Cuts and Jobs Act and its transitional application to our June 30 fiscal year end, we expected
our effective income tax rate to be approximately 32.0% during fiscal 2018. Our effective tax rate for fiscal 2018 was
5.5% compared to 94.4% in fiscal 2017. The rate for fiscal 2018 was negatively impacted by the impairment of
$8.3 million of non-deductible goodwill and by a $0.8 million valuation allowance recorded on a deferred tax asset
in connection with stock-based compensation. The fiscal 2017 tax rate was negatively impacted, in part, by the
Electrical Infrastructure project discussed above. The loss on this project produced a tax benefit in Canada, which had
a lower tax rate than the U.S. during fiscal 2017. At the same time, the Company earned most of its taxable income
domestically, which was taxed at a higher rate. A full analysis of the Company’s provision for income taxes is
included in Item 8. Financial Statements and Supplementary Data, Note 6 - Income Taxes.
29
In fiscal 2018, the Company had a net loss of $11.5 million, or $0.43 per fully diluted share, compared to a net loss
of $0.2 million, or $0.01 per fully diluted share, in fiscal 2017.
Electrical Infrastructure
Revenue for the Electrical Infrastructure segment decreased $117.5 million to $255.9 million in fiscal 2018 compared
to $373.4 million in fiscal 2017. The decrease is due to the expected reduction in power generation revenue in
connection with our strategic decision to exit full EPC power generation work and a reduction in high voltage
revenue. The segment gross margin of 7.2% in fiscal 2018 was impacted by under recovery of construction overhead
costs, lower than expected direct margins and increased competition. The fiscal 2017 segment gross margin was
1.9%, which was primarily attributable to the financial impact of an increased cost estimate on the power generating
facility project mentioned above that was caused by various factors that delayed schedule progress and reduced
productivity.
Oil Gas & Chemical
Revenue for the Oil Gas & Chemical segment was $322.8 million in fiscal 2018 compared to $240.5 million in the
same period a year earlier. The increase of $82.3 million is primarily attributable to higher turnaround and
maintenance and construction volumes. The segment gross margin was 10.4% in fiscal 2018 compared to 5.3% in
the same period last year. The segment gross margin for fiscal 2018 was positively impacted by strong project
execution and improved recovery of construction overhead costs. Fiscal 2017 gross margin was negatively impacted
by project execution and lower volume which led to higher under recovery of construction overhead costs.
Storage Solutions
Revenue for the Storage Solutions segment was $314.7 million in fiscal 2018 compared to $481.7 million in fiscal
2017, a decrease of $167.0 million. The decrease in segment revenue is primarily the result of delays in project
awards during fiscal 2017 and the first half of fiscal 2018, which prevented the Company from replacing higher
revenue generated in fiscal 2017 in connection with work on the construction of a significant crude gathering
terminals project. The segment gross margin was 8.2% in fiscal 2018 and 11.6% in fiscal 2017. The fiscal 2018
segment gross margin was negatively impacted by lower direct margins and under recovery of construction overhead
costs. The fiscal 2017 segment gross margin was supported by strong project execution, partially offset by under
recovery of construction overhead costs.
Industrial
Revenue for the Industrial segment was $198.2 million in fiscal 2018 compared to $101.9 million in fiscal 2017, an
increase of $96.3 million. The increase in revenue is primarily attributable to higher business volumes in the iron and
steel industry. The segment gross margin was 7.3% in fiscal 2018 compared to 5.4% in fiscal 2017. The fiscal 2018
segment gross margin was positively impacted by higher volumes, which led to improved recovery of construction
overhead costs, and a favorable project closeout. The fiscal 2017 segment gross margin was negatively impacted by
lower than anticipated volumes, which led to under recovery of construction overhead costs.
Non-GAAP Financial Measures
Adjusted EBITDA
We have presented Adjusted EBITDA, which we define as net income (loss) attributable to Matrix Service Company
before impairment of goodwill and other intangible assets, interest expense, income taxes, depreciation and
amortization, because it is used by the financial community as a method of measuring our performance and of
evaluating the market value of companies considered to be in similar businesses. We believe that the line item on our
Consolidated Statements of Income entitled ‘‘Net income (loss) attributable to Matrix Service Company’’ is the most
directly comparable GAAP measure to Adjusted EBITDA. Since Adjusted EBITDA is not a measure of performance
calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings
as an indicator of operating performance. Adjusted EBITDA, as we calculate it, may not be comparable to similarly
titled measures employed by other companies. In addition, this measure is not a measure of our ability to fund our
cash needs. As Adjusted EBITDA excludes certain financial information compared with net income (loss) attributable
30
to Matrix Service Company, the most directly comparable GAAP financial measure, users of this financial
information should consider the type of events and transactions that are excluded. Our non-GAAP performance
measure, Adjusted EBITDA, has certain material limitations as follows:
•
•
•
•
It does not include impairments to goodwill and other intangible assets. While impairments to intangible
assets are non-cash expenses in the period recognized, cash or other consideration was still transferred in
exchange for the intangible assets in the period of the acquisition. Any measure that excludes impairments
to intangible assets has material limitations since these expenses represent the loss of an asset that was
acquired in exchange for cash or other assets.
It does not include interest expense. Because we have borrowed money to finance our operations and to
acquire businesses, pay commitment fees to maintain our senior secured revolving credit facility, and incur
fees to issue letters of credit under the senior secured revolving 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 Adjusted EBITDA to net income (loss) attributable to Matrix Service Company follows:
Net income (loss) attributable to Matrix Service Company. . . . . . . . . . . . . . .
Goodwill and other intangible asset impairment . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for federal, state and foreign income taxes . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIQUIDITY AND CAPITAL RESOURCES
Overview
June 30,
2019
$27,982
—
1,296
10,430
18,224
$57,932
Fiscal Years Ended
June 30,
2018
(in thousands)
$(11,480)
17,998
2,600
(668)
20,347
$ 28,797
June 30,
2017
$ (183)
—
2,211
2,308
21,602
$25,938
We define liquidity as the ability to pay our liabilities as they become due, fund business operations and meet all
contractual and financial obligations. Our primary sources of liquidity in fiscal 2019 were cash and cash equivalents
on hand, capacity under our senior secured revolving credit facility and cash generated from operations. Cash and
cash equivalents on hand at June 30, 2019 totaled $89.7 million and availability under the senior secured revolving
credit facility totaled $152.2 million, resulting in total liquidity of $241.9 million. We expect to fund our operations
for the next twelve months through the use of cash generated from operations, existing cash and cash equivalents
balances and borrowings under our senior secured revolving credit facility, as necessary. The Company’s liquidity
continues to be adequate to support its long-term strategic growth plans.
The following table provides a summary of changes in our liquidity for the fiscal year ended June 30, 2019
(in thousands):
Liquidity as of June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in credit facility capacity constraint. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net borrowings on credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in letters of credit outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation of outstanding borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity as of June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$137,243
25,658
95,418
(5,329)
(11,074)
(18)
$241,898
31
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 security in the form of letters of credit or
significant retentions. The timing of collection of retentions is often uncertain.
Other changes in working capital.
Capital expenditures.
Other factors that may impact both short and long-term liquidity include:
•
•
•
•
•
•
•
Acquisitions and disposals of businesses.
Strategic investments in new operations.
Purchases of shares under our stock buyback program.
Contract disputes which can be significant.
Collection issues, including those caused by weak commodity prices or other factors which can lead to
credit deterioration of our customers.
Capacity constraints under our senior secured revolving credit facility and remaining in compliance with
all covenants contained in the Credit Agreement.
Issuances of letters of credit.
Cash Flows Provided by Operating Activities
Cash flows provided by operating activities for the fiscal year ended June 30, 2019 totaled $41.4 million. Major
components of cash flows from operating activities for the year ending June 30, 2019 are as follows:
Net Cash Provided by Operating Activities
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash effect of changes in working capital, net of disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 27,982
28,856
2,061
(18,206)
701
$ 41,394
Working capital changes, net of effects of a disposal of a business (see Item 8. Financial Statements and
Supplementary Data, Note 3 - Acquisitions and Disposals), at June 30, 2019 in comparison to June 30, 2018 include
the following:
•
•
Accounts receivable, net of bad debt expense recognized during the period, increased by $15.4 million
during fiscal 2019, which decreased cash flows from operating activities. The increase is primarily due to
higher volumes of business and the timing of billing and collections.
Costs and estimated earnings in excess of billings on uncompleted contracts (‘‘CIE’’) increased
$19.8 million, which decreased cash flows from operating activities. Billings on uncompleted contracts in
32
excess of costs and estimated earnings (‘‘BIE’’) decreased $15.0 million, which decreased cash flows from
operating activities. CIE and BIE balances can experience significant fluctuations based on the timing of
when job costs are incurred and the invoicing of those job costs to the customer.
Inventories increased $2.9 million, which decreased cash flows from operating activities. The increase in
inventories is primarily related to aluminum coil purchased to support our storage tank products business.
Other assets and liabilities increased $12.2 million, which decreased cash flows from operating activities.
The increase is primarily related to an increase in retentions that are expected to be collected beyond one
year in connection with large projects. These increases were partially offset by an increase in net income
taxes payable and a decrease in income taxes receivable.
Accounts payable and other accrued expenses increased by $47.1 million, which increased cash flows from
operating activities. The variance is primarily attributable to higher volumes of business and the timing of
vendor payments.
•
•
•
Cash Flows Used for Investing Activities
Investing activities used $14.4 million of cash in the fiscal year ended June 30, 2019 primarily due to $19.5 million
of capital expenditures, partially offset by $3.9 million of proceeds from the disposal of a business
(see Item 8. Financial Statements and Supplementary Data, Note 3 - Acquisitions and Disposals) and $1.2 million of
proceeds from other assets sales. Capital expenditures consisted of: $7.8 million for transportation equipment,
$5.9 million for software and office equipment, $5.2 million for construction and fabrication equipment, and
$0.6 million for facilities.
Cash Flows Used by Financing Activities
Financing activities used $1.1 million of cash in the fiscal year ended June 30, 2019 primarily due to share
repurchases of $5.2 million and the repurchase of $1.7 million of Company stock for payment of withholding taxes
due on equity-based compensation, partially offset by net borrowings of $5.3 million under the Company’s senior
secured revolving credit facility.
Senior Secured Revolving Credit Facility
On February 8, 2017, the Company entered into the Fourth Amended and Restated Credit Agreement (the ‘‘Credit
Agreement’’), by and among the Company and certain foreign subsidiaries, as Borrowers, various subsidiaries of the
Company, as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole
Bookrunner, and the other Lenders party thereto.
The Credit Agreement provides for a five-year senior secured revolving credit facility of $300.0 million that expires
February 8, 2022. The credit facility may be used for working capital, acquisitions, capital expenditures, issuances
of letters of credit and other lawful purposes. The Credit Agreement includes the following covenants and borrowing
limitations:
•
Our Leverage Ratio, determined as of the end of each fiscal quarter, may not exceed 3.00 to 1.00.
• We are required to maintain a Fixed Charge Coverage Ratio, determined as of the end of each fiscal quarter,
greater than or equal to 1.25 to 1.00.
•
Asset dispositions (other than dispositions in which all of the net cash proceeds therefrom are reinvested
into the Company and dispositions of inventory and obsolete or unneeded equipment in the ordinary course
of business) are limited to $20.0 million per 12-month period.
The credit facility includes a sub-facility for revolving loans and letters of credit denominated in Australian Dollars,
Canadian Dollars, Euros and Pounds Sterling in an aggregate amount not to exceed the U.S. Dollar equivalent of
$75.0 million and a $200.0 million sublimit for total letters of credit.
Each revolving borrowing under the Credit Agreement will bear interest at a rate per annum equal to:
•
•
The ABR or the Adjusted LIBO Rate, in the case of revolving loans denominated in U.S. Dollars;
The Canadian Prime Rate or the CDOR rate, in the case of revolving loans denominated in Canadian Dollars;
33
•
•
The Adjusted LIBO Rate, in the case of revolving loans denominated in Pounds Sterling or Australian
Dollars; or
The EURIBO Rate, in the case of revolving loans denominated in Euros,
in each case, plus the Applicable Margin, which is based on the Company’s Leverage Ratio. The Applicable Margin
on ABR loans ranges between 0.625% and 1.625%. The Applicable Margin for Adjusted LIBO, EURIBO and CDOR
loans ranges between 1.625% and 2.625% and the Applicable Margin for Canadian Prime Rate loans ranges between
2.125% and 3.125%.
The unused credit facility fee is between 0.25% and 0.45% based on the Leverage Ratio.
The Credit Agreement includes a Leverage Ratio covenant, which provides that Consolidated Funded Indebtedness,
as defined in the Credit Agreement, as of the end of any fiscal quarter, may not exceed 3.0 times Consolidated
EBITDA, as defined in the Credit Agreement, over the previous four quarters. For the four quarters ended June 30,
2019, Consolidated EBITDA was $68.6 million. Consolidated Funded Indebtedness at June 30, 2019 was
$53.5 million.
Consolidated EBITDA, as defined in the Credit Agreement, or ‘‘Covenant EBITDA,’’ differs from Adjusted
EBITDA, as reported under ‘‘Results of Operations - Non-GAAP Financial Measure,’’ in Item 7 primarily because
it permits the Company to:
•
•
•
exclude non-cash stock-based compensation expense,
include pro forma EBITDA of acquired businesses as if the acquisition occurred at the beginning of the
previous four quarters, and
exclude certain other extraordinary items, as defined in the Credit Agreement.
Availability under the senior secured revolving credit facility is as follows:
Senior secured revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capacity constraint due to the Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capacity under the senior secured revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . .
Letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2019
June 30,
2018
(In thousands)
$300,000
94,323
205,677
48,147
5,347
$300,000
189,741
110,259
37,073
—
Availability under the senior secured revolving credit facility . . . . . . . . . . . . . . . . . . . . . .
$152,183
$ 73,186
The Company is in compliance with all other affirmative, negative, and financial covenants under the Credit
Agreement.
At June 30, 2019, the Company was at the lowest margin tier for all categories of loans and the unused revolving
credit facility fee under the Credit Agreement.
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 cash dividends on our capital
stock during any fiscal year up to an amount which, when added to all other cash dividends paid during such fiscal
year, does not exceed 50% of our cumulative net income for such fiscal year to 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, 2018, the Board of Directors approved a new stock buyback program (the ‘‘November 2018
Program’’), which replaced the previous program that had been in place since December 2016 and was set to expire
in December 2018. Under the November 2018 Program, the Company may repurchase common stock up to a
34
maximum of $30.0 million per calendar year provided that the aggregate number of shares repurchased may not
exceed 10%, or approximately 2.7 million, of the Company’s shares outstanding as of November 6, 2018. The
Company may repurchase its stock from time to time in the open market at prevailing market prices or in privately
negotiated transactions and is not obligated to purchase any shares. The November 2018 Program will continue unless
and until it is modified or revoked by the Board of Directors. In December 2018, the Company repurchased
310,532 shares of its common stock for $5.2 million under the November 2018 Program. There were 2,396,643
shares available for repurchase under the November 2018 Program as of June 30, 2019.
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. The Company withheld 79,111 and
52,950 shares of common stock during fiscal 2019 and 2018, respectively, to satisfy these obligations. These shares
were returned to the Company’s pool of treasury shares. The Company has 1,081,014 treasury shares as of June 30,
2019 and intends to utilize these treasury shares in connection with equity awards under the Company’s stock
incentive plans and for sales to the Employee Stock Purchase Plan.
Off-Balance Sheet Arrangements
As of June 30, 2019, the following off-balance sheet arrangements were in place to support our ordinary course
obligations:
Expiration Period
Less than
1 Year
1–3 Years
3–5 Years
(In thousands)
More than
5 Years
Total
Letters of credit(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surety bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 26,903
208,694
$ 28,040
77,111
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$235,597
$105,151
$—
—
$—
$—
—
$—
$ 54,943
285,805
$340,748
(1) All letters of credit issued under our senior secured revolving credit facility are in support of our workers’ compensation insurance programs
or certain construction contracts. The letters of credit that support our workers’ compensation programs are expected to renew annually
through the term of our senior secured revolving credit facility. The letters of credit that support construction contracts carry expiry dates
into calendar year 2021. Our Credit Agreement allows exclusion of letters of credit that support our workers’ compensation programs when
calculating availability under the credit facility. At June 30, 2019, there were $6.8 million of letters of credit that support our workers’
compensation programs.
Contractual Obligations
Contractual obligations at June 30, 2019 are summarized below:
Contractual Obligations by Expiration Period
Less than
1 Year
1-3 Years
3-5 Years
(In thousands)
More than
5 Years
Total
Borrowings under senior secured revolving credit
facility(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payments on debt(1) . . . . . . . . . . . . . . . . . . . .
Operating leases(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 5,347
2,165
12,899
1,043
1,843
7,758
1,024
Total contractual obligations . . . . . . . . . . . . . . . . . . . .
$10,625
$21,454
$ —
—
7,046
—
$7,046
$ — $ 5,347
4,008
39,418
2,067
—
11,715
—
$11,715
$50,840
(1) Assumes total debt principal at June 30, 2019 is carried to maturity with no future borrowings or repayments and no changes to total letters
of credit outstanding as of June 30, 2019. Interest payments on debt assumes the margin tier that the Company was at on June 30, 2019,
which is the lowest margin tier under the Credit Agreement.
(2)
Includes an operating lease that the Company expects to commence during its first quarter of fiscal 2020. The lease has a 10 year term and
future lease payments of $11.9 million.
35
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 Agreement, which is
influenced by movements in short-term rates. Borrowings under our $300.0 million senior secured revolving credit
facility bear interest at a rate per annum equal to:
•
•
•
•
The ABR or the Adjusted LIBO Rate, in the case of revolving loans denominated in U.S. Dollars;
The Canadian Prime Rate or the CDOR rate, in the case of revolving loans denominated in Canadian Dollars;
The Adjusted LIBO Rate, in the case of revolving loans denominated in Pounds Sterling or Australian
Dollars; or
The EURIBO Rate, in the case of revolving loans denominated in Euros,
in each case, plus the Applicable Margin, which is based on the Company’s Leverage Ratio. The Applicable Margin
on ABR loans ranges between 0.625% and 1.625%. The Applicable Margin for Adjusted LIBO, EURIBO and CDOR
loans ranges between 1.625% and 2.625% and the Applicable Margin for Canadian Prime Rate loans ranges between
2.125% and 3.125%.
Financial instruments with interest rate risk at June 30, 2019 were as follows:
2020
Maturity by Fiscal Year
2022
2021
2023
(In thousands)
2024
Fair Value as
of June 30, 2019
Long-term debt:
Variable rate debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— $— $5,347
$— $—
$5,347
The Company has not entered into any derivative instruments to hedge interest rate risk, but evaluates the materiality
of interest rate risk exposure. An increase of 100 basis points in interest rates would not have had a material impact
on the financial results of the Company for the fiscal year ended June 30, 2019.
Foreign Currency Risk
Matrix Service Company has subsidiaries with operations in Canada and South Korea, which use the Canadian Dollar and
South Korean Won, respectively, as their functional currencies. The Company also has a subsidiary with operations in
Australia, but its functional currency is the U.S. Dollar since its sales are primarily denominated in U.S. Dollars.
Historically, movements in the Canadian Dollar to U.S. Dollar exchange rate have not significantly impacted the
Company’s results. Also, the Company does not expect exchange rate fluctuations in its South Korean and Australian
operations to materially impact its financial results since these operations represent an insignificant portion of the
Company’s consolidated revenues and expenses. However, further growth in its Canadian, South Korean and/or
Australian operations and/or significant fluctuations in the Canadian Dollar, South Korean Won and/or Australian
Dollar to U.S. Dollar exchange rates 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 senior secured revolving 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, 2019.
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, and also by negotiating contract escalation clauses to cover unexpected
costs due to fluctuations in materials derived from certain commodities.
36
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 Fiscal Years Ended June 30, 2019, June 30, 2018, and
June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for the Fiscal Years Ended June 30, 2019,
June 30, 2018, and June 30, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of June 30, 2019 and June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2019, June 30, 2018,
and June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years Ended June 30,
2019, June 30, 2018, and June 30, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarterly Financial Data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II—Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38
39
41
42
43
44
45
46
70
71
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, 2019, June 30, 2018 and June 30, 2017 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.
37
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, 2019. In making this assessment, the Company’s management used the criteria established in Internal
Control—Integrated Framework (2013) set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (‘‘COSO’’) in Internal Control-Integrated Framework.
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, 2019 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, 2019. 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
Kevin S. Cavanah
Vice President and Chief Financial Officer
September 4, 2019
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Matrix Service Company
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Matrix Service Company and subsidiaries (the
‘‘Company’’) as of June 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2019
based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2019 of the
Company and our report dated September 4, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
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 are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A 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 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Tulsa, Oklahoma
September 4, 2019
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Matrix Service Company
Opinion on the Financial Statements
We have audited the accompanying Consolidated Balance Sheets of Matrix Service Company and subsidiaries
(the ‘‘Company’’) as of June 30, 2019 and 2018, and the related Consolidated Statements of Income, Comprehensive
Income, Cash Flows and Changes in Stockholders’ Equity for each of the three years in the period ended
June 30, 2019 and the related notes and schedules listed in the Index at Item 8 (collectively referred to as the
‘‘financial statements’’). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in
the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2019, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated September 4, 2019 expressed an unqualified opinion
on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
Tulsa, Oklahoma
September 4, 2019
We have served as the Company’s auditor since 2006.
40
Matrix Service Company
Consolidated Statements of Income
(In thousands, except per share data)
June 30,
2019
Fiscal Years Ended
June 30,
2018
June 30,
2017
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,416,680
1,284,729
$1,091,553
999,617
$1,197,509
1,116,506
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible asset impairment . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for federal, state and foreign income taxes . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to noncontrolling interest. . . . . . . . . . . . . . .
Net income (loss) attributable to Matrix Service Company . . . . . . . . . . . .
Basic earnings (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per common share. . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares outstanding:
131,951
94,021
—
37,930
(1,296)
1,167
611
38,412
10,430
27,982
—
91,936
84,417
17,998
(10,479)
(2,600)
381
550
(12,148)
(668)
(11,480)
—
$
$
$
27,982
$ (11,480) $
1.04
1.01
$
$
(0.43) $
(0.43) $
81,003
76,144
—
4,859
(2,211)
132
(334)
2,446
2,308
138
321
(183)
(0.01)
(0.01)
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,891
27,587
26,769
26,769
26,533
26,533
See accompanying notes
41
Matrix Service Company
Consolidated Statements of Comprehensive Income
(In thousands)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax:
Foreign currency translation loss (net of tax expense (benefit) of $27,
$(24) and $180 for the fiscal years ended June 30, 2019, 2018 and
2017, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Comprehensive income attributable to noncontrolling interest . . . . . . .
Fiscal Years Ended
June 30,
2018
June 30,
2019
June 30,
2017
$27,982
$(11,480)
$ 138
(340)
27,642
—
(87)
(11,567)
—
(479)
(341)
321
Comprehensive income (loss) attributable to Matrix Service Company . . . . .
$27,642
$(11,567)
$(662)
See accompanying notes
42
Matrix Service Company
Consolidated Balance Sheets
(In thousands)
Current assets:
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, less allowances (2019 - $923; 2018 - $6,327) . . . . . . . . . . . . .
Costs and estimated earnings in excess of billings on uncompleted contracts. . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total property, plant and equipment - at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities:
Liabilities and stockholders’ equity
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billings on uncompleted contracts in excess of costs and estimated earnings. . . . . . . .
Accrued wages and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings under senior secured revolving credit facility . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies
Stockholders’ equity:
Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares
issued as of June 30, 2019 and June 30, 2018; 26,807,203 and 26,853,823 shares
outstanding as of June 30, 2019 and June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2019
June 30,
2018
$ 89,715
218,432
96,083
8,017
29
5,034
417,310
41,179
91,793
52,526
43,632
7,619
236,749
(157,414)
79,335
93,368
19,472
2,683
21,226
$ 633,394
$ 64,057
203,388
76,632
5,152
3,359
4,458
357,046
40,424
89,036
48,339
41,236
1,353
220,388
(147,743)
72,645
96,162
22,814
4,848
4,518
$ 558,033
$ 114,647
105,626
38,357
9,021
2,517
5,331
275,499
298
5,347
293
281,437
$ 79,439
120,740
24,375
9,080
7
4,824
238,465
429
—
296
239,190
279
137,712
239,476
(7,751)
369,716
279
132,198
211,494
(7,411)
336,560
Less treasury stock, at cost — 1,081,014 and 1,034,394 shares as of June 30, 2019
and June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(17,759)
351,957
$ 633,394
(17,717)
318,843
$ 558,033
See accompanying notes
43
Matrix Service Company
Consolidated Statements of Cash Flows
(In thousands)
Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided (used) by operating
activities, net of effects of acquisitions:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible asset impairment . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on disposal of business (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for uncollectible accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 and liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billings on uncompleted contracts in excess of costs and estimated earnings . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided (used) by operating activities. . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions, net of cash acquired (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposal of business (Note 3). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used by investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
Advances under senior secured revolving credit facility . . . . . . . . . . . . . . . . . . . .
Repayments of advances under senior secured revolving credit facility . . . . . . . .
Payment of debt amendment fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Open market purchase of treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuances of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock under employee stock purchase plan . .
Repurchase of common stock for payment of statutory taxes due on equity-
based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital contributions from noncontrolling interest. . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided (used) by 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosure of cash flow information:
Cash paid during the period for:
June 30,
2019
Fiscal Years Ended
June 30,
2018
June 30,
2017
$ 27,982
$ (11,480)
$
138
18,224
—
11,908
2,061
(427)
(854)
5
701
(15,374)
(19,809)
(2,872)
(12,246)
32,651
(14,983)
14,427
41,394
(19,558)
—
3,885
1,225
(14,448)
16,225
(10,896)
—
(5,190)
128
311
(1,685)
—
(1,107)
(181)
25,658
64,057
$ 89,715
20,347
17,998
8,618
(1,186)
—
(662)
107
397
5,504
14,548
(1,415)
369
(25,883)
45,613
1,796
74,671
(8,711)
(1,687)
—
1,062
(9,336)
85,317
(130,248)
(364)
—
317
293
(627)
—
(45,312)
229
20,252
43,805
$ 64,057
21,602
—
7,461
(2,556)
—
(142)
1,748
289
(11,932)
13,567
198
(7,641)
(37,047)
5,212
(9,643)
(18,746)
(11,908)
(40,819)
—
1,308
(51,419)
126,933
(82,251)
(1,073)
—
253
305
(2,290)
855
42,732
(418)
(27,851)
71,656
$ 43,805
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,309
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,705
$
$
1,410
2,719
$ 11,968
$
1,788
Non-cash investing and financing activities:
Accrued acquisition working capital adjustment (Note 3) . . . . . . . . . . . . . . . . .
$
— $
— $
1,687
Purchases of property, plant and equipment on account . . . . . . . . . . . . . . . . . .
$ 2,686
$
156
$
483
See accompanying notes
44
Matrix Service Company
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share data)
Balances, July 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . .
Capital contributions from noncontrolling interest . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . .
Treasury Shares sold to Employee Stock Purchase
Plan (16,609 shares) . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options (24,813 shares) . . . . . . . .
Issuance of deferred shares (396,530 shares) . . . . . .
Treasury shares repurchased to satisfy tax
withholding obligations (134,535 shares) . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . .
Balances, June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . .
Treasury Shares sold to Employee Stock Purchase
Plan (21,920 shares) . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options (31,050 shares) . . . . . . . .
Issuance of deferred shares (253,241 shares) . . . . . .
Treasury shares repurchased to satisfy tax
withholding obligations (52,950 shares) . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . .
Balances, June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . .
Treasury Shares Sold to Employee Stock Purchase
Plan (15,812 shares) . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options (12,500 shares) . . . . . . . .
Issuance of deferred shares (314,711 shares) . . . . . .
Treasury shares repurchased to satisfy tax
withholding obligations (79,111 shares) . . . . . . . .
Open market purchases of treasury shares
(310,532 shares) . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . .
Common
Stock
$279
—
—
—
Additional
Paid-In
Capital
$127,058
—
—
—
Retained
Earnings
Treasury
Stock
$223,157
—
(183)
—
$(26,907)
—
—
—
Accumulated
Other
Comprehensive
Income (Loss)
$(6,845)
—
—
(479)
Non-
Controlling
Interest
$(1,176)
855
321
—
Total
$315,566
855
138
(479)
—
—
—
—
—
279
—
—
—
—
—
—
—
279
—
—
—
—
—
—
—
—
(25)
(317)
(5,758)
—
7,461
—
—
—
—
—
128,419
222,974
— (11,480)
—
—
(130)
(240)
(4,469)
—
8,618
132,198
—
—
38
(126)
(6,306)
—
—
11,908
—
—
—
—
—
211,494
27,982
—
—
—
—
—
—
—
330
570
5,758
(2,290)
—
(22,539)
—
—
423
557
4,469
(627)
—
(17,717)
—
—
273
254
6,306
(1,685)
(5,190)
—
—
—
—
—
—
(7,324)
—
(87)
—
—
—
—
—
(7,411)
—
(340)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
305
253
—
(2,290)
7,461
321,809
(11,480)
(87)
293
317
—
(627)
8,618
318,843
27,982
(340)
311
128
—
(1,685)
(5,190)
11,908
Balances, June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . .
$279
$137,712
$239,476
$(17,759)
$(7,751)
$ — $351,957
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 have been prepared in accordance with accounting principles generally
accepted in the United States and include the accounts of Matrix Service Company (‘‘Matrix’’ or the ‘‘Company’’)
and its subsidiaries, all of which are wholly owned. Intercompany transactions and balances have been eliminated in
consolidation.
The Company operates in the United States, Canada, South Korea and Australia. The Company’s reportable segments
are Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions and Industrial.
Use of Estimates
The preparation of financial statements 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
including liabilities associated with litigation and with the
assets, and the estimation of loss contingencies,
self-insured retentions on our insurance programs. Actual results could materially differ from those estimates.
Revenue Recognition
Adoption of New Revenue Recognition Standard
The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) on July 1, 2018.
The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from
contracts with customers and supersedes most previous revenue recognition guidance, including industry-specific
guidance, and is applicable to all of the Company’s contracts with customers. The core principle of the revenue model
is that ‘‘an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.’’ The
Company used the modified retrospective method of application. Under the modified retrospective method, revenue
recognized on completed contracts is not restated, however contracts in progress are accounted for as if they were
under this new standard at inception. Any difference between historical revenue and revenue under the new standard
is recorded as a cumulative effect adjustment to retained earnings as of the date of adoption. The cumulative impact
of adopting Topic 606 was immaterial and did not require an adjustment to retained earnings. See Note 2 – Revenue
for new disclosures required as a result of adopting Topic 606.
General Information about our Contracts with Customers
Our revenues come from contracts to provide engineering, procurement, fabrication and construction, repair and
maintenance and other services. Our engineering, procurement and fabrication and construction services are usually
provided in association with capital projects, which commonly are fixed price contracts and are billed based on
project milestones. Our repair and maintenance services typically are cost reimbursable or time and material based
contracts and are billed monthly or, for projects of short duration, at the conclusion of the project. The elapsed time
from award to completion of performance may be in excess of one year for capital projects.
Step 1: Contract Identification
We do not recognize revenue unless we have identified a contract with a customer. A contract with a customer exists
when it has approval and commitment from both parties, the rights and obligations of the parties are identified,
payment terms are identified, the contract has commercial substance, and collectibility is probable. We also evaluate
whether a contract should be combined with other contracts and accounted for as one single contract. This evaluation
requires judgment and could change the timing of the amount of revenue and profit recorded for a given period.
Step 2: Identify Performance Obligations
Next, we identify each performance obligation in the contract. A performance obligation is a promise to provide a
distinct good or service or a series of distinct goods or services to the customer. Revenue is recognized separately
for each performance obligation in the contract. Many of our contracts have one clearly identifiable performance
46
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
obligation. However, many of our contracts provide the customer an integrated service that includes two or more of
the following services: engineering, procurement, fabrication, construction, repair and maintenance services. For
these contracts, we do not consider the integrated services to be distinct within the context of the contract when the
separate scopes of work combine into a single commercial objective or capability for the customer. Accordingly, we
generally identify one performance obligation in our contracts. The determination of the number of performance
obligations in a contract requires significant judgment and could change the timing of the amount of revenue recorded
for a given period.
Step 3: Determine Contract Price
After determining the performance obligations in the contract, we determine the contract price. The contract price is
the amount of consideration we expect to receive from the customer for completing the performance obligation(s).
In a fixed price contract, the contract price is a single lump-sum amount. In reimbursable and time and materials
based contracts, the contract price is determined by the agreed upon rates or reimbursements for time and materials
expended in completing the performance obligation(s) in the contract.
A number of our contracts contain various cost and performance incentives and penalties that can either increase or
decrease the contract price. These variable consideration amounts are generally earned or incurred based on certain
performance metrics, most commonly related to project schedule or cost targets. We estimate variable consideration
at the most likely amount of additional consideration to be received (or paid in the case of penalties), provided that
meeting the variable condition is probable. We include estimated amounts of variable consideration in the contract
price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the
uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and
determination of whether to include estimated amounts in the contract price are based largely on an assessment of
our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.
We reassess the amount of variable consideration each accounting period until the uncertainty associated with the
variable consideration is resolved. Changes in the assessed amount of variable consideration are accounted for
prospectively as a cumulative adjustment to revenue recognized in the current period.
Step 4: Assign Contract Price to Performance Obligations
After determining the contract price, we assign such price to the performance obligation(s) in the contract.
If a contract has multiple performance obligations, we assign the contract price to each performance obligation based
on the stand-alone selling prices of the distinct services that comprise each performance obligation.
Step 5: Recognize Revenue as Performance Obligations are Satisfied
We record revenue for contracts with our customers as we satisfy the contracts’ performance obligations.
We recognize revenue on performance obligations associated with fixed price contracts for engineering, procurement
and construction services over time since these services create or enhance assets the customer controls as they are
being created or enhanced. We measure progress of satisfying these performance obligations by using the
percentage-of-completion method, which is based on costs incurred to date compared to the total estimated costs at
completion, since it best depicts the transfer of control of assets being created or enhanced to the customer.
We recognize revenue over time for reimbursable and time and material based repair and maintenance contracts since
the customer simultaneously receives and consumes the benefit of those services as we perform work under the
contract. As a practical expedient allowed under the revenue accounting standards, we record revenue for these
contracts in the amount to which we have a right to invoice for the services performed provided that we have a right
to consideration from the customer in an amount that corresponds directly with the value of the performance
completed to date.
Costs incurred may include direct labor, direct materials, subcontractor costs and indirect costs, such as salaries and
benefits, supplies and tools, equipment costs and insurance costs. Indirect costs are charged to projects based upon
direct costs and overhead allocation rates per dollar of direct costs incurred or direct labor hours worked. Typically,
customer contracts will include standard warranties that provide assurance that products and services will function
as expected. The Company does not sell separate warranties.
47
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
We have numerous contracts that are in various stages of completion which require estimates to determine the
forecasted costs at completion. Due to the nature of the work left to be performed on many of our contracts, the
estimation of total cost at completion for fixed price contracts is complex, subject to many variables and requires
significant judgment. Estimates of total cost at completion are made each period and changes in these estimates are
accounted for prospectively as cumulative adjustments to revenue recognized in the current period. 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.
Change Orders
Contracts are often modified through change orders, which are changes to the agreed upon scope of work. Most of
our change orders, which may be priced or unpriced, are for goods or services that are not distinct from the existing
contract due to the significant integration of services provided in the context of the contract and are accounted for
as if they were part of that existing contract. The effect of a change order on the contract price and our measure of
progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative
catch-up basis. For unpriced change orders, we estimate the increase or decrease to the contract price using the
variable consideration method described in the Step 3: Determine Contract Price paragraph above. Unpriced change
orders are more fully discussed in Note 7 - Contingencies.
Claims
Sometimes we seek claims for amounts in excess of the contract price for delays, errors in specifications and designs,
contract terminations, change orders in dispute or other causes of additional costs incurred by us. Recognition of
amounts as additional contract price related to claims is appropriate only if there is a legal basis for the claim.
The determination of our legal basis for a claim requires significant judgment. We estimate the change to the contract
price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above.
Claims are more fully discussed in Note 7 - Commitments and Contingencies.
Cash and Cash Equivalents
The Company includes as cash equivalents all investments with original maturities of three months or less which are
readily convertible into cash. We have cash on deposit at June 30, 2019 with banks in the United States, Canada,
South Korea and Australia in excess of Federal Deposit Insurance Corporation (‘‘FDIC’’), Canada Deposit Insurance
Corporation (‘‘CDIC’’), Korea Deposit Insurance Corporation (‘‘KDIC’’) and Financial Claims Scheme (‘‘FCS’’)
protection limits, respectively. The United States Dollar equivalent of Canadian, South Korean and Australian
deposits totaled $2.6 million as of June 30, 2019.
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, steel 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
reasonable collection attempts have been exhausted.
Retentions
Contract retentions collectible beyond one year are included in Other assets in the Consolidated Balance Sheets.
Accounts payable retentions are generally settled within one year.
48
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
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.
Inventories
Inventories consist primarily of steel plate and pipe and aluminum coil and extrusions. Cost is determined primarily
using the average cost method and inventories are stated at the lower of cost or net realizable value.
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.
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, which is a level below our
reportable segments.
We perform our annual test during the fourth quarter of each fiscal year and in any other period in which indicators
of impairment warrant additional tests. The goodwill impairment test involves comparing management’s estimate of
the fair value of a reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit
exceeds its carrying value, then goodwill is not impaired. If the fair value of a reporting unit is less than its carrying
value, then goodwill is impaired to the extent of the difference, but the impairment may not exceed the balance of
goodwill assigned to that reporting unit.
We utilize a discounted cash flow analysis, referred to as an income approach, and market multiples, referred to as
a market approach, to determine the estimated fair value of our reporting units. For the income approach, significant
judgments and assumptions, including forecasted project awards, discount rate, anticipated revenue growth rate, gross
margins, operating expenses, working capital needs and capital expenditures, are inherent in the fair value estimates,
which are based on our operating and capital budgets and on our strategic plan. As a result, actual results may differ
49
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
from the estimates utilized in our income approach. For the market approach, significant judgments and assumptions
include the selection of guideline companies and our forecasted EBITDA. The use of alternate judgments and/or
assumptions could result in a fair value that differs from our estimate and could result in the recognition of an
impairment charge in the financial statements. As a test for reasonableness, we also consider the combined estimated
fair values of our reporting units to our market capitalization.
Other Intangible Assets
Intangible assets that have finite useful lives are amortized by the straight-line method over their useful lives ranging
from 4 years to 15 years. A finite intangible asset is considered impaired when its carrying amount is not recoverable
and exceeds the asset’s fair value. The carrying amount is deemed unrecoverable if it is greater than the sum of
undiscounted cash flows expected to result from use and eventual disposition of the asset. An impairment loss is equal
to the excess of the carrying amount over the fair value of the asset. 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, which is calculated using a Monte Carlo model. The fair value of stock options is
determined based on the Black-Scholes option pricing model. For all stock-based awards, expense is recognized over
the requisite service period with forfeitures recorded as they occur.
Income Taxes
We use the asset and liability approach for financial accounting and reporting for income taxes. Deferred income tax
assets and liabilities are computed annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances based
on our judgments and estimates are established when necessary to reduce deferred tax assets to the amount expected
to be realized in future operating results. Company management believes that realization of deferred tax assets in
excess of the valuation allowance is more likely than not. Our estimates are based on facts and circumstances in
existence as well as interpretations of existing tax regulations and laws applied to the facts and circumstances, with
the help of professional tax advisors. Therefore, we estimate and provide for amounts of additional income taxes that
may be assessed by the various taxing authorities.
Foreign Currency
The functional currencies of the Company’s operations in Canada, South Korea and Australia are the Canadian
Dollar, South Korean Won and U.S. Dollar, respectively. The functional currency of the Company’s Australian
operations is the U.S. Dollar since its sales are primarily denominated in that currency. For subsidiaries with
operations using a foreign functional currency, assets and liabilities are translated at the year-end exchange rates and
50
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
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), net of tax, in the Consolidated Statements
of Changes in Stockholders’ Equity and in Other Comprehensive Income (Loss) in the Consolidated Statements of
Comprehensive Income. Translation gains and losses are reversed from Accumulated Other Comprehensive Income
(Loss) and are recognized in current period income in the event the Company disposes of an entity with accumulated
translation gains or losses. 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 2016-02, Leases (Topic 842)
On February 25, 2016, the FASB issued ASU 2016-02 that amends accounting for leases. Under the new guidance,
lessees will recognize the following for all
the lease
commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease,
measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use,
or control the use of, a specified asset for the lease term. The Company plans to apply the new leases standard using
the modified retrospective method, which recognizes a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption. The ASU is effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years.
leases (with the exception of short-term leases) at
We currently expect to recognize between $23 million and $28 million of operating right-of-use lease assets and
liabilities upon adoption during the first quarter of fiscal 2020. We are not expecting the modified retrospective
adjustment to retained earnings upon adoption to be material, and we do not expect the ASU will have a material
impact on our future operating results or cash flows. Our conclusions are preliminary and could change once we
finalize the implementation during the first fiscal quarter of fiscal 2020.
Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments
On June 16, 2016, the FASB issued ASU 2016-13, which will change how the Company accounts for credit losses,
including those related to its trade accounts receivable. The amendments in this update require a financial asset (or
a group of financial assets) to be presented at the net amount expected to be collected. The income statement will
reflect any increases or decreases of expected credit losses that have taken place during the period. The measurement
of expected credit losses is based on relevant information about past events, including historical experience, current
conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount.
Current GAAP delays the recognition of the full amount of credit losses until the loss is probable of occurring. The
amendments in this update eliminate the probable initial recognition threshold and, instead, reflect the Company’s
current estimate of all expected credit losses. In addition, current guidance limits the information the Company may
consider in measuring a credit loss to its past events and current conditions.
The amendments in this update broaden the information the Company may consider in developing its expected credit
loss estimate to include forecasted information. The Company will adopt these amendments on July 1, 2020. The
Company must apply the amendments in this update through a cumulative-effect adjustment to retained earnings as
of the beginning of the first reporting period in which the guidance is effective. At this time, the Company does not
expect this update will have a material impact on its estimate of the allowance for uncollectible accounts.
Note 2 – Revenue
Remaining Performance Obligations
The Company had $823.3 million of remaining performance obligations yet to be satisfied as of June 30, 2019. The
Company expects to recognize approximately $656.4 million of its remaining performance obligations as revenue
within the next twelve months.
51
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Contract Balances
Contract terms with customers include the timing of billing and payment, which usually differs from the timing of
revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets
and liabilities are calculated on a contract-by-contract basis and reported on a net basis at the end of each period and
are classified as current. We present our contract assets in the balance sheet as Costs and Estimated Earnings in
Excess of Billings on Uncompleted Contracts (‘‘CIE’’). CIE consists of revenue recognized in excess of billings. We
present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and
Estimated Earnings (‘‘BIE’’). BIE consists of advance payments and billings in excess of revenue recognized. The
following table provides information about CIE and BIE:
June 30,
2019
June 30,
2018
Change
(In thousands)
Costs and estimated earnings in excess of billings on uncompleted contracts . . $ 96,083 $ 76,632 $19,451
15,114
Billings on uncompleted contracts in excess of costs and estimated earnings . .
(105,626)
(120,740)
Net contract liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(9,543) $ (44,108) $34,565
The difference between the beginning and ending balances of the Company’s CIE and BIE primarily results from the
timing of revenue recognized relative to its billings. The amount of revenue recognized during the twelve months
ended June 30, 2019 that was included in the prior period BIE balance was $120.7 million. This revenue consists
primarily of work performed during the period on contracts with customers that had advance billings.
Gross amounts of contact assets and liabilities on uncompleted contracts are as follows:
June 30,
2019
June 30,
2018
(In thousands)
Costs incurred and estimated earnings on uncompleted contracts . . . . . . . . . . . . . . . . .
Billings on uncompleted contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,942,903
1,952,446
$2,081,799
2,125,907
Net contract liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(9,543)
$ (44,108)
Progress billings in accounts receivable at June 30, 2019 and June 30, 2018 included retentions to be collected within
one year of $21.9 million and $25.9 million, respectively. Contract retentions collectible beyond one year are
included in other assets in the Consolidated Balance Sheet and totaled $17.7 million as of June 30, 2019 and
$2.6 million as of June 30, 2018.
Disaggregated Revenue
The following table presents revenue disaggregated by the geographic area where the work was performed:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other international. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,367,844
41,410
7,426
$ 981,292
104,208
6,053
$ 961,049
228,625
7,835
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,416,680
$1,091,553
$1,197,509
June 30,
2019
Twelve months ended
June 30,
2018
(In thousands)
June 30,
2017
52
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Note 3—Acquisitions and Disposals
Sale of Process Heating Business
In August 2018, the Company sold non-core assets associated with a business that marketed process heating
equipment for $3.9 million in cash, including $0.2 million of customary final post-closing adjustments paid in
October 2018. The Company recognized a gain of $0.4 million on the sale, which was included in Other in the
Consolidated Statements of Income. The revenues and operating results of the business, which were included in the
Oil Gas & Chemical segment, were not material.
Purchase of Houston Interests, LLC
On December 12, 2016, the Company completed the acquisition of Houston Interests, LLC (‘‘Houston Interests’’),
a global solutions company that provides consulting, engineering, design, construction services and systems
integration. Houston Interests brings expertise to the Company in natural gas processing; sulfur recovery, processing
and handling; liquid terminals, silos and other bulk storage; process plant design; power generation environmental
controls and material handling; industrial power distribution; electrical, instrumentation and controls; marine
structures; and material handling systems and terminals for cement, sulfur, fertilizer, coal and grain facilities. The
business has been included in our Matrix PDM Engineering, Inc. subsidiary, and its operating results impact primarily
the Oil Gas & Chemical, Storage Solutions and Industrial segments.
The Company purchased all of the equity interests of Houston Interests for $42.5 million, net of working capital
adjustments and cash acquired. The consideration paid is as follows (in thousands):
Cash paid for equity interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: cash acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 46,000
6,837
(10,331)
$ 42,506
The Company funded the acquisition primarily from borrowings under the Company’s senior secured revolving credit
facility (See Note 5). The net purchase price was allocated to the major categories of assets and liabilities based on
their estimated fair value at the acquisition date.
The following table summarizes the net purchase price allocation (in thousands):
Assets Acquired:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs and estimated earnings in excess of billings on uncompleted contracts . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities Acquired:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billings on uncompleted contracts in excess of costs and estimated earnings . . . . . . . . . . . . . . . . . . .
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Purchase Price:
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: cash acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,331
10,273
746
454
21,804
942
35,146
10,220
$68,112
$
962
11,648
2,475
15,085
190
$15,275
$52,837
10,331
$42,506
53
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
The goodwill recognized from the acquisition is primarily attributable to the technical expertise of the acquired
workforce and the complementary nature of Houston Interests’ operations, which the Company believes will enable
the combined entity to expand its service offerings and enter new markets. All of the goodwill recognized is
deductible for income tax purposes.
The Company agreed to pay the previous owners for any unused portion of acquired warranty obligations outstanding
as of June 30, 2017. This agreement was settled for $1.7 million, which was paid in July 2017. This settlement was
reflected as a decrease to the acquired current liabilities and an increase to the net purchase price.
The Company incurred $0.6 million of expenses related to closing the acquisition during the fiscal year ended
June 30, 2017, which were included within selling, general and administrative expenses in the Consolidated
Statements of Income.
information in the table below summarizes the combined results of operations of
The unaudited financial
Matrix Service Company and Houston Interests for the fiscal year ended June 30, 2017, on a pro forma basis, as
though the companies had been combined as of July 1, 2016. The pro forma financial information presented in the
table below is for informational purposes only and is not indicative of the results of operations that would have been
achieved if the acquisition had taken place at July 1, 2016 nor should it be taken as indicative of future consolidated
results of operations.
Fiscal Year Ended
June 30, 2017
(In thousands, except per share data)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Matrix Service Company . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,233,372
7,326
$
0.28
$
0.27
$
The pro forma financial information presented in the table above includes the following adjustments to the combined
entities’ historical financial statements:
•
•
•
•
Pro forma earnings were adjusted to include $0.8 million of integration expenses that would have been
recognized had the acquisition occurred on July 1, 2016.
Interest expense for the combined entities was increased by $0.7 million for the fiscal year ended June 30,
2017. The increase was attributable to the assumption that the Company’s borrowings of $46.0 million used
to fund a portion of the acquisition had been outstanding as of July 1, 2016. This increase was partially
offset by the assumption that Houston Interests’ former debt was extinguished as of July 1, 2016.
Depreciation and intangible asset amortization expense for the combined entities was reduced by
$1.4 million during the fiscal year ended June 30, 2017. This reduction is primarily due to the recognition
of amortizable intangible assets as part of the acquisition and the effect of fair value adjustments to acquired
property, plant and equipment.
Pro forma earnings were adjusted to include additional income tax expense of $2.0 million. Houston
Interests was previously an exempt entity and income taxes were not assessed in its historical financial
information.
54
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:
Net balance at July 1, 2016. . . . . . . . . . . . . . . . . . . . .
Purchase of Houston Interests (Note 3) . . . . . . . . . . .
Acquisition related adjustments. . . . . . . . . . . . . . . . . .
Translation adjustment(1) . . . . . . . . . . . . . . . . . . . . . . .
Net balance at June 30, 2017 . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment(1) . . . . . . . . . . . . . . . . . . . . . . .
Net balance at June 30, 2018 . . . . . . . . . . . . . . . . . . .
Disposal of business(2). . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment(1) . . . . . . . . . . . . . . . . . . . . . . .
Net balance at June 30, 2019 . . . . . . . . . . . . . . . . . . .
Electrical
Infrastructure
Oil Gas &
Chemical
Storage
Solutions
(In thousands)
Industrial
Total
$ 42,170
—
—
(18)
42,152
(17,281)
(45)
24,826
—
4
$14,008
19,596
—
—
33,604
—
—
33,604
(2,775)
—
$16,681
$ 5,434
— 15,550
—
88
(3)
(5)
$ 78,293
35,146
88
(26)
16,764
—
(4)
16,760
—
(24)
20,981
113,501
— (17,281)
(58)
(9)
20,972
—
1
96,162
(2,775)
(19)
$ 24,830
$30,829
$16,736
$20,973
$ 93,368
(1)
(2)
The translation adjustments relate to the periodic translation of Canadian Dollar and South Korean Won denominated goodwill recorded as
a part of prior acquisitions in Canada and South Korea, in which the local currency was determined to be the functional currency.
In August 2018, the Company disposed of a business that marketed process heating equipment. See Note 3 - Acquisitions and Disposals
for more information about the disposal. The business disposed of constituted its own reporting unit and the amount of goodwill written off
was all of the goodwill assigned to that reporting unit. None of the goodwill was considered impaired since the Company recorded a gain
on the disposal.
The Company performed its annual goodwill impairment test as of May 31, 2019, which resulted in no impairment.
However, the risk of impairment is dependent upon the relationship of fair values to carrying amounts at the reporting
unit level. The fiscal 2019 test indicated that some reporting units were at higher risk of future impairment than
others. If the market view of project opportunities or gross margins deteriorates next year prior to the annual test, an
interim test may be required, particularly for the higher risk reporting units, which could result in a material
impairment of goodwill.
In fiscal 2018, the Company recorded a $17.3 million impairment of goodwill included in the Electrical Infrastructure
segment. The impairment was triggered by lower financial projections as a result of the Company’s decision to shift
its strategy away from EPC power generation projects to smaller, individual packages that better fit the Company’s
strategy and risk profile, and sluggish maintenance and capital spending by some key clients in our Northeast and
Mid-Atlantic high voltage markets. The estimated fair value of the reporting unit was derived by utilizing a
combination of discounted cash flow analysis and market multiples.
Other Intangible Assets
Information on the carrying value of other intangible assets is as follows:
Useful Life
(Years)
10 to 15
6 to 15
4
Gross
Carrying
Amount
$ 2,579
38,572
1,453
$42,604
At June 30, 2019
Accumulated
Amortization
Net Carrying
Amount
(In thousands)
$ (1,779)
(19,915)
(1,438)
$(23,132)
$
800
18,657
15
$19,472
Intellectual property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . .
55
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Intellectual property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . .
Useful Life
(Years)
9 to 15
6 to 15
4
Gross
Carrying
Amount
$ 2,579
38,562
1,453
$42,594
At June 30, 2018
Accumulated
Amortization
Net Carrying
Amount
(In thousands)
$ (1,603)
(16,763)
(1,414)
$(19,780)
$
976
21,799
39
$22,814
In June 2018, the Company recorded a $0.7 million impairment to a customer relationship intangible asset associated
with an acquisition that was completed in fiscal 2013. The impairment was triggered by lower than anticipated
revenue and operating income. The impairment is included in the Oil Gas & Chemical segment and is presented
within the Goodwill and other intangible asset impairment caption in the Consolidated Statements of Income.
Amortization expense totaled $3.3 million, $4.8 million, and $4.9 million in fiscal 2019, 2018, and 2017,
respectively. We estimate that future amortization of other intangible assets will be as follows (in thousands):
For year ending:
June 30, 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,768
3,749
2,900
2,447
2,134
4,474
Total estimated amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19,472
Note 5—Debt
On February 8, 2017, the Company entered into the Fourth Amended and Restated Credit Agreement (the ‘‘Credit
Agreement’’), by and among the Company and certain foreign subsidiaries, as Borrowers, various subsidiaries of the
Company, as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole
Bookrunner, and the other Lenders party thereto.
The Credit Agreement provides for a five-year senior secured revolving credit facility of $300.0 million that expires
February 8, 2022. The credit facility may be used for working capital, acquisitions, capital expenditures, issuances
of letters of credit and other lawful purposes.
The Credit Agreement includes the following covenants and borrowing limitations:
•
Our Leverage Ratio, determined as of the end of each fiscal quarter, may not exceed 3.00 to 1.00.
• We are required to maintain a Fixed Charge Coverage Ratio, determined as of the end of each fiscal quarter,
greater than or equal to 1.25 to 1.00.
•
Asset dispositions (other than dispositions in which all of the net cash proceeds therefrom are reinvested
into the Company and dispositions of inventory and obsolete or unneeded equipment in the ordinary course
of business) are limited to $20.0 million per 12-month period.
The credit facility includes a sub-facility for revolving loans and letters of credit denominated in Australian Dollars,
Canadian Dollars, Euros and Pounds Sterling in an aggregate amount not to exceed the U.S. Dollar equivalent of
$75.0 million and a $200.0 million sublimit for total letters of credit.
56
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Each revolving borrowing under the Credit Agreement will bear interest at a rate per annum equal to:
•
•
•
•
The ABR or the Adjusted LIBO Rate, in the case of revolving loans denominated in U.S. Dollars;
The Canadian Prime Rate or the CDOR rate, in the case of revolving loans denominated in Canadian
Dollars;
The Adjusted LIBO Rate, in the case of revolving loans denominated in Pounds Sterling or Australian
Dollars; or
The EURIBO Rate, in the case of revolving loans denominated in Euros,
in each case, plus the Applicable Margin, which is based on the Company’s Leverage Ratio. The Applicable Margin
on ABR loans ranges between 0.625% and 1.625%. The Applicable Margin for Adjusted LIBO, EURIBO and CDOR
loans ranges between 1.625% and 2.625% and the Applicable Margin for Canadian Prime Rate loans ranges between
2.125% and 3.125%.
The unused credit facility fee is between 0.25% and 0.45% based on the Leverage Ratio.
The Credit Agreement includes a Leverage Ratio covenant, which provides that Consolidated Funded Indebtedness,
as defined in the Credit Agreement, as of the end of any fiscal quarter, may not exceed 3.0 times Consolidated
EBITDA, as defined in the Credit Agreement, or ‘‘Covenant EBITDA,’’ over the previous four quarters. For the four
quarters ended June 30, 2019, Covenant EBITDA was $68.6 million. Consolidated Funded Indebtedness at June 30,
2019 was $53.5 million.
Availability under the senior secured revolving credit facility is as follows:
Senior secured revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capacity constraint due to the Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capacity under the senior secured revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . .
Letters of credit issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2019
June 30,
2018
(In thousands)
$300,000
94,323
205,677
48,147
5,347
$300,000
189,741
110,259
37,073
—
Availability under the senior secured revolving credit facility . . . . . . . . . . . . . . . . . . . . . .
$152,183
$ 73,186
The Company is in compliance with all other affirmative, negative, and financial covenants under the Credit
Agreement. At June 30, 2019, the Company was at the lowest margin tier for all categories of loans and the unused
revolving credit facility fee under the Credit Agreement. The carrying value of the senior secured revolving credit
facility approximates its fair value at each balance sheet date.
Note 6—Income Taxes
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (the ‘‘Act’’) was enacted on December 22, 2017. The Act makes broad and complex
changes to the U.S. tax code, which have affected our current results and will affect our future results.
The following are significant changes in the tax code that became effective for the Company beginning July 1, 2018:
•
•
•
•
•
eliminating the deduction for domestic production activity;
limiting the annual deduction for business interest;
taxing global intangible low-tax income;
allowing a deduction for domestically earned foreign intangible income; and
restricting further deductibility of executive performance compensation in excess of $1.0 million; and
57
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
•
establishing a new base erosion and anti-abuse tax on payments between U.S. taxpayers and foreign related
parties.
We completed the accounting for the Act as of December 31, 2018 and accounted for the tax effect of the Act as
follows:
Deferred Taxes Remeasurement
We remeasured our domestic deferred tax assets and liabilities based on the rates at which we expect them to reverse
in the future. At June 30, 2018, we completed the remeasurement of our domestic deferred tax assets and liabilities
which resulted in an income tax benefit of $0.5 million recognized in fiscal 2018.
One-time Transition Tax on Unrepatriated Earnings of Certain Foreign Subsidiaries
The Act includes a one-time transition tax based on our total post-1986 foreign earnings and profits (‘‘E&P’’) which
we have previously deferred from U.S. income taxes. Based on our completed calculations surrounding this tax, we
incurred no additional tax related to this provision since our foreign subsidiaries have overall negative E&P.
Global Intangible Low-Tax Income (‘‘GILTI’’)
The Act creates a new requirement that certain income earned by controlled foreign corporations must be included
currently in the gross income of the U.S. shareholder. Under U.S. GAAP, we have made an accounting policy election
to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when
incurred instead of factoring such amounts into the measurement of our deferred taxes. For fiscal 2019, we have no
U.S. taxable income inclusion related to GILTI.
Valuation Allowances on Foreign Tax Credit Carryforwards
We continue to assess our ability to utilize our foreign tax credits in light of the lower U.S. federal income tax rate.
As of June 30, 2019, we had $1.5 million of foreign tax credit carryforwards, the majority of which relate to our
branch operations in Canada. Future operations of our Canadian branches will impact our ability to utilize these
credits. During our third fiscal quarter we concluded that we are unlikely to realize the benefit of foreign tax credits
generated by our Canadian branch operations, which expire in fiscal 2021. Therefore, we recorded a valuation
allowance of $0.6 million during the third fiscal quarter. In our fourth fiscal quarter, we placed an additional valuation
allowance of $0.3 million on foreign tax credits expiring in fiscal 2025. The remaining credits will expire in fiscal
2023 through fiscal 2025 if not utilized.
Indefinite Reinvestment Assertion
We do not provide for outside basis differences under the indefinite reinvestment assertion of ASC 740-30. Based on
our analysis of the Act, we do not anticipate the need to provide for additional taxes for basis differences or
withholding taxes on remitted foreign earnings in the immediate future.
Sources of pretax income (loss)
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$46,032
(7,620)
$ (2,656)
(9,492)
$ 19,763
(17,317)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$38,412
$(12,148)
$ 2,446
June 30,
2019
Fiscal Years Ended
June 30,
2018
(In thousands)
June 30,
2017
58
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Components of the provision for income tax expense (benefit)
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2019
Fiscal Years Ended
June 30,
2018
(In thousands)
June 30,
2017
$ 6,085
2,390
(97)
8,378
$ (121)
135
504
$ 6,522
(185)
(1,509)
518
4,828
(528)
451
2,129
2,052
1,093
(590)
(1,689)
(1,186)
618
101
(3,239)
(2,520)
$10,430
$ (668)
$ 2,308
Reconciliation between the expected income tax provision applying the domestic federal statutory tax rate and
the reported income tax provision
Expected provision (benefit) for federal income taxes at the statutory rate . .
State income taxes, net of federal benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of non-deductible goodwill(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges without tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reversal of branch liability(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax expense (benefit) on stock-based compensation(3) . . . . . . . . . . . . .
Remeasurement of deferred taxes(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IRC S199 deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development and other tax credits . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax differential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2019
Fiscal Years Ended
June 30,
2018
(In thousands)
$ 8,067
2,288
—
1,233
4,512
(3,546)
(296)
—
—
(1,972)
(248)
—
22
370
$(3,408)
247
2,342
1,100
1,173
—
511
(455)
—
(1,665)
(10)
—
(7)
(496)
June 30,
2017
$
857
808
—
1,741
1,295
—
(496)
—
(749)
(1,626)
1,496
(112)
(22)
(884)
Provision (benefit) for federal, state and foreign income taxes . . . . . . . . . . . .
$10,430
$ (668)
$ 2,308
(1)
(2)
(3)
(4)
Relates to a $17.3 million impairment of goodwill, which included $8.3 million of non-deductible goodwill. See Note 4 - Goodwill and
Other Intangible Assets for more information about the impairment.
In fiscal 2019, the Company placed $4.5 million of valuation allowances on net operating loss carryforwards and foreign tax credits
generated by its branch operations in Canada, which will likely not be utilized prior to their expiration. These valuation allowances were
largely offset by the reversal $3.5 million of branch liabilities associated with the Canadian net operating loss carryforwards and foreign
tax credits.
This represents the amount recognized for excess tax benefits upon the vesting or exercise of nonvested deferred share awards and stock
options, respectively, for which the Company expects to receive an income tax deduction. The Company adopted ASU 2016-09 in fiscal
2017, which required that excess tax benefits and tax deficiencies be recognized as part of the provision for income taxes.
This represents the remeasurement of deferred taxes in connection with Tax Cuts and Jobs Act - see Deferred Taxes Remeasurement
paragraph above.
59
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Significant components of the Company’s deferred tax assets and liabilities
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Tax over book depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax over book amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Branch future liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivable holdbacks and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30,
2019
June 30,
2018
(In thousands)
$
206
238
616
1,577
1
10,054
(4,959)
1,115
3,679
194
833
13,554
9,349
1,770
34
16
$
206
1,629
575
1,608
27
10,169
(1,638)
758
2,733
171
1,066
17,304
8,137
702
3,018
1,028
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,169
12,885
Net deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,385
$ 4,419
As reported in the Consolidated Balance Sheets:
June 30,
2019
June 30,
2018
(In thousands)
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,683
(298)
4,848
(429)
Net deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,385
$4,419
Operating loss and tax credit carryforwards
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, 2019 and June 30, 2018 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:
Operating Loss Carryforwards
Expiration Period
Amount (in thousands)
State net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 2024 to June 2039
June 2029 to June 2039
$18,638
$23,749
Tax Credit Carryforwards
Expiration Period
Amount (in thousands)
State tax credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal foreign tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 2032 to June 2034
June 2020 to June 2025
June 2035 to June 2039
$ 834
$1,302
$ 660
60
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Other
The Company files tax returns in multiple domestic and foreign taxing jurisdictions. With a few exceptions, the
Company is no longer subject to examination by taxing authorities through fiscal 2014. At June 30, 2019, the
Company updated its evaluation of its open tax years in all known jurisdictions. We have recorded a $0.5 million
liability as of June 30, 2019 for unrecognized tax positions and the payment of related interest and penalties. We treat
the related interest and penalties as income tax expense. Due to the uncertainties related to these tax matters, we are
unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority will occur.
Note 7—Contingencies
Insurance Reserves
The Company maintains insurance coverage for various aspects of its operations. However, exposure to potential
losses is retained through the use of deductibles, self-insured retentions and coverage limits.
Typically our contracts require us to indemnify our customers for injury, damage or loss arising from the performance
of our services and provide warranties for materials and workmanship. The Company may also be required to name
the customer as an additional insured up to the limits of insurance available, or we may be required to purchase
special insurance policies or surety bonds for specific customers or provide letters of credit in lieu of bonds to satisfy
performance and financial guarantees on some projects. Matrix maintains a performance and payment bonding line
sufficient to support the business. The Company generally requires its subcontractors to indemnify the Company and
the Company’s customer and name the Company as an additional
insured for activities arising out of the
subcontractors’ work. We also require certain subcontractors to provide additional insurance policies, including surety
bonds in favor of the Company, to secure the subcontractors’ work or as required by the subcontract.
There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors
will fully protect us against a valid claim or loss under the contracts with our customers.
Unpriced Change Orders and Claims
As of June 30, 2019 and June 30, 2018, costs and estimated earnings in excess of billings on uncompleted contracts
included revenues for unpriced change orders and claims of $10.1 million and $15.0 million, respectively. The
amounts ultimately realized may be significantly different than the recorded amounts resulting in a material
adjustment to future earnings. Generally, collection of amounts related to unpriced 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, 2019 total $39.4 million and are payable as follows: fiscal
2020—$7.8 million; fiscal 2021—$6.9 million; fiscal 2022—$6.0 million; fiscal 2023—$4.3 million; fiscal
2024—$2.7 million and thereafter—$11.7 million. Included in these payments is an operating lease the Company is
expecting to commence in the first quarter of fiscal 2020 that has a 10 year term and future minimum lease payments
of $11.9 million. Operating lease expense was $8.3 million, $8.6 million and $7.9 million for the fiscal years ended
June 30, 2019, June 30, 2018 and June 30, 2017, respectively.
61
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, 2019 or June 30, 2018.
Treasury Shares
On November 6, 2018, the Board of Directors approved a new stock buyback program (the ‘‘November 2018
Program’’), which replaced the previous program that had been in place since December 2016 and was set to expire
in December 2018. Under the November 2018 Program, the Company may repurchase common stock of the
Company up to a maximum of $30.0 million per calendar year provided that the aggregate number of shares
repurchased may not exceed 10%, or approximately 2.7 million, of the Company’s shares outstanding as of
November 6, 2018. The Company may repurchase its stock from time to time in the open market at prevailing market
prices or in privately negotiated transactions and is not obligated to purchase any shares. The November 2018
Program will continue unless and until it is modified or revoked by the Board of Directors. In December 2018, the
Company repurchased 310,532 shares of its common stock for $5.2 million under the November 2018 Program.
There were 2,396,643 shares available for repurchase under the November 2018 Program as of June 30, 2019.
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. The Company withheld 79,111 and
52,950 shares of common stock during fiscal 2019 and 2018, respectively, to satisfy these obligations. These shares
were returned to the Company’s pool of treasury shares. The Company has 1,081,014 treasury shares as of June 30,
2019 and intends to utilize these treasury shares in connection with equity awards under the Company’s stock
incentive plans and for sales to the Employee Stock Purchase Plan.
Note 10—Stock-Based Compensation
Total stock-based compensation expense for the fiscal years ended June 30, 2019, June 30, 2018, and June 30, 2017
was $11.9 million, $8.6 million and $7.5 million, respectively. Measured but unrecognized stock-based compensation
expense at June 30, 2019 was $14.7 million, all of which related to nonvested deferred shares which are expected
to be recognized as expense over a weighted average period of 1.7 years. The Company recognized excess tax
benefits of $0.3 million and $0.5 million related to stock-based compensation vesting for the fiscal years ended
June 30, 2019 and 2017, respectively. The Company recognized excess tax expense of $0.5 million for the fiscal year
ended June 30, 2018 related to stock-based compensation vesting.
Plan Information
In October 2018, the Company’s stockholders approved the Matrix Service Company 2018 Stock and Incentive
Compensation Plan (the ‘‘2018 Plan’’), which provides stock-based and cash-based incentives for officers, directors
and other key employees. Stock options, restricted stock, restricted stock units, stock appreciation rights, performance
shares and cash-based awards can be issued under this plan. Upon approval of the 2018 Plan, the 2016 Stock and
Incentive Compensation Plan (‘‘2016 Plan’’) was frozen with the exception of normal vesting and other activity
associated with awards previously granted under the 2016 Plan. The 2016 Plan was preceded by the 2012 Stock
Incentive Plan (‘‘2012 Plan’’), which was frozen upon approval of the 2016 Plan with the exception of normal
vesting, forfeiture and other activity associated with awards previously granted under the 2012 Plan. Shares awarded
under either the 2016 Plan or the 2012 Plan that are subsequently forfeited or net settled for tax withholding purposes
are returned to the treasury share pool and become available for grant under the 2018 Plan. The 2012 Plan was
preceded by the 2004 Stock Incentive Plan (‘‘2004 Plan’’), which was frozen upon approval of the 2012 Plan with
the exception of normal vesting, forfeiture and other activity associated with awards previously granted under the
2004 Plan.
Awards totaling 1,600,000 shares have been authorized under the 2018 Plan. There were 1,629,134 shares available
for grant under the 2018 Plan as of June 30, 2019.
62
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
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 2019, 2018, or 2017.
Stock option activity and related information for the fiscal year ended June 30, 2019 is as follows:
Number of
Options
Weighted-Average
Remaining
Contractual Life
(Years)
Weighted-Average
Exercise Price
Aggregate
Intrinsic Value
(In thousands)
Outstanding at June 30, 2018 . . . . . . . . . . . . . .
66,200
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(12,500)
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at June 30, 2019 . . . . . . . . . . . . . .
Vested at June 30, 2019 . . . . . . . . . . . . . . . . . . .
Exercisable at June 30, 2019 . . . . . . . . . . . . . . .
—
53,700
53,700
53,700
3.4
—
—
2.4
2.4
2.4
$10.19
$10.19
$10.19
$10.19
$10.19
$540
$143
$541
$541
$541
The total intrinsic value of stock options exercised was $0.3 million during each of fiscal 2018 and fiscal 2017.
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 equal annual installments beginning one year
after the grant date. Beginning in fiscal 2019, the award agreements contain a provision that accelerates the
vesting for retirement eligible participants and participants that become retirement eligible during the
vesting period. The award is forfeited if retirement occurs before the first anniversary of the award.
Settlement still occurs on the normal vesting schedules. Director awards vest one year after the grant date.
• 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 of total shareholder return 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 can range from zero to 200% of the original award
depending on the Company’s relative total shareholder return during the performance period. These awards
are settled in stock. As of June 30, 2019, there are approximately 173,000, 261,000, and 185,000
performance units that are scheduled to vest in fiscal 2020, fiscal 2021, and fiscal 2022, respectively,
assuming target performance.
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 stock options is determined based on the Black-Scholes option
pricing model. The grant date fair value of the market-based awards is calculated using a Monte Carlo model. For
the fiscal 2019 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 of those peer companies which pay cash dividends.
63
Matrix Service Company
Nonvested deferred share activity for the fiscal year ended June 30, 2019 is as follows:
Notes to Consolidated Financial Statements (continued)
Nonvested shares at June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares vested and released. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
1,366,047
602,148
(314,711)
(193,973)
Nonvested shares at June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,459,511
Weighted Average Grant
Date Fair Value per Share
$17.18
$25.10
$16.23
$22.97
$19.88
There were 715,539 and 516,969 deferred shares granted in fiscal 2018 and 2017 with average grant date fair values
of $13.64 and $19.80 per share, respectively. There were 253,241 and 396,530 deferred shares that vested and were
released in fiscal 2018 and 2017 with weighted average fair values of $19.60 and $18.24 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 of 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.
The computation of basic and diluted EPS is as follows:
June 30,
2019
Fiscal Years Ended
June 30,
2018
(In thousands, except per share data)
June 30,
2017
Basic EPS:
Net income (loss) attributable to Matrix Service Company. . . . . . . . . . . . . . .
$27,982
$(11,480)
$ (183)
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,891
26,769
26,533
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1.04
$ (0.43)
$ (0.01)
Diluted EPS:
Weighted average shares outstanding—basic . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive nonvested deferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted weighted average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,891
28
668
27,587
26,769
—
—
26,769
26,533
—
—
26,533
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1.01
$ (0.43)
$ (0.01)
64
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
The following securities are considered antidilutive and have been excluded from the calculation of diluted earnings
(loss) per share:
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested deferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total antidilutive securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
160
160
June 30,
2019
June 30,
2017
Fiscal Years Ended
June 30,
2018
(In thousands of shares)
31
424
455
43
430
473
Note 12—Employee Benefit Plans
Defined Contribution Plans
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 $6.2 million, $5.8 million, and $5.5 million for the fiscal years ended
June 30, 2019, 2018 and 2017, 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.
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.
65
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Our participation in significant plans for the fiscal year ended June 30, 2019 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
2019
2018
FIP/RP
Status
Pending or
Implemented
Company
Contributions
Fiscal Year
2019
2018
2017
(In thousands)
Expiration
Date of
Collective-
Bargaining
Agreement
Surcharge
Imposed
Boilermaker-Blacksmith National
Pension Trust
Joint Pension Fund Local Union 164
IBEW
Joint Pension Fund of Local Union
No 102 IBEW
IBEW Local 456 Pension Plan
Local 351 IBEW Pension Plan
Steamfitters Local Union No 420
Pension Plan
IBEW Local Union 98 Pension Plan
Indiana Laborers Pension Fund
Iron Workers Mid-America Pension
Plan, Local 395
Pipe Fitters Retirement Fund,
Local 597
Iron Workers Pension Plan of Western
Pennsylvania, Local 3
Iron Workers Pension Plan, Local 55
National Electrical Benefit Fund,
Local 488
Connecticut Plumbers and Pipefitters
Pension Fund, Local 777
48-6168020/001
Red
Yellow
22-6031199/001 Described below(2) Yellow
22-1615726/001
22-6238995/001
22-3417366/001
Green
Green
Green
Green
Green
Green
23-2004424/001
23-1990722/001 Described below(2)
35-6027150/001 Described below(2) Yellow
Red
Red
Red
36-6488227/001
Green
62-6105084/001
Green
Green
Green
25-1283169/001
Yellow
34-6682351/001 Described below(2) Green
Yellow
53-0181657/001
Green
06-6050353/001
Green
Green
Green
Yes
Yes
N/A
N/A
N/A
Yes
Yes
Yes
N/A
N/A
Yes
N/A
N/A
N/A
Contributions to other multiemployer plans
$12,434 $ 8,525 $ 7,098
Yes
Described below(1)
2,180
2,391
2,709
1,610
574
2,025
639
828
3,349
2,489
6,005
1,187
1,558
1,106
3,542
2,392
2,777
2,796
2,234
1,519
2,458
2,596
4,412
1,785
3,469
3,682
2,563
2,317
4,333
1,539
198
4,577
824
748
—
116
3,307
20,148
115
17,151
—
19,514
No
No
No
No
Yes
Yes
No
No
No
No
No
No
No
5/31/2021
5/31/2022
5/31/2021
12/4/2021
4/30/2020
5/29/2020
5/31/2020
5/31/2024
Described below(3)
5/1/2021
6/30/2020
1/1/2023
6/1/2020
Total contributions made
$64,386 $54,724 $48,709
(1) Our employees are members of several Boilermaker unions that participate in the Boilermaker-Blacksmith National Pension Trust. The most significant of
these unions are Boilermakers Local 374 and Boilermakers Local 128, which have collective bargaining agreements that expire on December 31, 2019 and
April 30, 2022, respectively.
(2)
For the Local 164 IBEW Pension Plan, Local 98 IBEW Pension Plan, Indiana Laborers Pension Fund, and Iron Workers Pension Plan Local 55, the Company
has not received a funding notification that covers the Company’s fiscal year 2019 during the preparation of this Form 10-K. Under Federal pension law, if
a multiemployer pension plan is determined to be in critical or endangered status, the plan must provide notice of this status to participants, beneficiaries, the
bargaining parties, the Pension Benefit Guaranty Corporation, and the Department of Labor. The Company also observed that these plans have not submitted
any Critical or Endangered Status Notices to the Department of Labor for calendar years that we have not received notification. The Critical or Endangered
Status Notices can be accessed at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/public-disclosure/2019-funding-status-notices.
(3)
The Company’s collective bargaining agreement with Pipe Fitters Local 597 does not have an expiration date. The agreement was last renegotiated in 2012.
66
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
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 from the Company at the current
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
15,812 shares issued in fiscal 2019, 21,920 shares in fiscal 2018, and 16,609 shares in fiscal 2017.
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 consists of power delivery services provided to investor owned utilities,
including construction of new substations, upgrades of existing substations, short-run transmission line installations,
distribution upgrades and maintenance, as well as emergency and storm restoration services. We also provide
construction and maintenance services to a variety of power generation facilities, such as combined cycle plants and
other natural gas fired power stations.
The Oil Gas & Chemical segment serves customers primarily in the downstream and midstream petroleum industries
who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas
liquids. We also perform work in the petrochemical, upstream petroleum, and sulfur extraction, recovery and
processing markets. Our services include plant maintenance, turnarounds, engineering and capital construction. We
also offer industrial cleaning services, including hydro-blasting, hydro-excavating, advanced chemical cleaning and
vacuum services.
The Storage Solutions segment consists of work related to aboveground storage tanks (‘‘AST’’) and terminals. Also
included in this segment are cryogenic and other specialty storage tanks and terminals including liquefied natural gas,
liquid nitrogen/liquid oxygen, liquid petroleum and other specialty vessels such as spheres as well as marine
structures and truck and rail
loading/offloading facilities. Our services include engineering, fabrication and
construction, and maintenance and repair, which includes planned and emergency services for both tanks and full
terminals. Finally, we offer AST products, including geodesic domes, aluminum internal floating roofs, floating
suction and skimmer systems, roof drain systems and floating roof seals.
The Industrial segment consists of work for integrated iron and steel companies, major mining and minerals
companies engaged primarily in the extraction of copper, as well as companies in other industries, including
aerospace and defense, cement, and agriculture and grain. Our services include engineering, fabrication and
construction, and maintenance and repair, which includes planned and emergency services. We also design
instrumentation and control systems and offer specialized expertise in the design and construction of bulk material
handling systems.
The 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 is recognized.
Segment assets consist primarily of accounts receivable, costs and estimated earnings in excess of billings on
uncompleted contracts, property, plant and equipment, goodwill and other intangible assets.
67
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
Fiscal Year ended June 30, 2019
Gross revenues . . . . . . . . . . . . . . . . . . . . .
Less: inter-segment revenues . . . . . . . . . .
Consolidated revenues . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . .
Segment assets . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . .
Fiscal Year ended June 30, 2018
Gross revenues . . . . . . . . . . . . . . . . . . . . .
Less: inter-segment revenues . . . . . . . . . .
Consolidated revenues . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . .
Segment assets . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . .
Fiscal Year ended June 30, 2017
Gross revenues . . . . . . . . . . . . . . . . . . . . .
Less: inter-segment revenues . . . . . . . . . .
Consolidated revenues . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . .
Segment assets . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . .
Geographical information is as follows:
$217,417
—
217,417
15,470
3,668
155,880
2,493
2,460
$255,931
—
255,931
18,300
(16,531)
161,207
493
4,359
$373,384
—
373,384
7,137
(8,309)
183,351
1,390
5,198
$322,065 $524,330 $357,464
—
2,398
2,198
319,867
35,987
12,984
91,959
2,736
4,661
521,932
56,011
14,097
188,912
4,644
6,666
357,464
24,483
7,181
90,336
3,464
4,437
$324,546 $319,106 $198,155
1
1,774
4,410
322,772
33,423
8,798
111,064
1,514
5,904
314,696
25,778
(5,907)
149,695
3,346
6,623
198,154
14,435
3,161
58,816
—
3,461
$247,423 $483,254 $103,449
1,543
6,900
1,558
240,523
12,675
(8,783)
129,177
829
6,299
481,696
55,651
22,928
166,742
2,017
7,277
101,906
5,540
(977)
53,754
38
2,828
$
— $1,421,276
4,596
—
— 1,416,680
131,951
—
37,930
—
633,394
106,307
19,558
6,221
18,224
—
$
$
— $1,097,738
6,185
—
— 1,091,553
91,936
—
(10,479)
—
558,033
77,251
8,711
3,358
20,347
—
— $1,207,510
10,001
—
— 1,197,509
81,003
—
4,859
—
586,030
53,006
11,908
7,634
21,602
—
United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other international . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$193,472
10,110
12,502
$174,241
13,738
13,008
$193,164
21,419
12,817
$216,084
$200,987
$227,400
June 30,
2019
Long-Lived Assets
June 30,
2018
(In thousands)
June 30,
2017
68
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Information about Significant Customers:
Significant Customers as a Percentage of Segment Revenues
Consolidated
Electrical
Infrastructure
Oil Gas &
Chemical
Storage
Solutions
Industrial
Fiscal Year ended June 30, 2019
Customer one . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer four . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer five. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer six . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer seven . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer eight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer nine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer ten . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer eleven. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Year ended June 30, 2018
Customer one . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer four . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer five. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer six . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer seven . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer eight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer nine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer ten . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Year ended June 30, 2017
Customer one . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer four . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer five. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer six . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer seven . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.7%
7.6%
7.6%
7.2%
7.1%
5.0%
4.6%
3.4%
3.1%
3.0%
2.1%
11.4%
8.6%
6.4%
6.0%
4.2%
3.2%
3.2%
3.0%
2.7%
2.3%
19.5%
15.3%
5.2%
4.2%
4.0%
2.7%
2.2%
—%
49.0%
—%
—%
—%
—%
0.3%
22.4%
—%
—%
13.4%
—%
—%
26.5%
25.4%
—%
—%
—%
12.9%
—%
10.0%
—%
46.0%
—%
—%
12.7%
—%
—%
—%
—%
—%
30.9%
—%
—%
3.1%
—%
—%
—%
—%
—%
29.0%
—%
—%
12.0%
10.8%
—%
—%
—%
—%
—%
—%
25.8%
20.7%
—%
—%
—%
—%
—%
—%
0.6%
19.4%
13.6%
10.6%
—%
—%
—%
—%
—%
—%
0.6%
—%
2.2%
—%
10.9%
—%
—%
—%
48.5%
2.4%
—%
—%
—%
—%
—%
38.4%
0.4%
30.1%
—%
—%
—%
—%
—%
12.3%
12.0%
—%
62.9%
—%
—%
—%
—%
—%
—%
—%
14.7%
—%
—%
—%
—%
—%
—%
31.7%
25.8%
69
Matrix Service Company
Quarterly Financial Data (Unaudited)
Fiscal Years Ended June 30, 2019 and June 30, 2018
Fiscal Year 2019
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per common share:
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share amounts)
$318,511
23,421
2,220
2,305
$340,568
27,886
5,527
3,932
$358,887
36,906
12,794
8,933
$398,714
43,738
17,389
12,812
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.09
0.08
0.15
0.14
0.33
0.33
0.48
0.47
Fiscal Year 2018
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to Matrix Service Company . . . . . . .
Earnings (loss) per common share:
$269,910
28,891
7,321
3,824
$282,911
26,703
5,174
4,532
$245,645
14,891
(5,862)
(5,153)
$293,087
21,451
(17,112)
(14,683)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.14
0.14
0.17
0.17
(0.19)
(0.19)
(0.55)
(0.55)
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.
70
Matrix Service Company
Schedule II—Valuation and Qualifying Accounts
June 30, 2019, June 30, 2018, and June 30, 2017
(In thousands)
COL. A
Fiscal Year 2019
Deducted from asset accounts:
Allowance for doubtful accounts. . . . . . . . . .
Valuation reserve for deferred tax assets. . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Year 2018
Deducted from asset accounts:
Allowance for doubtful accounts. . . . . . . . . .
Valuation reserve for deferred tax assets. . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Year 2017
Deducted from asset accounts:
Allowance for doubtful accounts. . . . . . . . . .
Valuation reserve for deferred tax assets. . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
$ 6,327
1,638
$ 7,965
$ 9,887
1,719
$11,606
$ 8,403
424
$ 8,827
$
5
4,594
$4,599
$ 107
1,020
$1,127
$1,748
1,295
$3,043
$—
$—
$—
—
$—
$—
—
$—
$(5,409)(A)
(1,273)(B)
$(6,682)
$
923
4,959
$ 5,882
$(3,667)(C)
(1,101)(D)
$(4,768)
$ 6,327
1,638
$ 7,965
$ (264)(E)
—
$ (264)
$ 9,887
1,719
$11,606
(A) Primarily relates to a $5.2 million reversal of a previous reserved account receivable balance that was fully settled with an agreement with
the customer.
(B) Relates to the deferred tax asset of $0.8 million created by a stock-based compensation award with a market condition that was fully reserved
in fiscal 2018. In fiscal 2019, upon the final determination that the award would not vest, the Company wrote off the deferred tax asset
against the reserve. The remaining balance relates to $0.5 million of fully reserved tax credits that expired in fiscal 2019.
(C)
Primarily relates to the reversal of reserved account receivable that was fully settled with cash and future backlog.
(D) Primarily relates to $0.8 million of stock-based compensation expense recognized in fiscal 2018 that was not deductible for tax purposes
due to not meeting a market condition vesting requirement and to $0.3 million of foreign tax credits that expired.
(E)
Primarily relates to a $0.2 million receivable written off against allowance for doubtful accounts.
71
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, 2019. 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, 2019.
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.
Changes in Internal Control Over Financial Reporting
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.
Item 9B. Other Information
None
72
PART III
Item 10. Directors, Executive Officers and Corporate Governance
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 2019 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 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,’’ ‘‘Compensation Discussion and Analysis’’ 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 ‘‘Corporate
Governance and Board Matters’’ and ‘‘Certain Relationships and Related Transactions’’ in the Proxy Statement.
Item 14. Principal Accounting 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.
73
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
(1) Financial Statements of the Company
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) . . . . . . . . . . . . . . . . .
38
39
Consolidated Statements of Income for the Fiscal Years Ended June 30, 2019, June 30, 2018 and
June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41
Consolidated Statements of Comprehensive Income for the Fiscal Years Ended June 30, 2019, June 30,
2018 and June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of June 30, 2019 and June 30, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42
43
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2019, June 30, 2018 and
June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44
Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years Ended June 30, 2019,
June 30, 2018 and June 30, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarterly Financial Data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II—Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
46
70
71
(2) Financial Statement Schedules
The financial statement schedule is filed as a part of this report under Schedule II—Valuation and Qualifying
Accounts June 30, 2019, June 30, 2018 and June 30, 2017, 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. The exhibits
below incorporated by reference herein are indicated as such by the information supplied in the
parenthetical hereafter.
2 Membership Interest Purchase Agreement dated as of December 12, 2016 among Matrix PDM
Engineering, Inc., as purchaser, the C. Douglas Houston Revocable Trust U/T/A dated November
21, 2016, as seller, and C. Douglas Houston, as seller representative (Exhibit 2 to the Company’s
Current Report on Form 8-K filed December 16, 2016 (File No. 1-15461).
3.1 Amended and Restated Certificate of Incorporation of Matrix Service Company (Appendix A to the
Company’s Proxy Statement filed October 7, 2016 (File No. 1-15461).
3.2 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.
74
3.3 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).
3.4 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).
3.5
Second Amended and Restated Bylaws, effective as of May 4, 2017 (Exhibit 3.1 to the Company’s
Quarterly Report on Form 10-Q (File No. 1-15461) filed May 10, 2017).
P4.1
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, P).
*4.2 Description of the Company’s Common Stock.
+10.1 Matrix Service Company 2004 Stock Incentive Plan (Appendix B to the Company’s Proxy
Statement filed September 15, 2006 (File No. 1-15461)).
+10.2 Amendment 1 to Matrix Service Company 2004 Stock Incentive Plan (Exhibit 10 to Amended
Schedule 14A filed October 4, 2006 (File No. 1-15461)).
+10.3 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).
+10.4 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)).
+10.5 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).
+ 10.6 Amendment Number 1 to the Matrix Service Company 2012 Stock and Incentive Compensation
Plan (Exhibit A to the Company’s Proxy Statement (File No. 1-15461) filed October 10, 2014).
+10.7
+10.8
Form of Long-Term Incentive Award Agreement (2012 Stock and Incentive Compensation Plan)
(Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 1-15461) filed
November 7, 2016).
Form of Restricted Stock Unit Award Agreement for employees (2012 Stock and Incentive
Compensation Plan) (Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
(File No. 1-15461) filed November 7, 2016).
+10.9 Matrix Service Company 2016 Stock and Incentive Compensation Plan (Appendix B to the
Company’s Proxy Statement (File No. 1-15461), filed October 7, 2016).
+10.10
+10.11
Form of Restricted Stock Unit Award Agreement for Directors (2016 Stock and Incentive
Compensation Plan) (Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
(File No. 1-15461), filed February 9, 2017).
Form of Long-Term Incentive Award Agreement (2016 Stock and Incentive Compensation Plan)
(Exhibit 10.11 to the Company’s Annual Report on Form 10-K/A (File No. 1-15461), filed
September 19, 2018).
+10.12 Matrix Service Company 2018 Stock and Incentive Compensation Plan (Appendix A to the
Company’s Proxy Statement (File No. 1-15461), filed September 21, 2018).
+10.13
Form of Restricted Stock Unit Award Agreement for Directors (2018 Stock and Incentive
Compensation Plan) (Exhibit 10 to the Company’s Quarterly Report on Form 10-Q
(File No. 1-15461), filed November 8, 2018).
75
+10.14
Form of Amended and Restated Severance Agreement (Exhibit 10 to the Company’s Current
Report on Form 8-K filed November 15, 2016 (File No. 1-15461)).
+10.15 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).
+10.16 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).
10.17
Fourth Amended and Restated Credit Agreement dated as of February 8, 2017 among the Company
and certain foreign subsidiaries, as Borrowers, various subsidiaries of the Company, as Guarantors,
JPMorgan Chase Bank, N.A., as Administrative Agent, Lead Arranger and Sole Bookrunner, and
the other lenders party thereto (Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
(File No. 1-15461) filed May 10, 2017).
10.18
First Amendment dated as of August 31, 2017 to Fourth Amended and Restated Credit Agreement
(Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 1-15461), filed
November 7, 2017).
+10.19
Form of Indemnification Agreement (Exhibit 10.1 to the Company’s Current Report on Form 8-K
(File No. 1-15461) filed June 9, 2015).
*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.
*
+
P:
Filed herewith.
Management Contract or Compensatory Plan.
Paper filing.
Item 16. Form 10-K Summary
None
76
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 4, 2019
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
Chairman of the Board of Directors
September 4, 2019
Jim W. Mogg
John R. Hewitt
Kevin S. Cavanah
Martha Z. Carnes
John D. Chandler
John W. Gibson
Liane K. Hinrichs
James H. Miller
President, Chief Executive Officer and Director
(Principal Executive Officer)
September 4, 2019
Vice President and Chief Financial Officer
(Principal Accounting and
Principal Financial Officer)
September 4, 2019
Director
September 4, 2019
Director
September 4, 2019
Director
September 4, 2019
Director
September 4, 2019
Director
September 4, 2019
77
Exhibit 21
Matrix Service Company
Subsidiaries
Matrix Service Inc., an Oklahoma corporation
Matrix Service Canada ULC, an Alberta, Canada unlimited liability corporation
Matrix North American Construction, Inc., an Oklahoma corporation
Matrix North American Construction, Ltd., a Canadian corporation
Matrix North American Construction, LLC, a Delaware limited liability company
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 company
Matrix Applied Technologies, Inc., a Delaware corporation
Matrix International Holding Company, Ltd., a British corporation
Matrix Applied Technologies, Ltd., a South Korean corporation
Matrix Applied Technologies, Pty. Ltd., an Australian corporation
Houston Interests, LLC, an Oklahoma limited liability company
River Consulting, LLC, a Louisiana limited liability company
Matrix Products and Services S. de R.L. de C.V., a Mexican limited liability variable stock corporation
Matrix Service VI, LLC, a U.S. Virgin Island limited liability company
Mobile Aquatic Solutions, Inc., an Oklahoma corporation
MSI Federal Contracting, LLC, a Delaware limited liability company
Matrix-SJC, LLC, a Delaware limited liability company
Devco USA, LLC, an Oklahoma limited liability company
Houston Dynamics, LLC, a Qatar limited liability company
Matrix Service International, LLC, a Delaware limited liability company
I, John R. Hewitt, certify that:
CERTIFICATIONS
Exhibit 31.1
1.
I have reviewed this Annual Report on Form 10-K of Matrix Service Company;
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 4, 2019
John R. Hewitt
President and Chief Executive Officer
I, Kevin S. Cavanah, certify that:
CERTIFICATIONS
Exhibit 31.2
1.
I have reviewed this Annual Report on Form 10-K of Matrix Service Company;
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 4, 2019
Kevin S. Cavanah
Vice President and Chief Financial Officer
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant
Section 906 of Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Matrix Service Company (the ‘‘Company’’) on Form 10-K for the period
ending June 30, 2019 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) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934 as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date:
September 4, 2019
John R. Hewitt
President and Chief Executive Officer
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant
Section 906 of Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Matrix Service Company (the ‘‘Company’’) on Form 10-K for the period
ending June 30, 2019 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) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934 as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date:
September 4, 2019
Kevin S. Cavanah
Vice President and Chief Financial Officer
[THIS PAGE INTENTIONALLY LEFT BLANK]
SHAREHOLDER INFORMATION
CORPORATE OFFICES
5100 E. Skelly Dr., Ste. 100
Tulsa, OK 74135
Ph: 918 838 8822
Fax: 918 838 8810
NOTICE OF ANNUAL MEETING
The Annual Meeting of Stockholders
will be at the Matrix Service Company
office located at:
5100 E. Skelly Dr., Ste. 100
Tulsa, OK 74135
November 5th, 2019 at 9:00 a.m. CT
STOCK TRANSFER AGENT & REGISTRAR
Computershare Trust Company, N.A.
250 Royall St.
Canton, MA 02021
WEBSITES
matrixservicecompany.com
matrixpdm.com
matrixnac.com
matrixservice.com
matrixappliedtech.com
COMMON STOCK DATA
Matrix Service Company’s Common
Stock is traded on NASDAQ
Global Select Market under the
Ticker Symbol: “MTRX”
INDEPENDENT REGISTERED
PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
6100 S. Yale Ave. — Ste. 2010
Tulsa, OK 74136
INVESTOR AND MEDIA RELATIONS
STOCKHOLDER RELATIONS
& AVAILABLE INFORMATION
Matrix Service Company’s Annual Report on
Form 10-K filed with the Securities and Exchange
Commission may be obtained by writing to:
Kevin S. Cavanah
Vice President and Chief Financial Officer
Matrix Service Company
5100 E. Skelly Dr., Ste. 100
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
$250
$200
$150
$100
$50
$0
6/14 6/15 6/16 6/17 6/18 6/19
Matrix Service Company NASDAQ Composite S&P Construction & Engineering
*$100 invested on 6/30/14 in stock or index, including reinvestment of dividends. Fiscal year ending June 30.
Copyright© 2019 Standard & Poor’s, a division of S&P Global. All rights reserved.
OUR VISION
To be the company of choice for
engineering, constructing and maintaining
the energy and industrial infrastructure
that people rely on around the world.
BOARD OF DIRECTORS
Jim W. Mogg
Chairman of the Board
John R. Hewitt
President and Chief Executive Officer
Martha Z. Carnes
Audit Committee Chair
John D. Chandler
Director
John W. Gibson
Compensation Committee Chair
Liane K. Hinrichs
Nominating and Corporate Governance Chair
James H. Miller
Director
OUR VALUES
COMMITMENT TO SAFETY
Put safety first for yourself and others.
Create a zero-incident environment
through leadership.
INTEGRITY
Do the right thing every time,
ethically and honestly.
POSITIVE RELATIONSHIPS
Be respectful, promote collaboration
and build lasting relationships.
STEWARDSHIP
Safeguard all that is entrusted to us.
COMMUNITY INVOLVEMENT
Make a difference in the communities
where we live and work.
DELIVER THE BEST
Strive for excellence in all we do.
MATRIX SERVICE COMPANY LEADERSHIP TEAM
John R. Hewitt
President and Chief Executive
Officer and Director
Joseph F. Montalbano
Chief Operating Officer
Kevin S. Cavanah
Vice President and
Chief Financial Officer
Alan R. Updyke
President, Operations
Nancy E. Austin
Vice President and Chief
Administrative Officer
D. Quinton Beasley
Vice President, Accounting
Rick J. Bennett
Vice President and
Chief Information Officer
Jack Frost
Vice President, Health,
Safety and Environmental
Melissa K. Gilliland
Vice President, Human Resources
Justin D. Sheets
Vice President and General Counsel
SUBSIDIARY LEADERSHIP TEAM
Bradley J. Rinehart
President, Matrix Service
Daniel T. Blair
Vice President, Matrix NAC
Jeffrey A. Hermann
Vice President, Matrix NAC
Glyn A. Rodgers
President, Matrix PDM Engineering
Frank M. Capristo
Vice President, Matrix Service
Bradley C. Killmer
Vice President, Matrix Service
Jason W. Turner
President, Matrix NAC
Kenneth L. Erdmann, P.E.
Senior Vice President,
Matrix PDM Engineering
Shawn P. Payne
Senior Vice President,
Matrix Service
Terry D. Stewart
Senior Vice President,
Matrix NAC
Patrick M. Chambers
Vice President, Matrix Service
Kevin A. Durkin
Vice President, Matrix Service
James C. Faroh
Vice President, Matrix NAC
Michael E. Formaini
Vice President, Matrix NAC
Karen A. McDonald
Vice President, Matrix Service
Douglas J. Montalbano
Vice President, Matrix NAC
Vicki R. Reese
Vice President, Matrix NAC
Matrix Service Company is an Equal Opportunity/Affirmative Action employer and does not discriminate against any employee or applicant for employment because of race,
color, religion, gender, sexual orientation, national origin, age, genetic information, disability, veteran status, marital status, or any other legally protected characteristic or category.
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5100 E. SKELLY DR., STE. 100 | TULSA, OK 74135
MATRIXSERVICECOMPANY.COM
NASDAQ: MTRX
ANNUAL
REPORT
2019