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, Australia and Colombia. 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 assets, and the estimation of loss contingencies, including liabilities associated with litigation and with the self-insured retentions on our insurance programs. Actual results could materially differ from those estimates.
Revenue Recognition
Matrix records revenue on fixed-price contracts on a percentage-of-completion basis, primarily based on costs incurred to date compared to the total estimated contract cost. The Company records revenue on reimbursable and time and material contracts on a proportional performance basis as costs are incurred. Contracts in process are valued at cost plus accrued profits less billings on uncompleted contracts. Contracts are generally considered substantially complete when field construction is completed. The elapsed time from award of a contract to completion of performance may be in excess of one year. Matrix includes pass-through revenue and costs on cost-plus contracts, which are customer-reimbursable materials, equipment and subcontractor costs, when Matrix determines that it is responsible for the procurement and management of such cost components.
Matrix has numerous contracts that are in various stages of completion which require estimates to determine the appropriate cost and revenue recognition. The Company has a history of making reasonably dependable estimates of the extent of progress towards completion, contract revenues and contract costs, and accordingly, does not believe significant fluctuations are likely to materialize. However, current estimates may be revised as additional information becomes available. If estimates of costs to complete fixed-price contracts indicate a loss, provision is made through a contract write-down for the total loss anticipated. A number of our contracts contain various cost and performance incentives and penalties that impact the earnings we realize from our contracts, and adjustments related to these incentives and penalties are recorded in the period, on a percentage-of-completion basis, when estimable and probable.
Indirect costs, such as salaries and benefits, supplies and tools, equipment costs and insurance costs, are charged to projects based upon direct labor hours and overhead allocation rates per direct labor hour. Warranty costs are normally incurred prior to project completion and are charged to project costs as they are incurred. Warranty costs incurred subsequent to project completion were not material for the periods presented. Overhead allocation rates are established annually during the budgeting process.
Precontract Costs
Precontract costs are costs incurred in anticipation of obtaining a contract that will result in no future benefit unless the contract is obtained. The Company generally expenses precontract costs to cost of revenue as incurred, but, in certain cases their recognition may be deferred if specific criteria are met. We had no deferred precontract costs at June 30, 2017 or 2016.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Change Orders and Claims Recognition
Change orders are modifications of an original contract that effectively change the existing provisions of the contract. Change orders may include changes in specifications or designs, manner of performance, facilities, equipment, materials, sites and period of completion of the work. Matrix or our clients may initiate change orders. The client's agreement to the terms of change orders is, in many cases, reached prior to work commencing; however, sometimes circumstances require that work progress prior to obtaining client agreement. Costs related to change orders are recognized as incurred. Revenues attributable to change orders that are unapproved as to price or scope are recognized to the extent that costs have been incurred if the amounts can be reliably estimated and their realization is probable. Revenues in excess of the costs attributable to change orders that are unapproved as to price or scope are recognized only when realization is assured beyond a reasonable doubt. Change orders that are unapproved as to both price and scope are evaluated as claims.
Claims are amounts in excess of the agreed contract price that we seek to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of anticipated additional costs incurred by us. Recognition of amounts as additional contract revenue related to claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. We must determine if:
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•
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there is a legal basis for the claim;
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•
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the additional costs were caused by circumstances that were unforeseen by the Company and are not the result of deficiencies in our performance;
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•
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the costs are identifiable or determinable and are reasonable in view of the work performed; and
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•
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the evidence supporting the claim is objective and verifiable.
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If all of these requirements are met, revenue from a claim is recorded only to the extent that we have incurred costs relating to the claim. Unapproved change orders and claims are more fully discussed in Note 7—Contingencies.
Cash 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. The Company had approximately
$0.3 million
of restricted cash related to a customer deposit at
June 30, 2017
and 2016. We have cash on deposit at
June 30, 2017
with banks in the United States, Canada, South Korea, Australia and Colombia in excess of Federal Deposit Insurance Corporation ("FDIC"), Canada Deposit Insurance Corporation ("CDIC"), Korea Deposit Insurance Corporation ("KDIC"), Financial Claims Scheme ("FCS") and
Fondo de Garantias de Instituciones Financieras
protection limits, respectively. The United States Dollar equivalent of Canadian, South Korean, Australian and Colombian deposits totaled
$7.7 million
as of June 30, 2017.
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 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.
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.
Management utilizes a discounted cash flow analysis, referred to as an income approach, to determine the estimated fair value of our reporting units. Significant judgments and assumptions including the discount rate, anticipated revenue growth rate, gross margins, operating expenses, working capital needs and capital expenditures are inherent in these fair value estimates, which are based on our operating and capital budgets and on our strategic plan. As a result, actual results may differ from the estimates utilized in our income approach. The use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate and could result in the recognition of an impairment charge in the financial statements. As a result of these uncertainties, we utilize multiple scenarios and assign probabilities to each of the scenarios in the income approach. We also consider the combined carrying values of our reporting units to our market capitalization.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Other Intangible Assets
Intangible assets that have finite useful lives are amortized by the straight-line method over their useful lives ranging from
1
year 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. 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, Australia and Colombia are the Canadian Dollar, South Korean Won, U.S. Dollar and Colombian Peso, respectively. For subsidiaries with operations using a foreign functional currency, assets and liabilities are translated at the year end exchange rates and the income statement accounts are translated at average exchange rates throughout the year. Translation gains and losses are reported in Accumulated Other Comprehensive Income (Loss) in the Consolidated Statements of Changes in Stockholders’ Equity and in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income. Transaction gains and losses are reported as a component of Other income (expense) in the Consolidated Statements of Income.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Recently Issued Accounting Standards
Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The ASU also requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU's disclosure requirements are significantly more comprehensive than those in existing revenue standards. The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification ("ASC"). The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted on a limited basis.
Management is currently evaluating the impact of adopting the ASU on the Company's financial position, results of operations, cash flows and related disclosures. Adoption of this ASU is expected to affect the manner in which the Company determines the unit of account for its projects (i.e., performance obligations). Under existing guidance, the Company may have multiple performance obligations for large, complex projects. Upon adoption, the Company expects that similar projects may have fewer performance obligations, possibly just one in some cases, which will result in a more constant recognition of revenue and profit over the term of the project. The Company will adopt this standard on July 1, 2018 using the modified retrospective method of application, which may result in a cumulative effect adjustment to retained earnings as of the date of adoption.
Management has completed its review of the new revenue standard and is currently developing a plan to review its contracts in order to confirm its understanding of how the new standard will impact its revenue recognition policy, disclosures, processes and internal controls. At this time, we cannot reliably estimate the amount of any potential retrospective adjustment.
Accounting Standards Update 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
On August 27, 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements. Further, an entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern.”
The ASU was adopted during the Company's first fiscal quarter ending September 30, 2016. In connection with the adoption of the ASU, the Company now performs an assessment of its ability to continue as a going concern on a quarterly basis. Disclosure regarding the status of the Company's ability to continue as a going concern is required when there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the date that the financial statements are issued.
Accounting Standards Update 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
On September 25, 2015, the FASB issued ASU 2015-16 to simplify the accounting for measurement-period adjustments. The ASU was issued in response to stakeholder feedback that restatements of prior periods to reflect adjustments made to provisional amounts recognized in a business combination increase the cost and complexity of financial reporting but do not significantly improve the usefulness of the information. Under the ASU, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. We adopted this standard on July 1, 2016 with no material impact to the Company's financial statements.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Accounting Standards Update 2016-02, Leases (Topic 842)
On February 25, 2016, the FASB issued ASU 2016-02. The amendments in this update require, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the 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. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, but we do not plan to do so at this time.
We are currently evaluating the ASU's expected impact on our financial statements. See Note 8 - Operating Leases for more information about the timing and amount of future operating lease payments, which we believe is indicative of the materiality of adoption of the ASU to our financial statements.
Accounting Standards Update 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
On March 30, 2016, the FASB issued ASU 2016-09, which simplified several aspects of accounting for stock-based compensation transactions, including the accounting for income taxes and forfeitures and statutory tax withholding requirements. The Company adopted the ASU during its first fiscal quarter ending September 30, 2016. The following is a description of the key provisions of the ASU and their impacts to the Company's financial statements:
Accounting for Income Taxes
: The amendments require the Company to recognize excess tax benefits or tax deficiencies in its provision for income taxes in its consolidated statements of income during the period of vesting or exercise of its nonvested deferred share awards and stock options, respectively, for which it expects to receive an income tax deduction. Previously, the Company recognized any excess tax benefits in additional paid-in capital ("APIC") in the balance sheet and any tax deficiencies were recognized as a reduction of APIC to the extent the Company has accumulated excess tax benefits. Any tax deficiencies in excess of accumulated excess tax benefits in APIC were recognized in the provision for income taxes. The amendments also require the Company to only present excess tax benefits and tax deficiencies in the operating section of its statements of cash flows as a component of deferred tax activity. Previously, the Company was required to present such items in both the financing section and operating section of its statements of cash flows. Amendments related to the recognition of excess tax benefits and tax deficiencies in income are required to be applied prospectively, and amendments related to the cash flow statement presentation of excess tax benefits and tax deficiencies may be applied either retrospectively or prospectively.
The Company applied the amendments requiring the recognition of excess tax benefits and tax deficiencies in income prospectively. As a result, the Company recognized
$0.5 million
of excess tax benefits in its provision for income taxes during the year ended June 30, 2017, which increased basic and diluted earnings per share by
$0.02
. Under the prior accounting standard, the Company would have recognized the excess tax benefits in equity as APIC.
The amendments relating to the presentation of excess tax benefits and tax deficiencies in the statement of cash flows were applied retrospectively. The effect of the retrospective adjustment was to eliminate the presentation of an operating cash outflow and a financing cash inflow for excess tax benefits on exercised stock options and vesting of deferred shares. These eliminations decreased net cash provided by operating activities by $3.3 million and decreased net cash used by financing activities by $3.3 million for the year ended June 30, 2016, and decreased net cash provided by operating activities by $1.8 million and increased cash provided by financing activities by $1.8 million for the year ended June 30, 2015. Net cash flows did not change in either year as a result of the retrospective adjustment.
Accounting for Forfeitures
: The amendments in this ASU allow the Company to elect, as a company-wide accounting policy, either to continue to estimate the amount of forfeitures to exclude from compensation expense or to exclude forfeitures from compensation expense as they occur. Upon the adoption of the ASU during the first quarter of fiscal 2017, the Company elected to account for forfeitures as they occur. The Company is required to apply these amendments on a modified retrospective basis with a cumulative adjustment to retained earnings as of the beginning of the fiscal year. The Company recorded a modified retrospective adjustment to reduce the June 30, 2016 retained earnings balance and increase the APIC balance by $0.1 million each.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Statutory Tax Withholding Requirements
: Under the prior accounting standard, an entire award must be classified as a liability if the fair value of the shares withheld exceeds the Company's minimum statutory withholding obligation. Under the ASU, the Company is allowed to withhold shares with a fair value up to the amount of tax owed using the maximum statutory tax rate in the employee's applicable jurisdictions. The Company is allowed to determine one maximum rate for all employees in each jurisdiction, rather than a rate for each employee in the jurisdiction. Also, the ASU requires that cash outflows to reacquire shares withheld for taxes to be classified in the financing section of the statement of cash flows.
The Company adopted the ASU during the first quarter of fiscal 2017. Since the Company did not have any awards classified as liabilities due to statutory tax withholding requirements as of June 30, 2017, and since the Company already presented its cash outflows for reacquiring shares withheld for taxes as a financing activity in its statements of cash flows, these amendments did not have any impact on its financial statements upon adoption. The Company does not expect changes to employee withholdings for stock compensation to have a material impact to the financial statements.
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 its allowance for uncollectible accounts. The amendments in this update require a financial asset (or a group of financial assets) to be presented at the net amount expected to be collected. 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 amendments in this update are effective for the Company on July 1, 2020 and the Company may early adopt on July 1, 2019. 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 to have a material impact to its estimate of the allowance for uncollectible accounts.
Accounting Standards Update 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
On January 26, 2017, the FASB issued ASU 2017-04, which simplifies the goodwill impairment test by eliminating step two from the procedure. Previously, goodwill was tested for impairment by performing a two-step test. The first step involves determining the fair value of a reporting unit and comparing it to the carrying amount of the reporting unit's net assets. If the fair value of the reporting unit is less than its carrying amount, then the goodwill assigned to that reporting unit is determined to be impaired and step two must then be completed to measure the amount of the impairment. Step two involved measuring the reporting unit's assets and liabilities at fair value following a process similar to determining the fair value of assets acquired and liabilities assumed in a business combination. The net fair value of the assets acquired and liabilities assumed was then compared to the fair value of the reporting unit in order to compute the implied goodwill for the reporting unit. The difference between the carrying amount of the reporting unit's goodwill and the amount of the implied goodwill computed was the amount of the goodwill impairment to be recognized. Under ASU 2017-04, instead of performing step two of the test, the Company will recognize an impairment charge to the extent a reporting unit's fair value is less than the carrying amount of its net assets, as indicated by step one of the test.
The standard must be applied prospectively and must be adopted in fiscal years beginning after December 15, 2019. Early adoption is permitted and the Company adopted the ASU during its fourth fiscal quarter of 2017. The Company performed its annual goodwill impairment test on May 31, 2017 in accordance with the adopted ASU.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Accounting Standards Update 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09 which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities should apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted and prospective application is required. Management does not expect the adoption of ASU 2017-09 to have a material impact on the Company’s financial position, results of operations or cash flows.
Note 2—Acquisitions
Purchase of Houston Interests, LLC
On
December 12, 2016
, the Company completed the acquisition of Houston Interests, LLC ("Houston Interests"), a premier 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; material handling systems and terminals for cement, sulfur, fertilizer, coal and grain; and process heaters. The business has been included in our Matrix PDM Engineering, Inc. subsidiary, and its operating results have been included in the Oil Gas & Chemical 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 as of June 30, 2017 is as follows (in thousands):
|
|
|
|
|
Cash paid for equity interest
|
$
|
46,000
|
|
Cash paid for working capital
|
5,150
|
|
Less: cash acquired
|
(10,331
|
)
|
Cash consideration paid
|
40,819
|
|
Accrued working capital adjustment
|
1,687
|
|
Net purchase price
|
$
|
42,506
|
|
The Company funded the equity interest portion of the consideration paid from borrowings under the Company's senior secured revolving credit facility (See Note 5). The purchase of working capital was paid with cash on hand. The net purchase price was allocated to the major categories of assets and liabilities based on their estimated fair value at the acquisition date.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
The following table summarizes the preliminary net purchase price allocation (in thousands):
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|
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Cash and cash equivalents
|
$
|
10,331
|
|
Accounts receivable
|
10,273
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
746
|
|
Other current assets
|
454
|
|
Current assets
|
21,804
|
|
Property, plant and equipment
|
942
|
|
Goodwill
|
35,146
|
|
Other intangible assets
|
10,220
|
|
Total assets acquired
|
68,112
|
|
Accounts payable
|
962
|
|
Billings on uncompleted contracts in excess of costs and estimated earnings
|
11,648
|
|
Other accrued expenses
|
2,475
|
|
Current liabilities
|
15,085
|
|
Other liabilities
|
190
|
|
Net assets acquired
|
52,837
|
|
Less: cash acquired
|
10,331
|
|
Net purchase price
|
$
|
42,506
|
|
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 fair value of the net assets acquired is preliminary pending the final valuation of those assets. As a result, goodwill is also preliminary since it has been recorded as the excess of the purchase price over the estimated fair value of the net assets acquired.
The Company agreed to pay the previous owners up to
$2.6 million
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 year ended June 30, 2017, which were included within selling, general and administrative expenses in the consolidated statements of income. During the year ended June 30, 2017, the acquired business contributed revenues of
$33.4 million
and operating income of
$1.3 million
.
The unaudited financial information in the table below summarizes the combined results of operations of Matrix Service Company and Houston Interests for the years ended June 30, 2017 and 2016, on a pro forma basis, as though the companies had been combined as of July 1, 2015. 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, 2015 nor should it be taken as indicative of future consolidated results of operations.
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|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
June 30, 2017
|
June 30, 2016
|
|
(In thousands, except per share data)
|
Revenues
|
$
|
1,233,372
|
|
$
|
1,427,313
|
|
Net income attributable to Matrix Service Company
|
$
|
7,326
|
|
$
|
32,352
|
|
Basic earnings per common share
|
$
|
0.28
|
|
$
|
1.22
|
|
Diluted earnings per common share
|
$
|
0.27
|
|
$
|
1.19
|
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
The pro forma financial information presented in the table above includes the following adjustments to the combined entities' historical financial statements:
|
|
•
|
The combined entities recorded approximately
$3.3 million
of acquisition and integration expenses during the year ended June 30, 2017, which were transferred in the pro forma earnings to the year ended June 30, 2016 in order to report them as if they were incurred on July 1, 2015. Pro forma earnings were adjusted to include integration expenses that would have been recognized had the acquisition occurred on July 1, 2015 of
$0.8 million
and
$0.9 million
during the years ended June 30, 2017 and 2016, respectively.
|
|
|
•
|
Interest expense for the combined entities was increased by
$0.7 million
for the year ended June 30, 2017 and by
$1.4 million
during the year ended June 30, 2016. 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, 2015. This increase was partially offset by the assumption that Houston Interests' former debt was extinguished as of July 1, 2015.
|
|
|
•
|
Depreciation and intangible asset amortization expense for the combined entities was reduced by
$1.4 million
during the year ended June 30, 2017 and was increased by
$1.8 million
during the year ended June 30, 2016. These adjustments are 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
and
$2.2 million
during the years ended June 30, 2017 and 2016, respectively. Houston Interests was previously an exempt entity and income taxes were not assessed in its historical financial information.
|
Purchase of Baillie Tank Equipment, Ltd.
On
February 1, 2016
, the Company completed the acquisition of all outstanding stock of Baillie Tank Equipment, Ltd. (“BTE”), an internationally-based company with nearly 20 years of experience in the design and manufacture of products for use on aboveground storage tanks. Founded in 1998, BTE is a provider of tank products including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems, and seals. BTE is headquartered in Sydney, Australia with a manufacturing facility in Seoul, South Korea. The Company acquired BTE to expand its service offerings of certain technical solutions for aboveground storage tanks. The business is now known as Matrix Applied Technologies, and its operating results are included in the Storage Solutions segment.
The Company purchased BTE with cash on-hand for a net purchase price of $13.0 million. The Company paid
$15.4 million
when including the subsequent repayment of long-term debt acquired and the settlement of certain other liabilities acquired, and excluding the cash acquired and certain amounts owed to the former owners for working capital adjustments. 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 final purchase price allocation (in thousands):
|
|
|
|
|
Current assets
|
$
|
5,574
|
|
Property, plant and equipment
|
4,347
|
|
Goodwill
|
7,030
|
|
Other intangible assets
|
720
|
|
Other assets
|
233
|
|
Total assets acquired
|
17,904
|
|
Current liabilities
|
1,669
|
|
Deferred income taxes
|
329
|
|
Long-term debt
|
1,858
|
|
Other liabilities
|
407
|
|
Net assets acquired
|
13,641
|
|
Less: cash acquired
|
592
|
|
Net purchase price
|
$
|
13,049
|
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
The goodwill recognized from the acquisition is attributable to the synergies of combining our operations and the technical expertise of the acquired workforce. None of the goodwill recognized is deductible for income tax purposes.
The Company incurred
$1.2 million
of expenses related to the acquisition for the year ended June 30, 2016, which are included within selling, general and administrative expenses in the consolidated statements of income. The acquired business contributed revenues of
$7.8 million
and operating income of
$0.5 million
during the year ended June 30, 2017, and contributed revenues of
$5.4 million
and operating income of
$0.3 million
for the period from February 1, 2016 to June 30, 2016.
Purchase of HDB Ltd. Limited Partnership
On
August 22, 2014
, the Company purchased substantially all of the assets of HDB Ltd. Limited Partnership ("HDB"). HDB, headquartered in Bakersfield, California provides construction, fabrication and turnaround services to energy companies throughout California's central valley. The acquisition advanced a strategic goal of the Company to expand into the upstream energy market. The acquisition purchase price was
$5.6 million
and was funded with cash on hand. Commencing on August 22, 2014, HDB's operating results are included in the Oil Gas & Chemical Segment.
The purchase price was allocated to the major categories of assets and liabilities based on their estimated fair value at the acquisition date. The following table summarizes the purchase price allocation (in thousands):
|
|
|
|
|
Current assets
|
$
|
1,645
|
|
Property, plant and equipment
|
1,001
|
|
Tax deductible goodwill
|
3,065
|
|
Other intangible assets
|
900
|
|
Total assets acquired
|
6,611
|
|
Current liabilities
|
1,060
|
|
Net assets acquired
|
$
|
5,551
|
|
All of the recorded goodwill from the HDB acquisition is tax deductible. The operating data related to this acquisition was not material.
Note 3—Uncompleted Contracts
Contract terms of the Company’s construction contracts generally provide for progress billings based on project milestones. The excess of costs incurred and estimated earnings over amounts billed on uncompleted contracts is reported as a current asset. The excess of amounts billed over costs incurred and estimated earnings on uncompleted contracts is reported as a current liability. Gross and net amounts on uncompleted contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
June 30,
2016
|
|
|
(In thousands)
|
Costs and estimated earnings recognized on uncompleted contracts
|
|
$
|
1,919,054
|
|
|
$
|
1,875,014
|
|
Billings on uncompleted contracts
|
|
1,903,001
|
|
|
1,829,340
|
|
|
|
$
|
16,053
|
|
|
$
|
45,674
|
|
Shown on balance sheet as:
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
91,180
|
|
|
$
|
104,001
|
|
Billings on uncompleted contracts in excess of costs and estimated earnings
|
|
75,127
|
|
|
58,327
|
|
|
|
$
|
16,053
|
|
|
$
|
45,674
|
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Progress billings in accounts receivable at
June 30, 2017
and
June 30, 2016
included retentions to be collected within one year of
$54.3 million
and
$29.7 million
, respectively. Contract retentions collectible beyond one year are included in other assets in the condensed consolidated balance sheet and totaled
$1.9 million
at
June 30, 2017
and
$0.3 million
at
June 30, 2016
. Accounts payable included retentions of
$12.6 million
at June 30, 2017 and
$14.9 million
at
June 30, 2016
. Accounts payable retentions are generally expected to be settled within one year.
Other
Our results were negatively impacted by an increased cost estimate related to a large project in the Electrical Infrastructure segment, which resulted in a decrease in gross profit. The change in cost estimate resulted from a deterioration in the financial forecast of the project during the third fiscal quarter and was caused by various factors that have delayed schedule progress and reduced productivity. In July 2017, the Company reached a settlement agreement with the customer, which resolved open claims and modified the terms enabling the Company to recover all costs and overhead to perform the remainder of the work. In addition, the execution strategy was revised and a significant portion of future work will no longer be performed by the Company. The magnitude of the scope reduction is based on the Company’s best estimate at this time but may change as the detailed execution plan continues to develop.
During the year ended June 30, 2015 our results of operations were materially impacted by charges resulting from a change in estimate related to an acquired EPC joint venture project in the Electrical Infrastructure segment. The charges resulted in a reduction to operating income of
$53.4 million
and an after-tax reduction of
$18.3 million
to net income attributable to Matrix Service Company for fiscal year 2015. The Company recorded additional charges on this project during the year ended June 30, 2016. The fiscal 2016 project charges are attributable to higher than expected project closeout costs. The Company reached substantial completion on the project in the fourth quarter of fiscal 2015.
Note 4—Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
Infrastructure
|
|
Oil Gas &
Chemical
|
|
Storage
Solutions
|
|
Industrial
|
|
Total
|
|
|
(In thousands)
|
Net balance at June 30, 2014
|
|
$
|
43,243
|
|
|
$
|
10,943
|
|
|
$
|
10,027
|
|
|
$
|
5,624
|
|
|
$
|
69,837
|
|
Acquisition related adjustments
|
|
175
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|
219
|
|
Purchase of HDB (Note 2)
|
|
—
|
|
|
3,065
|
|
|
—
|
|
|
—
|
|
|
3,065
|
|
Translation adjustment
(1)
|
|
(1,044
|
)
|
|
—
|
|
|
(363
|
)
|
|
(196
|
)
|
|
(1,603
|
)
|
Net balance at June 30, 2015
|
|
42,374
|
|
|
14,008
|
|
|
9,664
|
|
|
5,472
|
|
|
71,518
|
|
Purchase of BTE (Note 2)
|
|
—
|
|
|
—
|
|
|
6,942
|
|
|
—
|
|
|
6,942
|
|
Translation adjustment
(1)
|
|
(204
|
)
|
|
—
|
|
|
75
|
|
|
(38
|
)
|
|
(167
|
)
|
Net balance at June 30, 2016
|
|
42,170
|
|
|
14,008
|
|
|
16,681
|
|
|
5,434
|
|
|
78,293
|
|
Purchase of Houston Interests (Note 2)
|
|
—
|
|
|
19,596
|
|
|
—
|
|
|
15,550
|
|
|
35,146
|
|
Acquisition related adjustments
|
|
—
|
|
|
—
|
|
|
88
|
|
|
—
|
|
|
88
|
|
Translation adjustment
(1)
|
|
(18
|
)
|
|
—
|
|
|
(5
|
)
|
|
(3
|
)
|
|
(26
|
)
|
Net balance at June 30, 2017
|
|
$
|
42,152
|
|
|
$
|
33,604
|
|
|
$
|
16,764
|
|
|
$
|
20,981
|
|
|
$
|
113,501
|
|
|
|
(1)
|
The translation adjustments relate to the periodic translation of Canadian Dollar and South Korean Won denominated goodwill recorded as a part of prior acquisitions in Canada and South Korea, in which the local currency was determined to be the functional currency.
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
We performed our annual goodwill impairment test as of May 31, 2017, which resulted in no impairment. However, the aggregate difference between the fair values of our reporting units and their carrying amounts has decreased significantly since last year as a result of current market conditions. The fair value of one reporting unit (carrying value of goodwill of
$8.0 million
) only exceeded its carrying amount by
9%
. The valuation model for this reporting unit incorporates the award of a significant project prior to the end of the second fiscal quarter, with project work to commence shortly thereafter. Management has concluded this award is probable of occurring. If the project is ultimately not awarded to us, the Company currently expects this would represent a triggering event requiring an interim evaluation of goodwill with respect to this reporting unit, which could result in a material impairment. In addition, for our other reporting units, if the market view of revenue opportunities or gross margin changes, the Company may need to perform an interim analysis, which could result in the recognition of a material impairment to goodwill. The Company will continue to monitor the operating results of its reporting units each period and perform additional tests as needed.
Other Intangible Assets
Information on the carrying value of other intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2017
|
|
|
Useful Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
(Years)
|
|
(In thousands)
|
Intellectual property
|
|
9 to 15
|
|
$
|
2,579
|
|
|
$
|
(1,425
|
)
|
|
$
|
1,154
|
|
Customer based
|
|
1 to 15
|
|
38,207
|
|
|
(13,543
|
)
|
|
24,664
|
|
Non-compete Agreements
|
|
4 to 5
|
|
1,453
|
|
|
(1,298
|
)
|
|
155
|
|
Trade names
|
|
1 to 3
|
|
1,630
|
|
|
(1,307
|
)
|
|
323
|
|
Total other intangible assets
|
|
|
|
$
|
43,869
|
|
|
$
|
(17,573
|
)
|
|
$
|
26,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2016
|
|
|
Useful Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
(Years)
|
|
(In thousands)
|
Intellectual property
|
|
9 to 15
|
|
$
|
2,579
|
|
|
$
|
(1,246
|
)
|
|
$
|
1,333
|
|
Customer based
|
|
1.5 to 15
|
|
28,179
|
|
|
(9,655
|
)
|
|
18,524
|
|
Non-compete agreements
|
|
4 to 5
|
|
1,453
|
|
|
(1,102
|
)
|
|
351
|
|
Trade name
|
|
3 to 5
|
|
1,615
|
|
|
(824
|
)
|
|
791
|
|
Total other intangible assets
|
|
|
|
$
|
33,826
|
|
|
$
|
(12,827
|
)
|
|
$
|
20,999
|
|
If we are required to perform an interim goodwill analysis, and such analysis indicates impairment, the Company would need to perform an impairment analysis of relevant customer relationships and other intangible assets. With respect to the reporting unit referenced above, customer relationships with a net book value of
$7.2 million
as of June 30, 2017 could potentially be impaired if the reporting unit is concluded to be impaired. We will continue to monitor all intangible assets for indications of impairment and perform tests as necessary.
The increase in the gross carrying amount of other intangible assets at June 30, 2017 compared to June 30, 2016 is primarily due to the December 12, 2016 acquisition of Houston Interests (See Note 2). The specifically identifiable intangible assets recognized in the Houston Interests acquisition consist of:
|
|
•
|
customer-based intangibles with a fair value of
$10.0 million
and useful life of between
1
and
9
years; and
|
|
|
•
|
trade name with a fair value of
$0.2 million
and useful life of
1
year.
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Amortization expense totaled
$4.9 million
,
$3.6 million
, and
$5.0 million
in fiscal
2017
,
2016
, and 2015, respectively. The Company recognized
$1.6 million
of amortization expense during the year ended June 30, 2017 for intangible assets recorded as part of the Houston Interests acquisition. We estimate that future amortization of other intangible assets will be as follows (in thousands):
|
|
|
|
|
For year ending:
|
|
June 30, 2018
|
$
|
4,742
|
|
June 30, 2019
|
3,501
|
|
June 30, 2020
|
3,491
|
|
June 30, 2021
|
3,472
|
|
June 30, 2022
|
2,618
|
|
Thereafter
|
8,472
|
|
Total estimated amortization expense
|
$
|
26,296
|
|
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, which replaced the Third Amended and Restated Credit Agreement dated as of November 7, 2011, as previously amended (the "Prior Credit Agreement").
The Credit Agreement provides for a five-year senior secured revolving credit facility of
$300.0 million
that expires
February 8, 2022
, which replaces the
$250.0 million
senior secured revolving credit facility under the Prior Credit Agreement. The new 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:
|
|
•
|
A Leverage Ratio, determined as of the end of each fiscal quarter, may not exceed
3.00
to
1.00
.
|
|
|
•
|
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 new credit facility includes a sub-facility for revolving loans 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 letters of credit.
Each revolving borrowing under the Credit Agreement will bear interest at a rate per annum equal to:
|
|
•
|
The ABR or the Adjusted LIBO Rate, in the case of revolving loans denominated in U.S. Dollars;
|
|
|
•
|
The Canadian Prime Rate or the CDOR rate, in the case of revolving loans denominated in Canadian Dollars;
|
|
|
•
|
The Adjusted LIBO Rate, in the case of revolving loans denominated in Pounds Sterling or Australian Dollars;
|
|
|
•
|
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.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
The carrying value of the senior revolving credit facility approximates its fair value at each balance sheet date.
The Credit Agreement includes a Leverage Ratio covenant, which provides that Consolidated Funded Indebtedness, as of the end of any fiscal quarter, may not exceed
3.0
times Consolidated EBITDA, as defined in the Credit Agreement, over the previous four quarters. For the four quarters ended
June 30, 2017
, Consolidated EBITDA was
$43.6 million
. Consolidated Funded Indebtedness, as defined in the Credit Agreement, at
June 30, 2017
was
$52.5 million
.
Availability under the senior revolving credit facility is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
June 30,
2016
|
|
|
(In thousands)
|
Senior revolving credit facility
|
|
$
|
300,000
|
|
|
$
|
200,000
|
|
Capacity constraint due to the Leverage Ratio
|
|
169,092
|
|
|
20,138
|
|
Capacity under the senior revolving credit facility
|
|
130,908
|
|
|
179,862
|
|
Letters of credit issued
|
|
7,825
|
|
|
20,755
|
|
Borrowings outstanding
|
|
44,682
|
|
|
—
|
|
Availability under the senior revolving credit facility
|
|
$
|
78,401
|
|
|
$
|
159,107
|
|
Outstanding borrowings at June 30, 2017 under our Credit Agreement were primarily used to fund the acquisition of Houston Interests (See Note 2) and working capital needs in our Canadian business due to the timing of collections and disbursements on the previously announced Electrical Infrastructure project.
The Company is in compliance with all other affirmative, negative, and financial covenants under the Credit Agreement.
Subsequent Event
On August 31, 2017, the Company entered in to an amendment to its Credit Agreement, which provided the following:
|
|
•
|
The maximum permitted Leverage Ratio was temporarily increased to 4.00 to 1.00 for the quarters ending September 30, 2017, and December 31, 2017. The maximum Leverage Ratio will revert back to 3.00 to 1.00 beginning with the quarter ending March 31, 2018.
|
|
|
•
|
The Fixed Charge Coverage Ratio will not be tested for the quarters ending September 30, 2017 and December 31, 2017, but will be in effect and tested quarterly thereafter beginning with the quarter ending March 31, 2018.
|
|
|
•
|
A new minimum Consolidated EBITDA covenant was added solely for the four-quarter period ending December 31, 2017. For this period, the Company is required to achieve Consolidated EBITDA of $15.0 million.
|
|
|
•
|
The Restricted Payments covenant was amended to restrict cash dividends and share repurchases during the period beginning August 31, 2017 and ending December 31, 2017 to an aggregate basket of $5.0 million. In addition, during such period, both cash dividends and share repurchases are prohibited unless the pro forma Leverage Ratio is less than or equal to 2.50 to 1.00. Thereafter, the restriction reverts back to limiting cash dividends to 50% of net income for each fiscal year, and limiting share repurchases to $30.0 million per calendar year.
|
|
|
•
|
An additional increased pricing tier was added for the "Covenant Relief Period" beginning on August 31, 2017 and ending on the date we deliver our financial statements and compliance certificate for the fiscal quarter ending December 31, 2017. If our Leverage Ratio as of any quarterly calculation date during the Covenant Relief Period exceeds 3.00 to 1.00: (1) the Applicable Margin on ABR loans will be 1.875%; (2) the Applicable Margin for Adjusted LIBO, EURIBO and CDOR will be 2.875%; (3) the Applicable Margin for Canadian Prime Rate loans will be 3.375%; and (4) the unused credit facility fee will be 0.50%.
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Note 6—Income Taxes
The sources of pretax income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
June 30,
2017
|
|
June 30,
2016
|
|
June 30,
2015
|
|
|
(In thousands)
|
Domestic
|
|
$
|
19,763
|
|
|
$
|
33,986
|
|
|
$
|
(4,001
|
)
|
Foreign
|
|
(17,317
|
)
|
|
5,667
|
|
|
12,193
|
|
Total
|
|
$
|
2,446
|
|
|
$
|
39,653
|
|
|
$
|
8,192
|
|
For fiscal 2017, 2016 and 2015, domestic pretax income included a gain of
$0.3 million
and losses of
$3.3 million
and
$19.1 million
, respectively, related to our acquired EPC joint venture project. The Company consolidates the acquired EPC joint venture project and reports a noncontrolling interest. Accordingly, the Company's pretax income includes the noncontrolling interest holder's share of the acquired EPC project loss for which the Company does not receive a tax benefit.
The components of the provision for income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
June 30,
2017
|
|
June 30,
2016
|
|
June 30,
2015
|
|
|
(In thousands)
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
6,522
|
|
|
$
|
9,930
|
|
|
$
|
7,535
|
|
State
|
|
(185
|
)
|
|
2,570
|
|
|
1,606
|
|
Foreign
|
|
(1,509
|
)
|
|
(262
|
)
|
|
1,791
|
|
|
|
4,828
|
|
|
12,238
|
|
|
10,932
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
618
|
|
|
887
|
|
|
1,803
|
|
State
|
|
101
|
|
|
67
|
|
|
(362
|
)
|
Foreign
|
|
(3,239
|
)
|
|
924
|
|
|
(2,283
|
)
|
|
|
(2,520
|
)
|
|
1,878
|
|
|
(842
|
)
|
|
|
$
|
2,308
|
|
|
$
|
14,116
|
|
|
$
|
10,090
|
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
The difference between the expected income tax provision applying the domestic federal statutory tax rate and the reported income tax provision is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
June 30,
2017
|
|
June 30,
2016
|
|
June 30,
2015
|
|
|
(In thousands)
|
Expected provision for Federal income taxes at the statutory rate
|
|
$
|
857
|
|
|
$
|
13,879
|
|
|
$
|
2,868
|
|
State income taxes, net of Federal benefit
|
|
808
|
|
|
1,827
|
|
|
1,023
|
|
Deemed foreign dividends
|
|
—
|
|
|
—
|
|
|
1,462
|
|
Charges without tax benefit
|
|
1,741
|
|
|
2,187
|
|
|
1,478
|
|
Change in valuation allowance
|
|
1,295
|
|
|
311
|
|
|
25
|
|
Excess tax benefits on stock-based compensation
(1)
|
|
(496
|
)
|
|
—
|
|
|
—
|
|
IRC S199 deduction
|
|
(749
|
)
|
|
(999
|
)
|
|
—
|
|
Foreign tax credits
|
|
—
|
|
|
—
|
|
|
(1,433
|
)
|
Research and development and other tax credits
|
|
(1,626
|
)
|
|
(1,928
|
)
|
|
(1,197
|
)
|
Foreign tax differential
|
|
1,496
|
|
|
(815
|
)
|
|
(529
|
)
|
Noncontrolling interest
|
|
(112
|
)
|
|
1,164
|
|
|
6,669
|
|
Change in uncertain tax positions
|
|
(22
|
)
|
|
(569
|
)
|
|
—
|
|
Adjustment to tax accounts
|
|
(924
|
)
|
|
(786
|
)
|
|
—
|
|
Other
|
|
40
|
|
|
(155
|
)
|
|
(276
|
)
|
Provision for income taxes
|
|
$
|
2,308
|
|
|
$
|
14,116
|
|
|
$
|
10,090
|
|
|
|
(1)
|
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. Upon the adoption of ASU 2016-09, excess tax benefits and tax deficiencies are recognized as part of the provision for income taxes. See Note 1 - Summary of Significant Accounting Policies, Recently Issued Accounting Standards, ASU 2016-09, for more information about the new accounting standard.
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
June 30,
2016
|
|
|
(In thousands)
|
Deferred tax assets:
|
|
|
|
|
Warranty reserve
|
|
$
|
312
|
|
|
$
|
195
|
|
Bad debt reserve
|
|
3,869
|
|
|
3,188
|
|
Paid-time-off accrual
|
|
821
|
|
|
865
|
|
Insurance reserve
|
|
2,284
|
|
|
2,461
|
|
Legal reserve
|
|
82
|
|
|
87
|
|
Net operating loss benefit and credit carryforwards
|
|
9,332
|
|
|
8,207
|
|
Valuation allowance
|
|
(1,719
|
)
|
|
(424
|
)
|
Accrued compensation and pension
|
|
1,346
|
|
|
1,268
|
|
Stock compensation expense on nonvested deferred shares
|
|
3,731
|
|
|
3,472
|
|
Accrued losses
|
|
340
|
|
|
274
|
|
Foreign currency translation and other
|
|
1,080
|
|
|
1,041
|
|
Total deferred tax assets
|
|
21,478
|
|
|
20,634
|
|
Deferred tax liabilities:
|
|
|
|
|
Tax over book depreciation
|
|
11,446
|
|
|
11,504
|
|
Tax over book amortization
|
|
3,325
|
|
|
2,588
|
|
Branch future liability
|
|
2,538
|
|
|
2,889
|
|
Prepaid insurance
|
|
—
|
|
|
396
|
|
Receivable holdbacks and other
|
|
912
|
|
|
2,736
|
|
Total deferred tax liabilities
|
|
18,221
|
|
|
20,113
|
|
Net deferred tax asset
|
|
$
|
3,257
|
|
|
$
|
521
|
|
As reported in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
June 30,
2016
|
|
|
(In thousands)
|
Deferred income tax assets
|
|
3,385
|
|
|
3,719
|
|
Deferred income tax liabilities
|
|
(128
|
)
|
|
(3,198
|
)
|
Net deferred tax asset
|
|
$
|
3,257
|
|
|
$
|
521
|
|
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, 2017 and June 30, 2016 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:
|
|
|
|
|
|
Tax Credit Carryforwards
|
Expiration Period
|
Amount (in thousands)
|
State tax credits
|
June 2017 to June 2032
|
$
|
498
|
|
Federal foreign tax credits
|
June 2018 to June 2024
|
$
|
2,348
|
|
Foreign tax credits
|
June 2034 to June 2036
|
$
|
612
|
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
Operating Loss Carryforwards
|
Expiration Period
|
Amount (in thousands)
|
State net operating losses
|
June 2022 to June 2037
|
$
|
19,015
|
|
Foreign net operating losses
|
December 2028; June 2031 to June 2036
|
$
|
15,454
|
|
In general, it is the practice and intention of the Company to reinvest the earnings of its foreign subsidiaries in its foreign operations. Such amounts become subject to United States taxation upon the remittance of dividends and under certain other circumstances. As of
June 30, 2017
, unremitted earnings of foreign subsidiaries, which have been or are intended to be permanently invested, are approximately
$1.0 million
. We anticipate that any deferred tax liability related to the investment in these foreign subsidiaries could be offset by foreign tax credits.
The Company files tax returns in multiple domestic and foreign taxing jurisdictions. With a few exceptions, the Company is no longer subject to examination by taxing authorities through fiscal 2012. At
June 30, 2017
, the Company updated its evaluation of its open tax years in all known jurisdictions. Based on this evaluation, the Company did not identify any material uncertain tax positions. We have recorded a
$0.6 million
liability as of June 30, 2017 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.
Unapproved Change Orders and Claims
As of
June 30, 2017
and
June 30, 2016
, costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unapproved change orders and claims of
$11.0 million
and
$10.3 million
, respectively. Generally, collection of amounts related to unapproved change orders and claims is expected within twelve months. However, customers may not pay these amounts until final resolution of related claims, and accordingly, collection of these amounts may extend beyond one year.
Other
The Company and its subsidiaries are participants in various legal actions. It is the opinion of management that none of the known legal actions will have a material impact on the Company’s financial position, results of operations or liquidity.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
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, 2017
total
$36.0 million
and are payable as follows:
fiscal 2018
—
$7.5 million
;
fiscal 2019
—
$6.3 million
;
fiscal 2020
—
$5.0 million
;
fiscal 2021
—
$4.4 million
;
fiscal 2022
—
$2.6 million
and thereafter—
$10.1 million
. Operating lease expense was
$7.9 million
,
$6.6 million
and
$6.7 million
for the twelve months ended
June 30, 2017
,
June 30, 2016
and
June 30, 2015
, respectively.
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, 2017
or
June 30, 2016
.
Treasury Shares
On December 12, 2016, the Board of Directors approved a new stock buyback program (the "December 2016 Program"), which replaced the previous program that had been in place since November 2014. Under the December 2016 Program, the Company may repurchase common stock of the Company in any calendar year commencing with calendar year 2016 and continuing through calendar year 2018, up to a maximum of
$25.0 million
per calendar year.
The Company may repurchase its stock from time to time in the open market at prevailing market prices or in privately negotiated transactions, except during the period from August 31, 2017 until December 31, 2017, when share repurchases, along with cash dividend payments, are restricted to an aggregate basket of
$5.0 million
under our Credit Agreement. In addition, during this time share repurchases may only be made if the pro forma Leverage Ratio is less than or equal to
2.50
to
1.00
(see Item 8. Financial Statements and Supplementary Data, Note 5 - Debt for information about the amended Credit Agreement subsequent event). The December 2016 Program will continue through December 31, 2018 unless and until it is modified or revoked by the Board of Directors. No shares have been repurchased under the December 2016 Program as of June 30, 2017.
In addition to the stock buyback program, the Company may withhold shares of common stock to satisfy the tax withholding obligations upon vesting of an employee’s deferred shares. Matrix withheld
134,535
and
205,504
shares of common stock during fiscal 2017 and 2016, respectively, to satisfy these obligations. These shares were returned to the Company’s pool of treasury shares. The Company has
1,287,655
treasury shares as of June 30, 2017 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 years ended
June 30, 2017
,
June 30, 2016
, and
June 30, 2015
was
$7.5 million
,
$6.3 million
and
$6.3 million
, respectively. Measured but unrecognized stock-based compensation expense at
June 30, 2017
was
$11.9 million
, all of which related to nonvested deferred shares which are expected to be recognized as expense over a weighted average period of
1.8
years. The recognized tax benefit related to the stock-based compensation expense for the
years
ended
June 30, 2017
,
June 30, 2016
and
June 30, 2015
totaled
$0.5 million
,
$3.2 million
and
$2.5 million
, respectively.
Plan Information
In November 2016, the Company's stockholders approved the Matrix Service Company 2016 Stock and Incentive Compensation Plan (the "2016 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 2016 Plan, the 2012 Stock and Incentive Compensation Plan ("2012 Plan") was frozen with the exception of normal vesting and other activity associated with awards previously granted under the 2012 Plan. However, shares awarded under 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 2016 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.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Awards totaling
1,800,000
shares have been authorized under the 2016 Plan. At
June 30, 2017
there were
1,716,934
shares available for grant under the 2016 Plan.
Stock Options
Stock options are granted at the market value of the Company’s common stock on the grant date and expire after
10
years. The Company’s policy is to issue shares upon the exercise of stock options from its treasury shares, if available. The Company did not award any new stock options in fiscal years 2017, 2016, or 2015.
Stock option activity and related information for the year ended
June 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted-Average
Remaining
Contractual Life
|
|
Weighted-Average
Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
(Years)
|
|
|
|
(In thousands)
|
Outstanding at June 30, 2016
|
|
122,063
|
|
|
5.3
|
|
$
|
10.19
|
|
|
$
|
769
|
|
Granted
|
|
—
|
|
|
|
|
—
|
|
|
|
Exercised
|
|
(24,813
|
)
|
|
|
|
$
|
10.19
|
|
|
$
|
268
|
|
Canceled
|
|
—
|
|
|
|
|
—
|
|
|
|
Outstanding at June 30, 2017
|
|
97,250
|
|
|
P5Y3M
|
|
$
|
10.19
|
|
|
$
|
—
|
|
Vested at June 30, 2017
|
|
97,250
|
|
|
P5Y3M
|
|
$
|
10.19
|
|
|
$
|
—
|
|
Exercisable at June 30, 2017
|
|
97,250
|
|
|
P5Y3M
|
|
$
|
10.19
|
|
|
$
|
—
|
|
The total intrinsic value of stock options exercised during fiscal
2017
,
2016
, and
2015
was
$0.3 million
,
$0.7 million
and
$0.7 million
, respectively.
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. Director awards prior to 2016 cliff vest on the earlier of
three
years or upon retirement from the Board. Director awards beginning in 2016 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, 2017
, there are approximately
127,000
, and
183,000
performance units that are scheduled to vest in
fiscal 2019
, and
fiscal 2020
, respectively. There were approximately
80,000
performance units that were scheduled to vest in fiscal 2018, but total shareholder return during the performance period did not meet the threshold performance and the performance units were forfeited.
|
All awards vest upon the death or disability of the participant or upon a change of control of the Company.
The grant date fair value of the time-based awards is determined by the market value of the Company's common stock on the grant date. The grant date fair value of the market-based awards is calculated using a
Monte Carlo model
. For the fiscal 2017 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 of the peer companies over the performance period.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Nonvested deferred share activity for the twelve months ended
June 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant
Date Fair Value per Share
|
Nonvested shares at June 30, 2016
|
|
791,995
|
|
|
$
|
21.45
|
|
Shares granted
|
|
516,969
|
|
|
$
|
19.80
|
|
Performance shares earned in excess of target
|
|
88,523
|
|
|
$
|
18.90
|
|
Shares vested and released
|
|
(396,530
|
)
|
|
$
|
18.24
|
|
Shares canceled
|
|
(5,604
|
)
|
|
$
|
19.70
|
|
Nonvested shares at June 30, 2017
|
|
995,353
|
|
|
$
|
21.65
|
|
There were
370,490
and
242,649
deferred shares granted in fiscal 2016 and 2015 with average grant date fair values of
$20.77
and
$29.31
, respectively. There were
396,530
,
631,443
and
326,763
deferred shares that vested and were released in fiscal 2017, 2016 and 2015 with weighted average fair values of
$18.24
,
$22.34
and
$23.93
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
June 30,
2017
|
|
June 30,
2016
|
|
June 30,
2015
|
|
|
(In thousands, except per share data)
|
Basic EPS:
|
|
|
|
|
|
|
Net income (loss) attributable to Matrix Service Company
|
|
$
|
(183
|
)
|
|
$
|
28,863
|
|
|
$
|
17,157
|
|
Weighted average shares outstanding
|
|
26,533
|
|
|
26,597
|
|
|
26,603
|
|
Basic earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
1.09
|
|
|
$
|
0.64
|
|
Diluted EPS:
|
|
|
|
|
|
|
Weighted average shares outstanding—basic
|
|
26,533
|
|
|
26,597
|
|
|
26,603
|
|
Dilutive stock options
|
|
—
|
|
|
68
|
|
|
110
|
|
Dilutive nonvested deferred shares
|
|
—
|
|
|
435
|
|
|
464
|
|
Diluted weighted average shares
|
|
26,533
|
|
|
27,100
|
|
|
27,177
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
1.07
|
|
|
$
|
0.63
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
June 30,
2017
|
|
June 30,
2016
|
|
June 30,
2015
|
|
|
(In thousands)
|
Stock options
|
|
43
|
|
|
—
|
|
|
—
|
|
Nonvested deferred shares
|
|
430
|
|
|
56
|
|
|
148
|
|
Total antidilutive securities
|
|
473
|
|
|
56
|
|
|
148
|
|
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
$5.5 million
,
$5.0 million
, and
$4.9 million
for the years ended June 30, 2017, 2016 and 2015, 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.
Our participation in significant plans for the fiscal year ended
June 30, 2017
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.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Fund
|
|
EIN/Pension
Plan Number
|
|
Pension
Protection Act
Zone Status
|
|
FIP/RP
Status
Pending or
Implemented
|
|
Company Contributions
Fiscal Year
|
|
Surcharge
Imposed
|
|
Expiration
Date of
Collective-
Bargaining
Agreement
|
2017
|
2016
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Boilermaker-Blacksmith National Pension Trust
|
|
48-6168020/001
|
|
Described below (2)
|
Described below (2)
|
|
Described below (2)
|
|
$
|
7,098
|
|
|
$
|
7,658
|
|
|
$
|
8,330
|
|
|
Described below (2)
|
|
Described below (1)
|
Joint Pension Fund Local Union 164 IBEW
|
|
22-6031199/001
|
|
Described below (2)
|
Described below (2)
|
|
Described below (2)
|
|
2,709
|
|
|
2,635
|
|
|
3,026
|
|
|
Described below (2)
|
|
5/31/2021
|
Joint Pension Fund of Local Union No 102
|
|
22-1615726/001
|
|
Green
|
Green
|
|
N/A
|
|
2,392
|
|
|
3,063
|
|
|
2,395
|
|
|
No
|
|
5/31/2019
|
IBEW Local 456 Pension Plan
|
|
22-6238995/001
|
|
Green
|
Green
|
|
N/A
|
|
2,777
|
|
|
1,168
|
|
|
788
|
|
|
No
|
|
12/3/2017
|
Local 351 IBEW Pension Plan
|
|
22-3417366/001
|
|
Green
|
Green
|
|
N/A
|
|
2,796
|
|
|
5,018
|
|
|
2,608
|
|
|
No
|
|
9/30/2017
|
Steamfitters Local Union No 420 Pension Plan
|
|
23-2004424/001
|
|
Red
|
Red
|
|
Yes
|
|
2,234
|
|
|
1,265
|
|
|
937
|
|
|
Yes
|
|
4/30/2020
|
IBEW Local Union 98 Pension Plan
|
|
23-1990722/001
|
|
Described below (2)
|
Described below (2)
|
|
Described below (2)
|
|
1,519
|
|
|
1,653
|
|
|
2,768
|
|
|
Described below (2)
|
|
4/28/2018
|
Indiana Laborers Pension Fund
|
|
35-6027150/001
|
|
Described below (2)
|
Described below (2)
|
|
Described below (2)
|
|
2,458
|
|
|
2,320
|
|
|
2,519
|
|
|
Described below (2)
|
|
5/31/2018
|
Iron Workers Mid-America Pension Plan
|
|
36-6488227/001
|
|
Green
|
Green
|
|
N/A
|
|
1,785
|
|
|
2,248
|
|
|
2,605
|
|
|
No
|
|
5/31/2019
|
Plumbers & Pipefitters Local Union 74 Pension Fund
|
|
51-6015925/001
|
|
Yellow
|
Yellow
|
|
Yes
|
|
4
|
|
|
552
|
|
|
4,473
|
|
|
No
|
|
6/15/2018
|
Pipe Fitters Retirement Fund, Local 597
|
|
62-6105084/001
|
|
Green
|
Green
|
|
N/A
|
|
2,563
|
|
|
2,377
|
|
|
2,259
|
|
|
No
|
|
5/31/2018
|
|
|
|
|
Contributions to other multiemployer plans
|
|
20,374
|
|
|
16,054
|
|
|
22,282
|
|
|
|
|
|
|
|
|
|
Total contributions made
|
|
$
|
48,709
|
|
|
$
|
46,011
|
|
|
$
|
54,990
|
|
|
|
|
|
|
|
(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 December 31, 2020, respectively.
|
|
|
(2)
|
For the Boilermaker-Blacksmith National Pension Trust, Local 164 IBEW Pension Plan, Local 98 IBEW Pension Plan and the Indiana Laborers Pension Fund, the Company has not received a funding notification that covers the Company's fiscal years 2017 or 2016 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 either calendar years 2017 or 2016 (which can be accessed at http://www.dol.gov/ebsa/criticalstatusnotices.html).
|
Employee Stock Purchase Plan
The Matrix Service Company 2011 Employee Stock Purchase Plan (“ESPP”) was effective January 1, 2011. The ESPP allows employees to purchase shares through payroll deductions and members of the Board of Directors to purchase shares from amounts withheld from their cash retainers. Share purchases are limited to an aggregate market value of no greater than
$60,000
per calendar year per participant and are purchased at market value with no discount to the participant. Contributions are with after tax earnings and are accumulated in non-interest bearing accounts for quarterly purchases of company stock. Upon the purchase of shares, the participants receive all stockholder rights including dividend and voting rights, and are permitted to sell their shares at any time. The Company has made
1,000,000
shares available under the ESPP. The ESPP can be terminated at the discretion of the Board of Directors or on
January 2, 2021
. Shares are issued from Treasury Stock under the ESPP. There were
16,609
shares issued in fiscal 2017,
17,304
shares in fiscal 2016, and
13,243
shares in fiscal 2015.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Note 13—Segment Information
We operate our business through four reportable segments: Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial.
The Electrical Infrastructure segment primarily encompasses high voltage services to investor owned utilities, including construction of new substations, upgrades of existing substations, short-run transmission line installations, distribution upgrades and maintenance, and storm restoration services. We also provide construction and maintenance services to a variety of power generation facilities, such as combined cycle plants, natural gas fired power stations, and renewable energy installations.
The Oil Gas & Chemical segment includes turnaround activities, plant maintenance, engineering and construction in the downstream and midstream petroleum industries. Our customers in these industries are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. Another key offering is industrial cleaning services, which include hydroblasting, hydroexcavating, chemical cleaning and vacuum services. We also perform work in the petrochemical, upstream petroleum, and sulfur extraction, recovery and processing markets.
The Storage Solutions segment includes new construction of crude and refined products aboveground storage tanks (“ASTs”), as well as planned and emergency maintenance services. The Storage Solutions segment also includes balance of plant work in storage terminals and tank farms. Also included in the Storage Solutions segment is work related to specialty storage tanks, including liquefied natural gas (“LNG”), liquid nitrogen/liquid oxygen (“LIN/LOX”), liquid petroleum (“LPG”) tanks and other specialty vessels, including spheres. 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 primarily includes construction and maintenance work in the iron and steel, mining and minerals, and agricultural industries. Our work in the mining and minerals industry is primarily for customers engaged in the extraction of copper. Our work in the agricultural industry includes the engineering and design of grain silos, docks and handling systems; the design of control system automation and materials handling for the food industry; and engineering, construction, process design and balance of plant work for fertilizer production facilities. We also perform work in bulk material handling, thermal vacuum chambers, and other industrial markets.
The Company evaluates performance and allocates resources based on operating income. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are recorded at cost; therefore, no intercompany profit or loss is recognized.
Segment assets consist primarily of accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, property, plant and equipment and goodwill.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Results of Operations
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
Infrastructure
|
|
Oil Gas &
Chemical
|
|
Storage
Solutions
|
|
Industrial
|
|
Unallocated Corporate
|
|
Total
|
Twelve months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenues
|
|
$
|
373,384
|
|
|
$
|
247,423
|
|
|
$
|
483,254
|
|
|
$
|
103,449
|
|
|
$
|
—
|
|
|
$
|
1,207,510
|
|
Less: inter-segment revenues
|
|
—
|
|
|
6,900
|
|
|
1,558
|
|
|
1,543
|
|
|
—
|
|
|
10,001
|
|
Consolidated revenues
|
|
373,384
|
|
|
240,523
|
|
|
481,696
|
|
|
101,906
|
|
|
—
|
|
|
1,197,509
|
|
Gross profit
|
|
7,137
|
|
|
12,675
|
|
|
55,651
|
|
|
5,540
|
|
|
—
|
|
|
81,003
|
|
Operating income (loss)
|
|
(8,309
|
)
|
|
(8,783
|
)
|
|
22,928
|
|
|
(977
|
)
|
|
—
|
|
|
4,859
|
|
Segment assets
|
|
183,351
|
|
|
129,177
|
|
|
166,742
|
|
|
53,754
|
|
|
53,006
|
|
|
586,030
|
|
Capital expenditures
|
|
1,390
|
|
|
829
|
|
|
2,017
|
|
|
38
|
|
|
7,634
|
|
|
11,908
|
|
Depreciation and amortization expense
|
|
5,198
|
|
|
6,299
|
|
|
7,277
|
|
|
2,828
|
|
|
—
|
|
|
21,602
|
|
Twelve months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenues
|
|
$
|
349,011
|
|
|
$
|
252,973
|
|
|
$
|
564,738
|
|
|
$
|
149,744
|
|
|
$
|
—
|
|
|
$
|
1,316,466
|
|
Less: inter-segment revenues
|
|
—
|
|
|
3,178
|
|
|
1,226
|
|
|
145
|
|
|
—
|
|
|
4,549
|
|
Consolidated revenues
|
|
349,011
|
|
|
249,795
|
|
|
563,512
|
|
|
149,599
|
|
|
—
|
|
|
1,311,917
|
|
Gross profit
|
|
29,301
|
|
|
18,553
|
|
|
67,843
|
|
|
10,294
|
|
|
—
|
|
|
125,991
|
|
Operating income (loss)
|
|
11,144
|
|
|
(3,503
|
)
|
|
33,449
|
|
|
(208
|
)
|
|
—
|
|
|
40,882
|
|
Segment assets
|
|
135,298
|
|
|
91,350
|
|
|
201,875
|
|
|
67,569
|
|
|
68,875
|
|
|
564,967
|
|
Capital expenditures
|
|
1,611
|
|
|
1,481
|
|
|
3,882
|
|
|
104
|
|
|
6,861
|
|
|
13,939
|
|
Depreciation and amortization expense
|
|
5,008
|
|
|
4,811
|
|
|
8,124
|
|
|
3,498
|
|
|
—
|
|
|
21,441
|
|
Twelve months ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenues
|
|
$
|
257,930
|
|
|
$
|
310,826
|
|
|
$
|
504,155
|
|
|
$
|
281,319
|
|
|
$
|
—
|
|
|
$
|
1,354,230
|
|
Less: inter-segment revenues
|
|
—
|
|
|
5,466
|
|
|
1,032
|
|
|
4,597
|
|
|
—
|
|
|
11,095
|
|
Consolidated revenues
|
|
257,930
|
|
|
305,360
|
|
|
503,123
|
|
|
276,722
|
|
|
—
|
|
|
1,343,135
|
|
Gross profit (loss)
|
|
(31,444
|
)
|
|
25,394
|
|
|
58,085
|
|
|
35,335
|
|
|
—
|
|
|
87,370
|
|
Operating income (loss)
|
|
(44,293
|
)
|
|
7,064
|
|
|
29,069
|
|
|
16,962
|
|
|
—
|
|
|
8,802
|
|
Segment assets
|
|
129,725
|
|
|
108,960
|
|
|
172,857
|
|
|
102,761
|
|
|
47,386
|
|
|
561,689
|
|
Capital expenditures
|
|
579
|
|
|
3,858
|
|
|
2,396
|
|
|
1,139
|
|
|
7,801
|
|
|
15,773
|
|
Depreciation and amortization expense
|
|
4,915
|
|
|
4,772
|
|
|
7,298
|
|
|
6,495
|
|
|
—
|
|
|
23,480
|
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Geographical information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Twelve Months Ended
|
|
|
June 30,
2017
|
|
June 30,
2016
|
|
June 30,
2015
|
|
|
(In thousands)
|
United States
|
|
$
|
961,049
|
|
|
$
|
1,127,893
|
|
|
$
|
1,205,713
|
|
Canada
|
|
228,625
|
|
|
178,603
|
|
|
137,422
|
|
Other international
|
|
7,835
|
|
|
5,421
|
|
|
—
|
|
|
|
$
|
1,197,509
|
|
|
$
|
1,311,917
|
|
|
$
|
1,343,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets
|
|
|
June 30,
2017
|
|
June 30,
2016
|
|
June 30,
2015
|
|
|
(In thousands)
|
United States
|
|
$
|
193,164
|
|
|
$
|
158,970
|
|
|
$
|
166,132
|
|
Canada
|
|
21,419
|
|
|
19,915
|
|
|
22,086
|
|
Other international
|
|
12,817
|
|
|
10,636
|
|
|
—
|
|
|
|
$
|
227,400
|
|
|
$
|
189,521
|
|
|
$
|
188,218
|
|
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
|
Twelve months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Customer one
|
|
19.5
|
%
|
|
—
|
%
|
|
—
|
%
|
|
48.5
|
%
|
|
—
|
%
|
Customer two
|
|
15.3
|
%
|
|
46.0
|
%
|
|
—
|
%
|
|
2.4
|
%
|
|
—
|
%
|
Customer three
|
|
5.2
|
%
|
|
—
|
%
|
|
25.8
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer four
|
|
4.2
|
%
|
|
—
|
%
|
|
20.7
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer five
|
|
4.0
|
%
|
|
12.7
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer six
|
|
2.7
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
31.7
|
%
|
Customer seven
|
|
2.2
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
25.8
|
%
|
Twelve months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Customer one
|
|
14.8
|
%
|
|
38.9
|
%
|
|
—
|
%
|
|
10.2
|
%
|
|
—
|
%
|
Customer two
|
|
10.6
|
%
|
|
—
|
%
|
|
—
|
%
|
|
24.7
|
%
|
|
—
|
%
|
Customer three
|
|
8.3
|
%
|
|
—
|
%
|
|
—
|
%
|
|
19.3
|
%
|
|
—
|
%
|
Customer four
|
|
4.4
|
%
|
|
16.6
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer five
|
|
4.2
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
36.9
|
%
|
Customer six
|
|
3.9
|
%
|
|
—
|
%
|
|
20.2
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer seven
|
|
3.8
|
%
|
|
14.4
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer eight
|
|
3.4
|
%
|
|
12.7
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer nine
|
|
2.3
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
20.1
|
%
|
Customer ten
|
|
2.1
|
%
|
|
—
|
%
|
|
11.2
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer eleven
|
|
1.6
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
14.0
|
%
|
Twelve months ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
Customer one
|
|
12.3
|
%
|
|
—
|
%
|
|
—
|
%
|
|
33.0
|
%
|
|
—
|
%
|
Customer two
|
|
7.0
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
34.0
|
%
|
Customer three
|
|
6.5
|
%
|
|
12.7
|
%
|
|
—
|
%
|
|
10.9
|
%
|
|
—
|
%
|
Customer four
|
|
5.7
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
27.6
|
%
|
Customer five
|
|
4.8
|
%
|
|
25.1
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer six
|
|
4.0
|
%
|
|
—
|
%
|
|
17.7
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer seven
|
|
3.9
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
19.0
|
%
|
Customer eight
|
|
3.1
|
%
|
|
16.3
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer nine
|
|
2.8
|
%
|
|
14.7
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer ten
|
|
2.8
|
%
|
|
—
|
%
|
|
12.3
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer eleven
|
|
2.4
|
%
|
|
12.7
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Matrix Service Company
Quarterly Financial Data (Unaudited)
Fiscal Years Ended
June 30, 2017
and
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
(In thousands, except per share amounts)
|
Fiscal Year 2017
|
|
|
Revenues
|
|
$
|
341,781
|
|
|
$
|
312,655
|
|
|
$
|
251,237
|
|
|
$
|
291,836
|
|
Gross profit (loss)
|
|
32,278
|
|
|
28,212
|
|
|
(2,614
|
)
|
|
23,127
|
|
Operating income (loss)
|
|
14,301
|
|
|
8,237
|
|
|
(21,210
|
)
|
|
3,531
|
|
Net income (loss) attributable to Matrix Service Company
|
|
9,342
|
|
|
5,250
|
|
|
(13,821
|
)
|
|
(954
|
)
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
0.35
|
|
|
0.20
|
|
|
(0.52
|
)
|
|
(0.04
|
)
|
Diluted
|
|
0.35
|
|
|
0.20
|
|
|
(0.52
|
)
|
|
(0.04
|
)
|
Fiscal Year 2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
319,331
|
|
|
$
|
323,529
|
|
|
$
|
309,422
|
|
|
$
|
359,635
|
|
Gross profit
|
|
34,584
|
|
|
30,005
|
|
|
27,303
|
|
|
34,099
|
|
Operating income
|
|
15,101
|
|
|
4,935
|
|
|
6,347
|
|
|
14,499
|
|
Net income attributable to Matrix Service Company
|
|
9,941
|
|
|
5,431
|
|
|
4,357
|
|
|
9,134
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
0.38
|
|
|
0.20
|
|
|
0.16
|
|
|
0.35
|
|
Diluted
|
|
0.37
|
|
|
0.20
|
|
|
0.16
|
|
|
0.34
|
|
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.