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 and its subsidiaries (“Matrix”, the “Company” or “we”, “our”, and “us” are to Matrix Service Company and its subsidiaries), all of which are wholly owned. Intercompany transactions and balances have been eliminated in consolidation.
We operate in the United States, Canada, South Korea and Australia. Our reportable segments are Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions.
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.
Credit Losses
Adoption of Credit Losses Standard
On June 16, 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, which changed how we account for our 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 Consolidated Statements of Income 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.
Previous GAAP delays the recognition of the full amount of credit losses until the loss is probable of occurring. The amendments in this update eliminate the probable initial recognition threshold and, instead, reflect our current estimate of all expected credit losses. In addition, current guidance limits the information we may consider in measuring a credit loss to our past events and current conditions. The amendments in this update broaden the information we may consider in developing our expected credit loss estimate to include forecasted information.
We adopted the standard on July 1, 2020 with no material impact to our estimate of the allowance for uncollectible accounts.
Change in Reportable Segments
Due to changing markets facing our clients and to better align our financial reporting with our long-term strategic growth areas, we began reporting our financial results under new reportable segments effective July 1, 2020. The new reportable segments along with a description of each are as follows:
•Utility and Power Infrastructure: consists of power delivery services provided to investor owned utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, upgrades and maintenance, as well as emergency and storm restoration services. We also provide construction and maintenance services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configuration and provide engineering, fabrication, and construction services for LNG utility peak shaving facilities.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
•Process and Industrial Facilities: primarily serves customers in the downstream and midstream petroleum industries who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. We also serve customers in various other industries such as petrochemical, sulfur, mining and minerals companies engaged primarily in the extraction of non-ferrous metals, aerospace and defense, cement, agriculture, and other industrial customers. Our services include plant maintenance, turnarounds, industrial cleaning services, engineering, fabrication, and capital construction.
•Storage and Terminal Solutions: consists of work related to aboveground storage tanks and terminals. We also include work related to cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum, hydrogen and other specialty vessels such as spheres in this segment, as well work related to marine structures and truck and rail loading/offloading facilities. Our services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, we offer tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.
All prior period segment information has been restated to conform with our new reportable segments. In addition, beginning July 1, 2020, we separately report corporate selling, general and administrative expenses and other corporate expenses that were previously allocated to the segments.
Revenue Recognition
General Information about our Contracts with Customers
Our revenue comes from contracts to provide engineering, procurement, fabrication and construction, repair and maintenance and other services. Our engineering, procurement and fabrication and construction services are usually provided in association with capital projects, which are commonly fixed-price contracts that are billed based on project milestones. Our repair and maintenance services typically are cost reimbursable or time and material based contracts and are billed monthly or, for projects of short duration, at the conclusion of the project. The elapsed time from award to completion of performance may exceed one year for capital projects.
Step 1: Contract Identification
We do not recognize revenue unless we have identified a contract with a customer. A contract with a customer exists when it has approval and commitment from both parties, the rights and obligations of the parties are identified, payment terms are identified, the contract has commercial substance, and collectibility is probable. We also evaluate whether a contract should be combined with other contracts and accounted for as a single contract. This evaluation requires judgment and could change the timing of the amount of revenue and profit recorded for a given period.
Step 2: Identify Performance Obligations
Next, we identify each performance obligation in the contract. A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services to the customer. Revenue is recognized separately for each performance obligation in the contract. Many of our contracts have one clearly identifiable performance obligation. However, many of our contracts provide the customer an integrated service that includes two or more of the following services: engineering, procurement, fabrication, construction, repair and maintenance services. For these contracts, we do not consider the integrated services to be distinct within the context of the contract when the separate scopes of work combine into a single commercial objective or capability for the customer. Accordingly, we generally identify one performance obligation in our contracts. The determination of the number of performance obligations in a contract requires significant judgment and could change the timing of the amount of revenue recorded for a given period.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Step 3: Determine Contract Price
After determining the performance obligations in the contract, we determine the contract price. The contract price is the amount of consideration we expect to receive from the customer for completing the performance obligation(s). In a fixed-price contract, the contract price is a single lump-sum amount. In reimbursable and time and materials based contracts, the contract price is determined by the agreed upon rates or reimbursements for time and materials expended in completing the performance obligation(s) in the contract.
A number of our contracts contain various cost and performance incentives and penalties that can either increase or decrease the contract price. These variable consideration amounts are generally earned or incurred based on certain performance metrics, most commonly related to project schedule or cost targets. We estimate variable consideration at the most likely amount of additional consideration to be received (or paid in the case of penalties), provided that meeting the variable condition is probable. We include estimated amounts of variable consideration in the contract price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the contract price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We reassess the amount of variable consideration each accounting period until the uncertainty associated with the variable consideration is resolved. Changes in the assessed amount of variable consideration are accounted for prospectively as a cumulative adjustment to revenue recognized in the current period.
Step 4: Assign Contract Price to Performance Obligations
After determining the contract price, we assign such price to the performance obligation(s) in the contract. If a contract has multiple performance obligations, we assign the contract price to each performance obligation based on the stand-alone selling prices of the distinct services that comprise each performance obligation.
Step 5: Recognize Revenue as Performance Obligations are Satisfied
We record revenue for contracts with our customers as we satisfy the contracts' performance obligations. We recognize revenue on performance obligations associated with fixed-price contracts for engineering, procurement, fabrication and construction services over time since these services create or enhance assets the customer controls as they are being created or enhanced. We measure progress of satisfying these performance obligations by using the percentage-of-completion method, which is based on costs incurred to date compared to the total estimated costs at completion, since it best depicts the transfer of control of assets being created or enhanced to the customer.
We recognize revenue over time for reimbursable and time and material based repair and maintenance contracts since the customer simultaneously receives and consumes the benefit of those services as we perform work under the contract. As a practical expedient allowed under the revenue accounting standards, we record revenue for these contracts in the amount to which we have a right to invoice for the services performed provided that we have a right to consideration from the customer in an amount that corresponds directly with the value of the performance completed to date.
Costs incurred may include direct labor, direct materials, subcontractor costs and indirect costs, such as salaries and benefits, supplies and tools, equipment costs and insurance costs. Indirect costs are charged to projects based upon direct costs and overhead allocation rates per dollar of direct costs incurred or direct labor hours worked. Typically, customer contracts will include standard warranties that provide assurance that products and services will function as expected. We do not sell separate warranties.
We have numerous contracts that are in various stages of completion which require estimates to determine the forecasted costs at completion. Due to the nature of the work left to be performed on many of our contracts, the estimation of total cost at completion for fixed-price contracts is complex, subject to many variables and requires significant judgment. Estimates of total cost at completion are made each period and changes in these estimates are accounted for prospectively as cumulative adjustments to revenue recognized in the current period. If estimates of costs to complete fixed-price contracts indicate a loss, a provision is made through a contract write-down for the total loss anticipated.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Change Orders
Contracts are often modified through change orders, which are changes to the agreed upon scope of work. Most of our change orders, which may be priced or unpriced, are for goods or services that are not distinct from the existing contract due to the significant integration of services provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a change order on the contract price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. For unpriced change orders, we estimate the increase or decrease to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Unpriced change orders are more fully discussed in Note 7 - Commitments and Contingencies.
Claims
Sometimes we seek claims for amounts in excess of the contract price for delays, errors in specifications and designs, contract terminations, change orders in dispute or other causes of additional costs incurred by us. Recognition of amounts as additional contract price related to claims is appropriate only if there is a legal basis for the claim. The determination of our legal basis for a claim requires significant judgment. We estimate the change to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Claims are more fully discussed in Note 7 - Commitments and Contingencies.
Cash and Cash Equivalents
We include as cash equivalents all investments with original maturities of three months or less which are readily convertible into cash. We have cash on deposit at June 30, 2021 with banks in the United States, Canada, South Korea and Australia in excess of Federal Deposit Insurance Corporation ("FDIC"), Canada Deposit Insurance Corporation ("CDIC"), Korea Deposit Insurance Corporation ("KDIC") and Financial Claims Scheme ("FCS") protection limits, respectively. The United States Dollar equivalent of Canadian, South Korean and Australian deposits totaled $14.1 million as of June 30, 2021.
Accounts Receivable
Accounts receivable are carried on a gross basis, less the allowance for credit losses. Our customers consist primarily of major integrated oil companies, independent refiners and marketers, power companies, petrochemical companies, pipeline companies, mining companies, contractors and engineering firms. We are 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 we can place liens against the property, plant or equipment constructed or terminate the contract if a material contract default occurs. We estimate the allowance for credit losses based on existing economic conditions, the financial condition of our customers and the amount and age of past due accounts. Accounts are written off against the allowance for credit losses only after all reasonable collection attempts have been exhausted.
Retentions
Contract retentions collectible beyond one year are included in Other assets in the Consolidated Balance Sheets. Accounts payable retentions are generally settled within one year.
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.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
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.
Leases
We enter into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. We determine if an arrangement is or contains a lease at inception of the arrangement. An arrangement is determined to be a lease if it conveys the right to control the use of identified property and equipment for a period of time in exchange for consideration. Operating lease right-of-use assets are recognized as the present value of future lease payments over the lease term as of the commencement date, plus any lease payments made prior to commencement, and less any lease incentives received. Operating lease liabilities are recognized as the present value of the future lease payments over the lease term as of the commencement date. Operating lease expense is recognized based on the undiscounted future lease payments over the remaining lease term on a straight-line basis. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term.
Determinations with respect to lease term (including any renewals and terminations), incremental borrowing rate used to discount lease payments, variable lease expense and future lease payments require the use of judgment based on the facts and circumstances related to each lease. We consider various factors, including economic incentives, intent, past history and business need, to determine the likelihood that a renewal option will be exercised.
Right-of-use assets are evaluated for impairment in accordance with our policy for impairment of long-lived assets.
Impairment of Long-Lived Assets
We evaluate 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 impairment test in the fourth quarter of each fiscal year, or in between annual tests whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable, to determine whether an impairment exists and to determine the amount of headroom. We define "headroom" as the percentage difference between the fair value of a reporting unit and its carrying value. The goodwill impairment test involves comparing management’s estimate of the fair value of a reporting unit with its carrying value, including goodwill. 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.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
We utilize a discounted cash flow analysis, referred to as an income approach, and market multiples, referred to as a market approach, to determine the estimated fair value of our reporting units. For the income approach, significant judgments and assumptions including forecasted project awards, discount rate, anticipated revenue growth rate, gross margins, operating expenses, working capital needs and capital expenditures are inherent in the fair value estimates, which are based on our operating and capital budgets and on our strategic plan. As a result, actual results may differ from the estimates utilized in our income approach. For the market approach, significant judgments and assumptions include the selection of guideline companies, forecasted guideline company EBITDA and our forecasted EBITDA. The use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate and could result in the recognition of additional impairment charges in the financial statements. As a test for reasonableness, we also consider the combined fair values of our reporting units to our market capitalization.
Other Intangible Assets
Intangible assets that have finite useful lives are amortized by the straight-line method over their useful lives ranging from 6 years to 15 years. A finite intangible asset is considered impaired when its carrying amount is not recoverable and exceeds the asset's fair value. The carrying amount is deemed unrecoverable if it is greater than the sum of undiscounted cash flows expected to result from use and eventual disposition of the asset. An impairment loss is equal to the excess of the carrying amount over the fair value of the asset. If quoted market prices are not available, the fair values of the intangible assets are based on present values of expected future cash flows or royalties avoided using discount rates commensurate with the risks involved.
Insurance Reserves
We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses through the use of deductibles, coverage limits and self-insured retentions. We establish reserves for claims using a combination of actuarially determined estimates and case-by-case evaluations of the underlying claim data and update our evaluations as further information becomes known. Judgments and assumptions are inherent in our reserve accruals; as a result, changes in assumptions or claims experience could result in changes to these estimates in the future. If actual results of claim settlements are different than the amounts estimated we may be exposed to future gains and losses that could be material.
Stock-Based Compensation
We have issued stock options, nonvested deferred share awards and cash-settled restricted share units under our 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 and cash-settled restricted share units is the value of our common stock at the grant date. The fair value of market-based nonvested deferred shares is based on several factors, including the probability that the market condition specified in the grant will be achieved, which is calculated using a Monte Carlo model. The fair value of stock options is determined based on the Black-Scholes option pricing model. Cash-settled restricted share units must be settled in cash and are accounted for as liability-type awards and are remeasured at the end of each reporting period at fair value until settlement. For all 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. We believe 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.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Foreign Currency
The functional currencies of our operations in Canada, South Korea and Australia are the Canadian Dollar, South Korean Won and U.S. Dollar, respectively. The functional currency of our Australian operations is the U.S. Dollar since its sales are primarily denominated in that currency. For subsidiaries with operations using a foreign functional currency, assets and liabilities are translated at the year-end exchange rates and the income statement accounts are translated at average exchange rates throughout the year. Translation gains and losses are reported in Accumulated Other Comprehensive Loss, net of tax, in the Consolidated Statements of Changes in Stockholders’ Equity and in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income. Translation gains and losses are reversed from Accumulated Other Comprehensive Income (Loss) and are recognized in current period income in the event we dispose of an entity with accumulated translation gains or losses. Transaction gains and losses are reported as a component of Other income (expense) in the Consolidated Statements of Income.
Note 2 – Revenue
Remaining Performance Obligations
We had $365.6 million of remaining performance obligations yet to be satisfied as of June 30, 2021. We expect to recognize approximately $297.6 million of our remaining performance obligations as revenue within the next twelve months.
Contract Balances
Contract terms with customers include the timing of billing and payment, which usually differs from the timing of revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets and liabilities are calculated on a contract-by-contract basis and reported on a net basis at the end of each period and are classified as current. We present our contract assets in the balance sheet as Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts ("CIE"). CIE consists of revenue recognized in excess of billings. We present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and Estimated Earnings ("BIE"). BIE consists of billings in excess of revenue recognized. The following table provides information about CIE and BIE:
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June 30,
2021
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June 30,
2020
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Change
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(In thousands)
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Costs and estimated earnings in excess of billings on uncompleted contracts
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$
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30,774
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$
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59,548
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$
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(28,774)
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Billings on uncompleted contracts in excess of costs and estimated earnings
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(53,832)
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(63,889)
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|
|
10,057
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Net contract liabilities
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$
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(23,058)
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$
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(4,341)
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|
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$
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(18,717)
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|
The difference between the beginning and ending balances of our CIE and BIE primarily results from the timing of revenue recognized relative to its billings. The amount of revenue recognized during the fiscal year ended June 30, 2021 that was included in the prior period BIE balance was $58.6 million. This revenue consists primarily of work performed during the period on contracts with customers that had advance billings.
Progress billings in accounts receivable at June 30, 2021 and June 30, 2020 included retentions to be collected within one year of $19.9 million and $37.3 million, respectively. Contract retentions collectible beyond one year are included in other assets in the Consolidated Balance Sheets and totaled $3.1 million as of June 30, 2021 and $1.6 million as of June 30, 2020.
Disaggregated Revenue
Revenue disaggregated by reportable segment is presented in Note 13 - Segment Information. The following series of tables presents revenue disaggregated by geographic area where the work was performed and by contract type:
Geographic Disaggregation:
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Fiscal Years Ended
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June 30,
2021
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June 30,
2020
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June 30,
2019
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(In thousands)
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United States
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$
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604,739
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$
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1,020,083
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$
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1,367,844
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Canada
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61,703
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70,133
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41,410
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Other international
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6,956
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10,722
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7,426
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Total
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$
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673,398
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$
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1,100,938
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$
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1,416,680
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Contract Type Disaggregation:
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Fiscal Years Ended
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June 30,
2021
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June 30,
2020
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June 30,
2019
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(In thousands)
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Fixed-price contracts
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$
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444,042
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$
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685,559
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$
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748,007
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Time and materials and other cost reimbursable contracts
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229,356
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415,379
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668,673
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Total
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$
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673,398
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$
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1,100,938
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$
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1,416,680
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Typically, we assume more risk with fixed-price contracts since increases in cost to perform the work may not be recoverable. However, these types of contracts typically offer higher profits than time and materials and other cost reimbursable contracts when completed at or below the costs originally estimated. The profitability of time and materials and other cost reimbursable contracts is typically lower than fixed-price contracts and is usually less volatile than fixed-price contracts since the profit component is factored into the rates charged for labor, equipment and materials, or is expressed in the contract as a percentage of the reimbursable costs incurred.
Other
Our results of operations in fiscal 2021 were materially impacted by increases in the forecasted costs to complete a large capital project in the Utility and Power Infrastructure segment. The project reduced gross profit by $5.8 million in fiscal 2021. The changes in estimate were due to lower than previously forecasted productivity caused by excessive rain at the project site, the continuing impact of COVID-19, and rework which led to higher costs and schedule compression. This project was nearly complete at year-end and we are performing start-up and commissioning work in the first quarter of fiscal 2022.
During the fourth quarter of fiscal 2021, we reached a settlement on a contract dispute over the construction of a crude oil terminal. The project's financial impact for the fiscal year ended June 30, 2021 was a $2.9 million reduction to gross profit in the Storage and Terminal Solutions segment. The settlement resulted in a cash receipt of $8.9 million in the first quarter of fiscal 2022, which enabled us to avoid future legal costs and litigation risk.
During the third quarter of fiscal 2021, we achieved mechanical completion of a large crude oil terminal project, demobilized from the project site and completed its assessment of additional recovery of unpriced change orders. The project's financial impact for the fiscal year ended June 30, 2021 was a $3.8 million reduction to gross profit in the Storage and Terminal Solutions segment.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Note 3—Disposals
Sale of Process Heating Business
In August 2018, we sold non-core assets associated with a business that marketed process heating equipment for $3.9 million in cash, including $0.2 million of customary final post-closing adjustments paid in October 2018. We recognized a gain of $0.4 million on the sale, which was included in Other in the Consolidated Statements of Income. The revenue and operating results of the business, which were included in the Process and Industrial Facilities segment, were not material.
Note 4—Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
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Utility and Power
Infrastructure
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Process and Industrial Facilities
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Storage and Terminal
Solutions
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Total
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(In thousands)
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Net balance at June 30, 2018
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$
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31,848
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$
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37,612
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|
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$
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26,702
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|
|
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$
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96,162
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Disposal of business (1)
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—
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(2,775)
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—
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(2,775)
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Translation adjustment (2)
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(8)
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5
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(16)
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(19)
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Net balance at June 30, 2019
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31,840
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34,842
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|
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26,686
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|
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|
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93,368
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Goodwill impairment
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(24,900)
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|
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(7,981)
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—
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(32,881)
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Translation adjustment (2)
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(35)
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(15)
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(68)
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(118)
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Net balance at June 30, 2020
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6,905
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26,846
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26,618
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60,369
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Translation adjustment(2)
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79
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|
32
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|
|
156
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|
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|
|
267
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Net balance at June 30, 2021
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|
$
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6,984
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|
|
$
|
26,878
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|
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$
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26,774
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|
|
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$
|
60,636
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)In August 2018, we disposed of a business that marketed process heating equipment. See Note 3 - Acquisitions and Disposals for more information about the disposal. The business disposed of constituted its own reporting unit and the amount of goodwill written off was all of the goodwill assigned to that reporting unit. None of the goodwill was considered impaired since we recorded a gain on the disposal.
(2)The translation adjustments relate to the periodic translation of Canadian Dollar and South Korean Won denominated goodwill recorded as a part of prior acquisitions in Canada and South Korea, in which the local currency was determined to be the functional currency.
We performed our annual goodwill impairment test as of May 31, 2021, which resulted in no impairment. The fiscal 2021 test indicated that four reporting units with a combined total of $37.7 million of goodwill as of June 30, 2021 were at higher risk of future impairment than others. If our view of project opportunities or gross margins deteriorates, particularly for the higher risk reporting units, then we may be required to record an impairment.
In the second quarter of fiscal 2020, we concluded that a goodwill impairment indicator existed in the Utility and Power Infrastructure segment based on the recent history of depressed gross margins and the second quarter’s downward acceleration of revenue and gross margin. Accordingly, we performed an interim impairment test as of December 31, 2019, reflecting updated revenue and gross margin assumptions, and concluded that the reporting unit's $24.9 million of goodwill was fully impaired. Additionally, we concluded that a goodwill impairment indicator existed for a Process and Industrial Facilities segment reporting unit based on several second quarter events. These events included the deterioration of our relationship with a significant customer in the iron and steel industry in the second quarter. As a result, the customer canceled other previously awarded work and we received no subsequent business from this customer. Accordingly, we performed an interim impairment test as of December 31, 2019 and concluded that the reporting unit's $8.0 million of goodwill was fully impaired.
The estimated fair value of each reporting unit was derived primarily by utilizing a discounted cash flow analysis. The key assumptions used are described in Note 1 - Summary of Significant Accounting Policies.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Other Intangible Assets
In the fourth quarter of fiscal 2020, we fully impaired a customer relationship intangible asset with a net book value of $1.2 million. The customer relationship primarily related to services which were impacted by our performance improvement plan (see Note 14 - Restructuring Costs). As a result, the customer relationship intangible asset was no longer recoverable. As of June 30, 2020, this intangible asset had a remaining useful life of approximately 2 years, a gross carrying amount of $6.3 million and accumulated amortization of $5.1 million. The impairment is included in restructuring costs in the Consolidated Statements of Income.
Also in the fourth quarter of fiscal 2020, we fully impaired a customer relationship intangible asset with a net book value of $0.4 million in connection with the closure of an underperforming operating unit. The closure was part of our performance improvement plan (see Note 14 - Restructuring Costs). As of June 30, 2020, this intangible asset had a remaining useful life of approximately 4 years, a gross carrying amount of $0.9 million and accumulated amortization of $0.5 million. The impairment is included in the restructuring costs caption in the Consolidated Statements of Income.
In the second quarter of fiscal 2020, in connection with the factors disclosed for the Process and Industrial Facilities segment goodwill impairment above, we fully impaired a customer relationship with a net book value of $5.6 million. As of December 31, 2019, this intangible asset had a remaining useful life of 9 years, a gross carrying amount of $9.4 million and accumulated amortization of $3.8 million. The impairment is included within the goodwill and other intangible asset impairment caption in the Consolidated Statements of Income.
Information on the carrying value of other intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2021
|
|
|
Useful Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
(Years)
|
|
(In thousands)
|
Intellectual property
|
|
10 to 15
|
|
$
|
2,483
|
|
|
$
|
(2,031)
|
|
|
$
|
452
|
|
Customer based
|
|
6 to 15
|
|
17,354
|
|
|
(11,192)
|
|
|
6,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
|
$
|
19,837
|
|
|
$
|
(13,223)
|
|
|
$
|
6,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2020
|
|
|
Useful Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
(Years)
|
|
(In thousands)
|
Intellectual property
|
|
10 to 15
|
|
$
|
2,579
|
|
|
$
|
(1,956)
|
|
|
$
|
623
|
|
Customer based
|
|
6 to 15
|
|
21,840
|
|
|
(13,626)
|
|
|
8,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
|
|
$
|
24,419
|
|
|
$
|
(15,582)
|
|
|
$
|
8,837
|
|
Amortization expense totaled $2.3 million, $3.4 million, and $3.3 million in fiscal 2021, 2020, and 2019, respectively.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
We estimate that future amortization of other intangible assets will be as follows (in thousands):
|
|
|
|
|
|
For year ending:
|
|
June 30, 2022
|
$
|
1,819
|
|
June 30, 2023
|
1,729
|
|
June 30, 2024
|
1,415
|
|
June 30, 2025
|
1,096
|
|
June 30, 2026
|
555
|
|
|
|
Total estimated amortization expense
|
$
|
6,614
|
|
Note 5—Debt
ABL Credit Facility
On September 9, 2021, we and our primary U.S. and Canada operating subsidiaries entered into an asset-backed credit agreement (the "ABL Facility") as borrowers with Bank of Montreal, as Administrative Agent, Swing-Line Lender, a Letter of Credit Issuer and a Lender. The ABL Facility is guaranteed by substantially all of our remaining U.S. and Canadian subsidiaries. The ABL Facility provides for available borrowings of up to $100.0 million, which may be increased further by an amount not to exceed $15.0 million, subject to certain conditions, including obtaining additional commitments. The ABL Facility is intended to be used for working capital, capital expenditures, issuances of letters of credit and other lawful purposes. Our obligations under the ABL Facility are secured by a first lien on all our assets and the assets of our co-borrowers and guarantors under the ABL Facility.
The maximum amount that we may borrow under the ABL Facility is subject to a borrowing base, which is based on restricted cash plus a percentage of the value of certain accounts receivable, inventory and equipment, reduced for certain reserves. We are required to maintain a minimum of $25.0 million of restricted cash at all times, but such amounts are also included in the borrowing base. At September 9, 2021, availability under the ABL Facility was $25.9 million and there were $43.5 million in letters of credit outstanding. The ABL Facility matures and any outstanding amounts become due and payable on September 9, 2026.
Borrowings under the ABL Facility bear interest through maturity at a variable rate based upon, at our option, an annual rate of either a base rate (“Base Rate”), CDOR rate or a LIBOR rate, plus an applicable margin. The Base Rate is defined as a fluctuating interest rate equal to the greatest of (i) rate of interest announced by Bank of Montreal from time to time as its prime rate; (ii) the U.S. federal funds rate plus 0.50%, and (iii) LIBOR rate for one month period plus 1.00%. Depending on the amount of average availability, the applicable margin is between 1.00% to 1.50% for Base Rate, which includes either U.S. or Canadian prime rate, and between 2.00% and 2.50% for CDOR and LIBOR rate borrowings. Interest is payable either (i) monthly for Base Rate borrowings or (ii) the last day of the interest period for LIBOR or CDOR rate borrowings, as set forth in the Credit Agreement. The fee for undrawn amounts is 0.25% per annum and is due quarterly.
The ABL Facility contains customary conditions to borrowings, events of default and covenants, including, but not limited to, covenants that restrict our ability to sell assets, engage in mergers and acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay cash dividends, issue equity instruments, make distribution or redeem or repurchase capital stock. In the event that our availability is less than the greater of (i) $15.0 million and (ii) 15.00% of the lesser of (1) the current borrowing base and (2) the commitments under the ABL Facility then in effect, a consolidated Fixed Charge Coverage Ratio of at least 1.00 to 1.00 must be maintained.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Senior Secured Revolving Credit Facility
The ABL Facility replaced the Fifth Amended and Restated Credit Agreement (the "Prior Credit Agreement"), that was entered into on November 2, 2020, and subsequently amended on May 4, 2021, by and among us and certain foreign subsidiaries, as Borrowers, various subsidiaries of ours, as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole Book Runner, and the other Lenders party thereto. The Prior Credit Agreement provided for a three-year senior secured revolving credit facility of $200.0 million that expired November 2, 2023.
We had no borrowings and $41.3 million of letters of credit outstanding under the Prior Credit Agreement as of June 30, 2021. We had $9.2 million of borrowings and $34.5 million of letters of credit outstanding under the Prior Credit Agreement as of June 30, 2020.
Each revolving borrowing under the Prior Credit Agreement bore interest at a rate per annum equal to a base rate, plus a margin of 1.00% to 3.50%. The unused credit facility fee was between 0.35% and 0.50% based on the Leverage Ratio as defined in the Prior Credit Agreement.
The Prior Credit Agreement contained customary financial, negative and affirmative covenants and limited our borrowing availability based on our EBITDA, as it was defined in the Prior Credit Agreement. The Prior Credit Agreement also limited our ability to make acquisitions, repurchase shares, make capital expenditures and dispose of assets.
Note 6—Income Taxes
Coronavirus Aid, Relief, and Economic Security Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the "CARES Act") was signed into law. The purpose of the CARES Act was to provide $2.2 trillion in funding to fight the COVID-19 pandemic and provide economic relief in the form of tax relief, government loans and grants. The CARES Act contains the following key provisions which affect income taxes:
•Eliminates the 80% of taxable income limitations by allowing corporations to fully utilize net operating loss carryforwards to offset taxable income in 2018, 2019, or 2020 and reinstating it for tax years after 2020;
•Allows net operating losses generated in 2018, 2019 or 2020 to be carried back five years;
•Increases the net interest expense deduction limit to 50% of adjusted taxable income from 30% for the 2019 and 2020 tax years;
•Allows taxpayers with alternative minimum tax credits to claim a refund for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as required by the 2017 Tax Cuts and Jobs Act; and
•Allows entities to deduct more of their charitable cash contributions made during calendar year 2020 by increasing the taxable income limitation to 25% from 10%.
Through provisions in the CARES Act, we have an income tax benefit of $5.2 million from the ability to carryback the fiscal 2021 federal net operating loss to a period with a higher statutory federal income tax rate. We estimate that we will receive a $13.0 million tax refund in connection with the carryback of the fiscal 2021 net operating loss, which is included in income taxes receivable in the Consolidated Balance Sheets.
We have deferred $11.1 million of U.S. payroll tax as of June 30, 2021 through provisions of the CARES Act. The deferred payroll taxes are included within other accrued expenses and other liabilities in the Consolidated Balance Sheets. We must repay half of the deferred payroll tax by December 31, 2021 and the remainder by December 31, 2022.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Sources of pretax income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
June 30,
2021
|
|
June 30,
2020
|
|
June 30,
2019
|
|
|
(In thousands)
|
Domestic
|
|
$
|
(38,867)
|
|
|
$
|
(32,660)
|
|
|
$
|
46,032
|
|
Foreign
|
|
(4,396)
|
|
|
(3,984)
|
|
|
(7,620)
|
|
Total
|
|
$
|
(43,263)
|
|
|
$
|
(36,644)
|
|
|
$
|
38,412
|
|
Components of the provision for income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
June 30,
2021
|
|
June 30,
2020
|
|
June 30,
2019
|
|
|
(In thousands)
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(13,154)
|
|
|
$
|
(376)
|
|
|
$
|
6,085
|
|
State
|
|
465
|
|
|
412
|
|
|
2,390
|
|
Foreign
|
|
(239)
|
|
|
23
|
|
|
(97)
|
|
|
|
(12,928)
|
|
|
59
|
|
|
8,378
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
774
|
|
|
(5,000)
|
|
|
(528)
|
|
State
|
|
(291)
|
|
|
(1,091)
|
|
|
451
|
|
Foreign
|
|
406
|
|
|
2,462
|
|
|
2,129
|
|
|
|
889
|
|
|
(3,629)
|
|
|
2,052
|
|
|
|
$
|
(12,039)
|
|
|
$
|
(3,570)
|
|
|
$
|
10,430
|
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Reconciliation between the expected income tax provision applying the domestic federal statutory tax rate and the reported income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
June 30,
2021
|
|
June 30,
2020
|
|
June 30,
2019
|
|
|
(In thousands)
|
Expected provision (benefit) for federal income taxes at the statutory rate
|
|
$
|
(9,085)
|
|
|
$
|
(7,695)
|
|
|
$
|
8,067
|
|
State income taxes, net of federal benefit
|
|
(1,240)
|
|
|
(768)
|
|
|
2,288
|
|
|
|
|
|
|
|
|
Impairment of non-deductible goodwill(1)
|
|
—
|
|
|
1,813
|
|
|
—
|
|
Charges without tax benefit
|
|
961
|
|
|
1,707
|
|
|
1,233
|
|
Change in valuation allowance(2)
|
|
2,797
|
|
|
3,062
|
|
|
4,512
|
|
Reversal of branch liability(2)
|
|
—
|
|
|
—
|
|
|
(3,546)
|
|
Excess tax expense (benefit) on stock-based compensation
|
|
1,826
|
|
|
230
|
|
|
(296)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development and other tax credits
|
|
(1,707)
|
|
|
(1,724)
|
|
|
(1,972)
|
|
Foreign tax differential
|
|
(96)
|
|
|
(132)
|
|
|
(248)
|
|
Federal rate differential net operating loss carryback(3)
|
|
(5,223)
|
|
|
—
|
|
|
—
|
|
Change in uncertain tax positions
|
|
(7)
|
|
|
20
|
|
|
22
|
|
|
|
|
|
|
|
|
Other
|
|
(265)
|
|
|
(83)
|
|
|
370
|
|
Provision (benefit) for federal, state and foreign income taxes
|
|
$
|
(12,039)
|
|
|
$
|
(3,570)
|
|
|
$
|
10,430
|
|
(1)In fiscal 2020, we impaired $32.9 million of goodwill, which included $8.6 million of non-deductible goodwill. See Note 4 - Goodwill and Other Intangible Assets for more information about the impairments.
(2)In fiscal 2021, we placed $2.8 million of valuation allowances, including $1.5 million on certain state net operating loss carryforwards due to a recent history of cumulative losses for a subsidiary. In fiscal 2020, we placed $3.1 million of valuation allowances on net operating loss carryforwards and foreign tax credits primarily related to Canada. In fiscal 2019, we placed $4.5 million of valuation allowances on net operating loss carryforwards and foreign tax credits generated by branch operations in Canada, which will likely not be utilized prior to their expiration. These valuation allowances were largely offset by the reversal $3.5 million of branch liabilities associated with the Canadian net operating loss carryforwards and foreign tax credits.
(3)Relates to fiscal 2021 net operating losses carried back under provisions of the CARES Act to fiscal years 2016 and 2017 which had a 35% federal tax rate.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Significant components of our deferred tax assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
June 30,
2020
|
|
|
(In thousands)
|
Deferred tax assets:
|
|
|
|
|
Warranty reserve
|
|
$
|
206
|
|
|
$
|
206
|
|
Bad debt reserve
|
|
231
|
|
|
233
|
|
Paid-time-off accrual
|
|
747
|
|
|
669
|
|
Insurance reserve
|
|
1,229
|
|
|
1,221
|
|
Legal reserve
|
|
146
|
|
|
207
|
|
Net operating loss benefit and credit carryforwards
|
|
14,966
|
|
|
10,354
|
|
Valuation allowance
|
|
(11,104)
|
|
|
(7,763)
|
|
Accrued compensation and pension
|
|
690
|
|
|
1,447
|
|
Prepaid insurance
|
|
27
|
|
|
—
|
|
Stock compensation expense on nonvested deferred shares
|
|
1,895
|
|
|
3,231
|
|
Accrued losses
|
|
64
|
|
|
96
|
|
Restructuring reserve
|
|
725
|
|
|
1,381
|
|
Book over tax amortization
|
|
3,765
|
|
|
5,195
|
|
Deferred FICA
|
|
1,920
|
|
|
—
|
|
Foreign currency translation and other
|
|
665
|
|
|
843
|
|
Total deferred tax assets
|
|
16,172
|
|
|
17,320
|
|
Deferred tax liabilities:
|
|
|
|
|
Tax over book depreciation
|
|
10,315
|
|
|
11,313
|
|
|
|
|
|
|
Branch future liability
|
|
—
|
|
|
74
|
|
|
|
|
|
|
Receivable holdbacks and other
|
|
596
|
|
|
6
|
|
Total deferred tax liabilities
|
|
10,911
|
|
|
11,393
|
|
Net deferred tax asset
|
|
$
|
5,261
|
|
|
$
|
5,927
|
|
As reported in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
June 30,
2020
|
|
|
(In thousands)
|
Deferred income tax assets
|
|
5,295
|
|
|
5,988
|
|
Deferred income tax liabilities
|
|
(34)
|
|
|
(61)
|
|
Net deferred tax asset
|
|
5,261
|
|
|
$
|
5,927
|
|
Operating loss and tax credit carryforwards
We have 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, 2021 and June 30, 2020 reduces the recognized tax benefit of these carryforwards to an amount that is more likely than not to be realized. These carryforwards will generally expire as shown below:
|
|
|
|
|
|
|
|
|
Operating Loss Carryforwards
|
Expiration Period
|
Amount (in thousands)
|
State net operating losses
|
June 2025 to indefinite
|
$
|
57,786
|
|
Foreign net operating losses
|
June 2029 to June 2041
|
$
|
33,242
|
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
Tax Credit Carryforwards
|
Expiration Period
|
Amount (in thousands)
|
State tax credits
|
June 2033 to indefinite
|
$
|
578
|
|
Federal tax credits
|
June 2041
|
$
|
1,087
|
|
Federal foreign tax credits
|
June 2023 to June 2025
|
$
|
655
|
|
Foreign tax credits
|
June 2035 to June 2041
|
$
|
687
|
|
Other
In general, it is our practice and intention to reinvest the earnings of our foreign subsidiaries in our foreign operations. We do not provide for outside basis differences under the indefinite reinvestment assertion of ASC 740-30.
We file tax returns in multiple domestic and foreign taxing jurisdictions. With a few exceptions, we are no longer subject to examination by taxing authorities through fiscal 2016. At June 30, 2021, we updated our evaluation of our open tax years in all known jurisdictions. As of June 30, 2021, we have a $0.3 million liability for unrecognized tax positions and the payment of related interest and penalties. We treat the related interest and penalties as income tax expense. Due to the uncertainties related to these tax matters, we are unable to make a reasonably reliable estimate as to when cash settlement with a taxing authority will occur.
Note 7—Commitments and Contingencies
Insurance Reserves
We maintain insurance coverage for various aspects of our 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. We 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. We maintain a performance and payment bonding line sufficient to support the business. We generally require our subcontractors to indemnify us and our customer and name us 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 us, to secure the subcontractors’ work or as required by the subcontract.
There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against a valid claim or loss under the contracts with our customers.
Unpriced Change Orders and Claims
As of June 30, 2021 and June 30, 2020, costs and estimated earnings in excess of billings on uncompleted contracts included revenue for unpriced change orders and claims of $14.6 million and $14.5 million, respectively. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings. Generally we expect collection of amounts related to unpriced change orders and claims within twelve months. However, customers may not pay these amounts until final resolution of related claims, which may extend beyond one year.
Other
During the fourth quarter of fiscal 2021, we settled a contract dispute over the construction of a crude oil terminal, which resulted in a reduction of gross profit of $2.9 million. The settlement resulted in a cash receipt of $8.9 million in the first quarter of fiscal 2022, which enabled us to avoid future legal costs and litigation risk.
During the third quarter of fiscal 2020, we commenced litigation in an effort to collect accounts receivable from an iron and steel customer following the deterioration of the relationship in the second quarter of fiscal 2020. The unpaid receivable balance at June 30, 2021 was $17.0 million. Litigation is unpredictable, however, based on the terms of the contract with this customer, we believe we are entitled to collect the full amount owed under the contract.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
We and our subsidiaries are participants in various legal actions. It is the opinion of management that none of the other known legal actions, including a contract dispute with a customer involving the construction of a crude terminal, will have a material impact on our financial position, results of operations or liquidity.
Note 8— Leases
We enter into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. Real estate leases accounted for approximately 94% of all right-of-use assets as of June 30, 2021. Most real estate and information technology equipment leases generally have fixed payments that follow an agreed upon payment schedule and have remaining lease terms ranging from less than a year to 15 years. Construction equipment leases generally have "month-to-month" lease terms that automatically renew as long as the equipment remains in use.
We recorded $0.5 million of impairments to right-of-use assets related to leased office space that was closed in connection with our restructuring activities, see Note 14 – Restructuring Costs for additional information.
The components of lease expense in the Consolidated Statements of Income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
June 30, 2021
|
|
June 30, 2020
|
Lease expense
|
|
Location of Expense in Consolidated Statements of Income
|
|
(in thousands)
|
Operating lease expense
|
|
Cost of revenue and selling, general and administrative expenses
|
|
$
|
8,386
|
|
|
$
|
12,274
|
|
Short-term lease expense(1)
|
|
Cost of revenue
|
|
25,912
|
|
|
37,371
|
|
Total lease expense
|
|
|
|
$
|
34,298
|
|
|
$
|
49,645
|
|
(1)Primarily represents the lease expense of construction equipment that is subject to month-to-month rental agreements with expected rental durations of less than one year.
The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in our Consolidated Balance Sheets, were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
Maturity Analysis:
|
|
(in thousands)
|
Fiscal 2022
|
|
$
|
6,548
|
|
Fiscal 2023
|
|
4,684
|
|
Fiscal 2024
|
|
3,600
|
|
Fiscal 2025
|
|
3,143
|
|
Fiscal 2026
|
|
2,866
|
|
Thereafter
|
|
11,224
|
|
Total future operating lease payments
|
|
32,065
|
|
Imputed interest
|
|
(5,547)
|
|
Net present value of future lease payments
|
|
26,518
|
|
Less: current portion of operating lease liabilities
|
|
5,747
|
|
Non-current operating lease liabilities
|
|
$
|
20,771
|
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of June 30, 2021:
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years)
|
|
7.3 years
|
Weighted-average discount rate
|
|
5.3
|
%
|
Supplemental cash flow information related to leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
June 30, 2021
|
|
|
(in thousands)
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating lease payments
|
|
$
|
9,922
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
|
Operating leases
|
|
$
|
8,342
|
|
Note 9—Stockholders’ Equity
Preferred Stock
We have 5.0 million shares of preferred stock authorized, none of which was issued or outstanding at June 30, 2021 or June 30, 2020.
Treasury Shares
The terms of our Credit Agreement limit share repurchases to $2.5 million per fiscal year provided that that we do not violate our Fixed Charge Coverage Ratio financial covenant (see Note 5 - Debt for more information about our Credit Agreement). We may repurchase common stock pursuant to the Stock Buyback Program, which was approved by the board of directors in November 2018. Under the program, the aggregate number of shares repurchased may not exceed 2,707,175 shares. We may repurchase our stock from time to time in the open market at prevailing market prices or in privately negotiated transactions and are not obligated to purchase any shares. The program will continue unless and until it is modified or revoked by the Board of Directors. We made no repurchases under the program in fiscal 2021 and have no current plans to repurchase stock in the near-term. There were 1,349,037 shares available for repurchase under the November 2018 Program as of June 30, 2021.
In addition to the stock buyback program, we may withhold shares of common stock to satisfy the tax withholding obligations upon vesting of an employee’s deferred shares. We withheld 170,629 and 181,081 shares of common stock during fiscal 2021 and 2020, respectively, to satisfy these obligations. These shares were returned to our pool of treasury shares. We have 1,338,779 treasury shares as of June 30, 2021 and intend to utilize these treasury shares in connection with equity awards under our incentive plans and for sales to the Employee Stock Purchase Plan.
Note 10—Stock-Based Compensation
Total stock-based compensation expense for the fiscal years ended June 30, 2021, June 30, 2020, and June 30, 2019 was $8.2 million, $9.9 million and $11.9 million, respectively. Measured but unrecognized stock-based compensation expense at June 30, 2021 was $8.6 million, all of which related to nonvested deferred shares which are expected to be recognized as expense over a weighted average period of 1.6 years. We recognized excess tax expense of $1.8 million and $0.2 million related to stock-based compensation vesting for the fiscal years ended June 30, 2021 and 2020, respectively. We recognized excess tax benefits of $0.3 million for the fiscal year ended June 30, 2019 related to stock-based compensation vesting.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Plan Information
In November 2020, our stockholders approved the Matrix Service Company 2020 Stock and Incentive Compensation Plan (the "2020 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 2020 Plan, the 2018 Stock and Incentive Compensation Plan ("2018 Plan") was frozen with the exception of normal vesting and other activity associated with awards previously granted under the 2018 Plan. The 2018 Plan was preceded by the 2016 Stock Incentive Plan ("2016 Plan"), which was frozen upon approval of the 2018 Plan with the exception of normal vesting, forfeiture and other activity associated with awards previously granted under the 2016 Plan. Shares awarded under either the 2018 Plan or 2016 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 2020 Plan. The 2016 Plan was preceded by the 2012 Stock Incentive Plan ("2012 Plan") and the 2004 Stock Incentive Plan ("2004 Plan"), which were frozen upon approval of the 2016 Plan and 2012 Plan, respectively, with the exception of normal vesting, forfeiture and other activity associated with awards previously granted under the 2012 Plan and 2004 Plan. There are no outstanding awards under the 2012 Plan, but there were stock option awards outstanding under the 2004 Plan as of June 30, 2021 - see Stock Options section below.
Awards totaling 1,725,000 shares have been authorized under the 2020 Plan. There were 1,769,487 shares available for grant under the 2020 Plan as of June 30, 2021.
Stock Options
Stock options are granted at the market value of our common stock on the grant date and expire after 10 years. Our policy is to issue shares upon the exercise of stock options from its treasury shares, if available. We did not award any new stock options in fiscal years 2021, 2020, or 2019. The options outstanding as of June 30, 2021 expire on November 17, 2021.
Stock option activity and related information for the fiscal year ended June 30, 2021 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, 2020
|
|
53,700
|
|
|
1.4
|
|
$
|
10.19
|
|
|
$
|
—
|
|
Granted
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
(34,150)
|
|
|
|
|
$
|
10.19
|
|
|
82
|
|
Canceled
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
Outstanding at June 30, 2021
|
|
19,550
|
|
|
0.4
|
|
$
|
10.19
|
|
|
$
|
6
|
|
Vested at June 30, 2021
|
|
19,550
|
|
|
0.4
|
|
$
|
10.19
|
|
|
$
|
6
|
|
Exercisable at June 30, 2021
|
|
19,550
|
|
|
0.4
|
|
$
|
10.19
|
|
|
$
|
6
|
|
The total intrinsic value of stock options exercised was $0.1 million during fiscal year 2021 and fiscal 2019. No stock options were exercised in fiscal 2020.
Nonvested Deferred Shares
We have issued nonvested deferred shares under the following types of arrangements:
•Time-based awards—Employee awards generally vest in four equal annual installments beginning one year after the grant date. Beginning in fiscal 2019, the award agreements contain a provision that accelerates the vesting for retirement eligible participants and participants that become retirement eligible during the vesting period and who elect to retire more than one year after the date of the award. The award is forfeited if retirement occurs before the first anniversary of the award. Settlement still occurs on the normal vesting schedules. Director awards vest one year after the grant date.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
•Market-based awards—These awards are in the form of performance units which vest 3 years after the grant date only if our 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, 2021, there are approximately 147,000, 174,000, and 369,000 performance units that are scheduled to vest in fiscal 2022, fiscal 2023, and fiscal 2024, respectively, assuming target performance.
All awards under the 2020 Plan vest upon the death or disability of the participant or upon a change of control of the Company, provided that the successor company fails to assume or replace the awards in connection with that change of control event. If the successor company does assume the awards, then vesting of the awards will be accelerated in the event of an involuntary termination or other material adverse event that occurs in connection with or following the change of control. All awards prior to the 2020 Plan 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 our common stock on the grant date. The grant date fair value of stock options is determined based on the Black-Scholes option pricing model. The grant date fair value of the market-based awards is calculated using a Monte Carlo model. For the fiscal 2021 grant, the model estimated the fair value of the award based on approximately 100,000 simulations of the future prices of our common stock compared to the future prices of the common stock of its peer companies based on historical volatilities. The model also took into account the expected dividends over the performance period of those peer companies which pay cash dividends.
Nonvested deferred share activity for the fiscal year ended June 30, 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant
Date Fair Value per
Share
|
Nonvested shares at June 30, 2020
|
|
1,234,918
|
|
|
$
|
20.89
|
|
Shares granted
|
|
665,597
|
|
|
$
|
10.60
|
|
Performance shares earned in excess of target
|
|
15,314
|
|
|
$
|
—
|
|
Shares vested and released
|
|
(515,218)
|
|
|
$
|
16.99
|
|
Shares canceled
|
|
(119,904)
|
|
|
$
|
20.67
|
|
Nonvested shares at June 30, 2021
|
|
1,280,707
|
|
|
$
|
17.07
|
|
There were 490,322 and 602,148 deferred shares granted in fiscal 2020 and 2019 with average grant date fair values of $21.79 and $25.10 per share, respectively. There were 542,279 and 314,711 deferred shares that vested and were released in fiscal 2020 and 2019 with weighted average fair values of $19.43 and $16.23 per share, respectively.
Cash-Settled Restricted Share Units
In fiscal 2021, we granted 238,848 cash-settled restricted share units with a grant date fair value of $2.3 million. No cash-settled restricted share units were granted in fiscal years 2020 and 2019 and no settlements have occurred. The grant date fair value of these awards is based on the price of our common stock and the number of shares awarded on the date of grant. The award must be settled in cash and is accounted for as a liability-type award. The expense is recognized over the requisite service period with remeasurement at the end of each reporting period at fair value until settlement. The requisite service period is based on the vesting provisions of the awards which generally occur in four equal annual installments beginning one year after the grant date. These awards contain the same retirement provisions described for time-based awards in the nonvested deferred shares section above. We recognized $1.0 million of expense in fiscal 2021 for cash-settled restricted share units, which was included in selling, general and administrative expenses and cost of revenue in the Consolidated Statements of Income. As of June 30, 2021, the liability for cash-settled restricted share units was $1.0 million and is included in accrued wages and benefits in the Consolidated Balance Sheets.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
June 30,
2021
|
|
June 30,
2020
|
|
June 30,
2019
|
|
|
(In thousands, except per share data)
|
Basic EPS:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(31,224)
|
|
|
$
|
(33,074)
|
|
|
$
|
27,982
|
|
Weighted average shares outstanding
|
|
26,451
|
|
|
26,621
|
|
|
26,891
|
|
Basic earnings (loss) per share
|
|
$
|
(1.18)
|
|
|
$
|
(1.24)
|
|
|
$
|
1.04
|
|
Diluted EPS:
|
|
|
|
|
|
|
Weighted average shares outstanding—basic
|
|
26,451
|
|
|
26,621
|
|
|
26,891
|
|
Dilutive stock options
|
|
—
|
|
|
—
|
|
|
28
|
|
Dilutive nonvested deferred shares
|
|
—
|
|
|
—
|
|
|
668
|
|
Diluted weighted average shares
|
|
26,451
|
|
|
26,621
|
|
|
27,587
|
|
Diluted earnings (loss) per share
|
|
$
|
(1.18)
|
|
|
$
|
(1.24)
|
|
|
$
|
1.01
|
|
The following securities are considered antidilutive and have been excluded from the calculation of diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
June 30,
2021
|
|
June 30,
2020
|
|
June 30,
2019
|
|
|
(In thousands of shares)
|
Stock options
|
|
3
|
|
|
19
|
|
|
—
|
|
Nonvested deferred shares
|
|
399
|
|
|
662
|
|
|
160
|
|
Total antidilutive securities
|
|
402
|
|
|
681
|
|
|
160
|
|
Note 12—Employee Benefit Plans
Defined Contribution Plans
We sponsor 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. We match 100% of the first 3% of employee contributions and 50% of the next 2% of employee contributions. Our matching contributions vest immediately.
Our matching contributions were $5.4 million in the fiscal year ended June 30, 2021, and $6.2 million in each of the fiscal years ended June 30, 2020 and June 30, 2019.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Multiemployer Pension Plans
We contribute to a number of multiemployer defined benefit pension plans in the U.S. and Canada under the terms of collective-bargaining agreements that cover our union-represented employees, who are represented by more than 90 local unions. The related collective-bargaining agreements between those organizations and us, which specify the rate at which we must contribute to the multi-employer defined pension plan, expire at different times between 2021 and 2024. Benefits under these plans are generally based on compensation levels and years of service.
For us, 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, 2021 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
|
2021
|
2020
|
|
2021
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Boilermaker-Blacksmith National Pension Trust
|
|
48-6168020/001
|
|
Yellow
|
Yellow
|
|
Implemented
|
|
$
|
4,003
|
|
|
$
|
6,634
|
|
|
$
|
12,434
|
|
|
No
|
Joint Pension Fund Local Union 164 IBEW
|
|
22-6031199/001
|
|
Described below (1)
|
Described below (1)
|
|
Implemented
|
|
1,958
|
|
|
1,560
|
|
|
2,180
|
|
|
No
|
Joint Pension Fund of Local Union No 102 IBEW
|
|
22-1615726/001
|
|
Described below (1)
|
Green
|
|
NA
|
|
1,341
|
|
|
1,227
|
|
|
1,610
|
|
|
No
|
IBEW Local 456 Pension Plan
|
|
22-6238995/001
|
|
Green
|
Green
|
|
NA
|
|
595
|
|
|
427
|
|
|
574
|
|
|
No
|
Local 351 IBEW Pension Plan
|
|
22-3417366/001
|
|
Described below (1)
|
Green
|
|
NA
|
|
479
|
|
|
1,709
|
|
|
2,025
|
|
|
No
|
Steamfitters Local Union No 420 Pension Plan
|
|
23-2004424/001
|
|
Described below (1)
|
Red
|
|
Implemented
|
|
442
|
|
|
1,523
|
|
|
639
|
|
|
Yes
|
IBEW Local Union 98 Pension Plan
|
|
23-1990722/001
|
|
Red
|
Red
|
|
Implemented
|
|
195
|
|
|
352
|
|
|
828
|
|
|
Yes
|
Indiana Laborers Pension Fund
|
|
35-6027150/001
|
|
Described below (1)
|
Green
|
|
NA
|
|
20
|
|
|
1,604
|
|
|
3,349
|
|
|
No
|
Iron Workers Mid-America Pension Plan, Local 395
|
|
36-6488227/001
|
|
Described below (1)
|
Green
|
|
NA
|
|
—
|
|
|
840
|
|
|
2,596
|
|
|
No
|
Pipefitters Retirement Fund, Local 597
|
|
62-6105084/001
|
|
Green
|
Green
|
|
NA
|
|
—
|
|
|
835
|
|
|
3,469
|
|
|
No
|
Iron Workers Pension Plan of Western Pennsylvania, Local 3
|
|
25-1283169/001
|
|
Described below (1)
|
Described below (1)
|
|
Implemented
|
|
—
|
|
|
500
|
|
|
2,317
|
|
|
No
|
Iron Workers Pension Plan, Local 55
|
|
34-6682351/001
|
|
Described below (1)
|
Green
|
|
NA
|
|
—
|
|
|
2,951
|
|
|
4,333
|
|
|
No
|
National Electrical Benefit Fund, IBEW locals 71, 126, 488, and 1319
|
|
53-0181657/001
|
|
Described below (1)
|
Green
|
|
NA
|
|
1,865
|
|
|
2,674
|
|
|
5,893
|
|
|
No
|
Connecticut Plumbers and Pipefitters Pension Fund, Local 777
|
|
06-6050353/001
|
|
Green
|
Green
|
|
NA
|
|
—
|
|
|
—
|
|
|
3,307
|
|
|
No
|
Northwestern Ohio Plumbers and Pipefitters Pension, Local 50
|
|
34-6502487/001
|
|
Described below (1)
|
Green
|
|
NA
|
|
—
|
|
|
2,504
|
|
|
1,161
|
|
|
No
|
Ohio Carpenters' Pension Fund, Locals 1090 and 351
|
|
34-6574360/001
|
|
Described below (1)
|
Red
|
|
Implemented
|
|
—
|
|
|
3,042
|
|
|
2,962
|
|
|
Yes
|
IBEW Local 654 Pension Plan
|
|
23-6538183/001
|
|
Described below (1)
|
Green
|
|
NA
|
|
818
|
|
|
1,021
|
|
|
1,006
|
|
|
No
|
|
|
|
|
Contributions to other multiemployer plans
|
|
3,653
|
|
|
8,000
|
|
|
13,703
|
|
|
|
|
|
|
|
Total contributions made
|
|
$
|
15,369
|
|
|
$
|
37,403
|
|
|
$
|
64,386
|
|
|
|
(1)For the Local 164 IBEW Pension Plan, Local IBEW 102 IBEW Pension Plan, Local 351 IBEW Pension Plan, Steamfitters Local Union No. 420 Pension Plan, Indiana Laborers Pension Fund, Local 395 Iron Workers Mid-America Pension Plan, Local 3 Iron Workers Pension Plan of Western Pennsylvania, Iron Workers Pension Plan Local 55, National Electrical Benefit Fund for Locals 71/126/488/1319, Local 777 Connecticut Plumbers and Pipefitters Pension Fund, Local 50 Northwestern Ohio Plumbers and Pipefitters Pension, and Local 654 IBEW Pension Plan, we have not received a funding notification that covers our fiscal year 2021 during the preparation of this Form 10-K. For Local 164 IBEW Pension Plan and Local 3 Iron Workers Pension Plan of Western Pennsylvania, we have not received a funding notification that covers our fiscal year 2020 either. Under Federal pension law, if a multiemployer pension plan is determined to be in critical or endangered status, the plan must provide notice of this status to participants, beneficiaries, the bargaining parties, the Pension Benefit Guaranty Corporation, and the Department of Labor. We also observed that these plans have not submitted any Critical or Endangered Status Notices to the Department of Labor for calendar years that we have not received notification. The Critical or Endangered Status Notices can be accessed at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/public-disclosure/2021-funding-status-notices#2020-c-and-d.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Employee Stock Purchase Plan
The Matrix Service Company 2011 Employee Stock Purchase Plan (“ESPP”) was effective January 1, 2011. The ESPP allows employees to purchase shares through payroll deductions and members of the Board of Directors to purchase shares from amounts withheld from their cash retainers. Share purchases are limited to an aggregate market value of no greater than $60,000 per calendar year per participant and are purchased from us at the current market value with no discount to the participant. Contributions are with after tax earnings and are accumulated in non-interest bearing accounts for quarterly purchases of company stock. Upon the purchase of shares, the participants receive all stockholder rights including dividend and voting rights, and are permitted to sell their shares at any time. We have made 1,000,000 shares available under the ESPP. The ESPP can be terminated at any time at the discretion of the Board of Directors and will automatically terminate once the plan shares are exhausted. Shares are issued from Treasury Stock under the ESPP. There were 29,171 shares issued in fiscal 2021, 20,733 shares in fiscal 2020, and 15,812 shares in fiscal 2019.
Note 13—Segment Information
Due to changing markets facing our clients and to better align our financial reporting with our long-term strategic growth areas, we began reporting our financial results under new reportable segments effective July 1, 2020. The new reportable segments along with a description of each are as follows:
•Utility and Power Infrastructure: consists of power delivery services provided to investor owned utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, upgrades and maintenance, as well as emergency and storm restoration services. We also provide construction and maintenance services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configuration and provide engineering, fabrication, and construction services for LNG utility peak shaving facilities.
•Process and Industrial Facilities: primarily serves customers in the downstream and midstream petroleum industries who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. We also serve customers in various other industries such as petrochemical, sulfur, mining and minerals companies engaged primarily in the extraction of non-ferrous metals, aerospace and defense, cement, agriculture, and other industrial customers. Our services include plant maintenance, turnarounds, industrial cleaning services, engineering, fabrication, and capital construction.
•Storage and Terminal Solutions: consists of work related to aboveground storage tanks and terminals. We also include work related to cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum, hydrogen and other specialty vessels such as spheres in this segment, as well work related to marine structures and truck and rail loading/offloading facilities. Our services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, we offer tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.
All prior period segment information has been restated to conform with our new reportable segments. In addition, beginning July 1, 2020, we separately report corporate selling, general and administrative expenses and other corporate expenses that were previously allocated to the segments.
We evaluate performance and allocate resources based on operating income. We record intersegment sales and transfers 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, right-of-use lease assets, goodwill and other intangible assets.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Results of Operations
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility and Power Infrastructure
|
|
Process and Industrial Facilities
|
|
Storage and Terminal
Solutions
|
|
Corporate
|
|
Total
|
Fiscal year ended June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
210,052
|
|
|
$
|
201,472
|
|
|
$
|
267,982
|
|
|
$
|
—
|
|
|
$
|
679,506
|
|
Less: inter-segment revenue
|
|
—
|
|
|
1,555
|
|
|
4,553
|
|
|
—
|
|
|
6,108
|
|
Consolidated revenue
|
|
210,052
|
|
|
199,917
|
|
|
263,429
|
|
|
—
|
|
|
673,398
|
|
Gross profit
|
|
1,506
|
|
|
17,642
|
|
|
13,617
|
|
|
—
|
|
|
32,765
|
|
Selling, general and administrative expenses
|
|
9,882
|
|
|
14,756
|
|
|
18,644
|
|
|
26,474
|
|
|
69,756
|
|
Restructuring costs
|
|
1,312
|
|
|
3,807
|
|
|
1,391
|
|
|
246
|
|
|
6,756
|
|
Operating loss
|
|
(9,688)
|
|
|
(921)
|
|
|
(6,418)
|
|
|
(26,720)
|
|
|
(43,747)
|
|
Segment assets
|
|
81,717
|
|
|
106,619
|
|
|
160,782
|
|
|
118,438
|
|
|
467,556
|
|
Capital expenditures
|
|
1,183
|
|
|
834
|
|
|
1,136
|
|
|
1,201
|
|
|
4,354
|
|
Depreciation and amortization expense
|
|
4,127
|
|
|
6,018
|
|
|
7,456
|
|
|
257
|
|
|
17,858
|
|
Fiscal year ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
212,001
|
|
|
$
|
424,710
|
|
|
$
|
470,871
|
|
|
$
|
—
|
|
|
$
|
1,107,582
|
|
Less: inter-segment revenue
|
|
—
|
|
|
2,839
|
|
|
3,805
|
|
|
—
|
|
|
6,644
|
|
Consolidated revenue
|
|
212,001
|
|
|
421,871
|
|
|
467,066
|
|
|
—
|
|
|
1,100,938
|
|
Gross profit (loss)
|
|
7,081
|
|
|
36,349
|
|
|
61,413
|
|
|
(2,667)
|
|
|
102,176
|
|
Selling, general and administrative expenses
|
|
10,047
|
|
|
24,266
|
|
|
26,386
|
|
|
25,577
|
|
|
86,276
|
|
Intangible asset impairments and restructuring costs
|
|
27,625
|
|
|
22,914
|
|
|
1,066
|
|
|
920
|
|
|
52,525
|
|
Operating income (loss)
|
|
(30,591)
|
|
|
(10,831)
|
|
|
33,961
|
|
|
(29,164)
|
|
|
(36,625)
|
|
Segment assets
|
|
67,398
|
|
|
138,734
|
|
|
187,167
|
|
|
124,011
|
|
|
517,310
|
|
Capital expenditures
|
|
3,285
|
|
|
7,523
|
|
|
4,921
|
|
|
2,810
|
|
|
18,539
|
|
Depreciation and amortization expense
|
|
3,054
|
|
|
8,014
|
|
|
7,743
|
|
|
313
|
|
|
19,124
|
|
Fiscal year ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
249,867
|
|
|
$
|
656,137
|
|
|
$
|
514,948
|
|
|
$
|
—
|
|
|
$
|
1,420,952
|
|
Less: inter-segment revenue
|
|
—
|
|
|
2,123
|
|
|
2,149
|
|
|
—
|
|
|
4,272
|
|
Consolidated revenue
|
|
249,867
|
|
|
654,014
|
|
|
512,799
|
|
|
—
|
|
|
1,416,680
|
|
Gross profit (loss)
|
|
21,161
|
|
|
58,853
|
|
|
54,600
|
|
|
(2,663)
|
|
|
131,951
|
|
Selling, general and administrative expenses
|
|
9,842
|
|
|
26,932
|
|
|
30,319
|
|
|
26,928
|
|
|
94,021
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
11,319
|
|
|
31,921
|
|
|
24,281
|
|
|
(29,591)
|
|
|
37,930
|
|
Segment assets
|
|
166,857
|
|
|
162,449
|
|
|
197,781
|
|
|
106,307
|
|
|
633,394
|
|
Capital expenditures
|
|
2,711
|
|
|
6,673
|
|
|
4,284
|
|
|
5,890
|
|
|
19,558
|
|
Depreciation and amortization expense
|
|
2,567
|
|
|
8,232
|
|
|
7,132
|
|
|
293
|
|
|
18,224
|
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Geographical information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets
|
|
|
June 30,
2021
|
|
June 30,
2020
|
|
June 30,
2019
|
|
|
(In thousands)
|
United States
|
|
$
|
157,442
|
|
|
$
|
164,056
|
|
|
$
|
193,472
|
|
Canada
|
|
6,523
|
|
|
5,659
|
|
|
10,110
|
|
Other international
|
|
12,372
|
|
|
12,435
|
|
|
12,502
|
|
|
|
$
|
176,337
|
|
|
$
|
182,150
|
|
|
$
|
216,084
|
|
Information about Significant Customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Customers as a Percentage of Segment Revenue
|
|
|
Consolidated
|
|
Utility and Power
Infrastructure
|
|
Process and Industrial Facilities
|
|
Storage and Terminal
Solutions
|
Fiscal Year ended June 30, 2021
|
|
|
|
|
|
|
|
|
Customer one
|
|
12.9
|
%
|
|
41.3
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer two
|
|
9.9
|
%
|
|
—
|
%
|
|
33.3
|
%
|
|
0.1
|
%
|
Customer three
|
|
7.0
|
%
|
|
22.5
|
%
|
|
—
|
%
|
|
0.1
|
%
|
Customer four
|
|
4.4
|
%
|
|
—
|
%
|
|
—
|
%
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended June 30, 2020
|
|
|
|
|
|
|
|
|
Customer one
|
|
9.7
|
%
|
|
—
|
%
|
|
25.4
|
%
|
|
—
|
%
|
Customer two
|
|
8.2
|
%
|
|
42.7
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer three
|
|
8.2
|
%
|
|
—
|
%
|
|
—
|
%
|
|
19.3
|
%
|
Customer four
|
|
6.8
|
%
|
|
—
|
%
|
|
—
|
%
|
|
16.1
|
%
|
Customer five
|
|
2.0
|
%
|
|
10.5
|
%
|
|
—
|
%
|
|
—
|
%
|
Fiscal Year ended June 30, 2019
|
|
|
|
|
|
|
|
|
Customer one
|
|
9.7
|
%
|
|
—
|
%
|
|
21.0
|
%
|
|
—
|
%
|
Customer two
|
|
7.6
|
%
|
|
42.7
|
%
|
|
0.2
|
%
|
|
—
|
%
|
Customer three
|
|
7.6
|
%
|
|
—
|
%
|
|
16.4
|
%
|
|
—
|
%
|
Customer four
|
|
7.2
|
%
|
|
—
|
%
|
|
15.1
|
%
|
|
0.6
|
%
|
Customer five
|
|
7.1
|
%
|
|
—
|
%
|
|
—
|
%
|
|
19.7
|
%
|
Customer six
|
|
5.0
|
%
|
|
—
|
%
|
|
—
|
%
|
|
13.8
|
%
|
Customer seven
|
|
4.6
|
%
|
|
0.2
|
%
|
|
1.5
|
%
|
|
10.8
|
%
|
Customer eight
|
|
3.4
|
%
|
|
19.5
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer nine
|
|
2.1
|
%
|
|
11.7
|
%
|
|
—
|
%
|
|
—
|
%
|
Customer ten
|
|
2.0
|
%
|
|
11.3
|
%
|
|
—
|
%
|
|
—
|
%
|
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Note 14—Restructuring Costs
During the third quarter of fiscal 2020, we initiated a business improvement plan to increase profitability and reduce our cost structure related to:
•our strategic initiative to exit the domestic iron and steel industry;
•the implementation of business improvements in the power delivery portion of the Utility and Power Infrastructure segment; and
•the decline in revenue caused by the ongoing effects of the COVID-19 pandemic and related market disruptions.
The business improvement plan consists of discretionary cost reductions, workforce reductions, reduction of capital expenditures and the reduction in size or closure of certain offices in order to increase the utilization of our staff and bring the cost structure of the business in line with revenue volume. We incurred $14.0 million of restructuring costs during fiscal 2020 and $6.8 million during fiscal 2021. The restructuring costs consist primarily of severance costs, facility closure costs, lease and fixed asset impairments, other intangible asset impairments and other liabilities as a result of exiting certain operations.
In fiscal 2021, we engaged a third party consultant to help us perform a strategic review of our end markets in support of updating our business strategy and to ensure that our organizational structure is properly designed to support our updated strategy. Based on the preliminary results of this review, we believe there are opportunities for us to be more competitive, which will require organizational and process changes and will likely result in additional restructuring costs. We expect to substantially complete this initiative in fiscal 2022.
Matrix Service Company
Notes to Consolidated Financial Statements (continued)
Restructuring costs incurred are classified as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30, 2021
|
|
Since Inception of Business Improvement Plan
|
|
|
(in thousands)
|
Utility and Power Infrastructure
|
|
|
|
|
Severance and other personnel-related costs
|
|
$
|
1,199
|
|
|
$
|
2,539
|
|
Facility costs
|
|
113
|
|
|
348
|
|
Other intangible asset impairments
|
|
—
|
|
|
1,150
|
|
Total Utility and Power Infrastructure
|
|
$
|
1,312
|
|
|
$
|
4,037
|
|
Process and Industrial Facilities
|
|
|
|
|
Severance and other personnel-related costs
|
|
$
|
2,951
|
|
|
$
|
9,118
|
|
Facility costs
|
|
431
|
|
|
3,188
|
|
Other intangible asset impairments
|
|
—
|
|
|
375
|
|
Other costs
|
|
426
|
|
|
426
|
|
Total Process and Industrial Facilities
|
|
$
|
3,808
|
|
|
$
|
13,107
|
|
Storage and Terminal Solutions
|
|
|
|
|
Severance and other personnel-related costs
|
|
$
|
1,231
|
|
|
$
|
1,578
|
|
Facility costs
|
|
159
|
|
|
879
|
|
Total Storage and Terminal Solutions
|
|
$
|
1,390
|
|
|
$
|
2,457
|
|
Corporate
|
|
|
|
|
Severance and other personnel-related costs
|
|
$
|
164
|
|
|
$
|
1,083
|
|
Facility costs
|
|
82
|
|
|
82
|
|
Other intangible asset impairments
|
|
—
|
|
|
—
|
|
Total Corporate
|
|
$
|
246
|
|
|
$
|
1,165
|
|
Total restructuring costs
|
|
$
|
6,756
|
|
|
$
|
20,766
|
|
|
|
|
|
|
Restructuring Costs by Type:
|
|
|
|
|
Severance and other personnel-related costs
|
|
$
|
5,545
|
|
|
$
|
14,318
|
|
Total facility costs
|
|
785
|
|
|
4,497
|
|
Total other intangible asset impairments
|
|
—
|
|
|
1,525
|
|
Other costs
|
|
426
|
|
|
426
|
|
Total restructuring costs
|
|
$
|
6,756
|
|
|
$
|
20,766
|
|
The restructuring reserve is included in other accrued expenses and other liabilities in the Consolidated Balance Sheets. The table below is a reconciliation of the beginning and ending restructuring reserve balance (in thousands):
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2020
|
|
$
|
2,403
|
|
Restructuring costs incurred
|
|
4,026
|
|
Cash payments
|
|
(3,484)
|
|
Adjustment to liability
|
|
(510)
|
|
Balance as of June 30, 2021
|
|
$
|
2,435
|
|
Matrix Service Company
Quarterly Financial Data (Unaudited)
Fiscal Years Ended June 30, 2021 and June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
(In thousands, except per share amounts)
|
Fiscal Year 2021
|
|
|
Revenue
|
|
$
|
182,771
|
|
|
$
|
167,468
|
|
|
$
|
148,260
|
|
|
$
|
174,899
|
|
Gross profit
|
|
14,350
|
|
|
15,313
|
|
|
1,560
|
|
|
1,542
|
|
Restructuring costs
|
|
(320)
|
|
|
5,045
|
|
|
1,860
|
|
|
171
|
|
Operating loss
|
|
(3,458)
|
|
|
(6,456)
|
|
|
(17,479)
|
|
|
(16,354)
|
|
Net loss
|
|
(3,037)
|
|
|
(4,591)
|
|
|
(12,873)
|
|
|
(10,723)
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
(0.12)
|
|
|
(0.17)
|
|
|
(0.49)
|
|
|
(0.40)
|
|
Diluted
|
|
(0.12)
|
|
|
(0.17)
|
|
|
(0.49)
|
|
|
(0.40)
|
|
Fiscal Year 2020
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
338,097
|
|
|
$
|
318,677
|
|
|
$
|
248,327
|
|
|
$
|
195,837
|
|
Gross profit
|
|
32,465
|
|
|
30,001
|
|
|
20,477
|
|
|
19,233
|
|
Intangible asset impairments and restructuring costs
|
|
—
|
|
|
38,515
|
|
|
6,559
|
|
|
7,451
|
|
Operating income (loss)
|
|
8,774
|
|
|
(31,679)
|
|
|
(5,800)
|
|
|
(7,920)
|
|
Net income (loss)
|
|
6,151
|
|
|
(28,008)
|
|
|
(5,495)
|
|
|
(5,722)
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
0.23
|
|
|
(1.04)
|
|
|
(0.21)
|
|
|
(0.22)
|
|
Diluted
|
|
0.22
|
|
|
(1.04)
|
|
|
(0.21)
|
|
|
(0.22)
|
|
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.