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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-Q 
_______________________________________
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2019
or
Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from             to            
Commission File No. 1-15461
__________________________________________
MATRIX SERVICE COMPANY
(Exact name of registrant as specified in its charter)
__________________________________________
Delaware
 
73-1352174
(State of incorporation)
 
(I.R.S. Employer Identification No.)
5100 East Skelly Drive, Suite 500, Tulsa, Oklahoma 74135
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (918838-8822
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
___________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
MTRX
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
Accelerated Filer
 
Non-accelerated Filer
 
Smaller Reporting Company
 
Emerging Growth Company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of February 4, 2020 there were 27,888,217 shares of the Company’s common stock, $0.01 par value per share, issued and 26,677,219 shares outstanding.
 








TABLE OF CONTENTS
 
 
PAGE
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 









PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Matrix Service Company
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
December 31,
2019
 
December 31,
2018
 
December 31,
2019
 
December 31,
2018
Revenue
$
318,677

 
$
340,568

 
$
656,774

 
$
659,079

Cost of revenue
288,676

 
312,682

 
594,308

 
607,772

Gross profit
30,001

 
27,886

 
62,466

 
51,307

Selling, general and administrative expenses
23,165

 
22,359

 
46,856

 
43,560

Goodwill and other intangible asset impairment
38,515

 

 
38,515

 

Operating income (loss)
(31,679
)
 
5,527

 
(22,905
)
 
7,747

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(444
)
 
(361
)
 
(833
)
 
(653
)
Interest income
417

 
274

 
891

 
556

Other
396

 
(22
)
 
399

 
524

Income (loss) before income tax expense
(31,310
)
 
5,418

 
(22,448
)
 
8,174

Provision (benefit) for federal, state and foreign income taxes
(3,302
)
 
1,486

 
(591
)
 
1,937

Net income (loss)
$
(28,008
)
 
$
3,932

 
$
(21,857
)
 
$
6,237

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
(1.04
)
 
$
0.15

 
$
(0.81
)
 
$
0.23

Diluted earnings (loss) per common share
$
(1.04
)
 
$
0.14

 
$
(0.81
)
 
$
0.23

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
26,925

 
27,043

 
26,930

 
26,982

Diluted
26,925

 
27,582

 
26,930

 
27,628

See accompanying notes.

- 1-








Matrix Service Company
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
December 31,
2019
 
December 31,
2018
 
December 31,
2019
 
December 31,
2018
Net income (loss)
$
(28,008
)
 
$
3,932

 
$
(21,857
)
 
$
6,237

Other comprehensive gain (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation gain (loss) (net of tax expense (benefit) of $59 and $37 for the three and six months ended December 31, 2019, respectively, and ($238) and ($176) for the three and six months ended December 31, 2018, respectively)
523

 
(1,069
)
 
129

 
(668
)
Comprehensive income (loss)
$
(27,485
)
 
$
2,863

 
$
(21,728
)
 
$
5,569

See accompanying notes.

- 2-








Matrix Service Company
Condensed Consolidated Balance Sheets
(In thousands)
(unaudited)


December 31,
2019

June 30,
2019
Assets



Current assets:
 

 
Cash and cash equivalents
$
110,495


$
89,715

Accounts receivable, less allowances (December 31, 2019—$1,722 and June 30, 2019—$923)
199,066


218,432

Costs and estimated earnings in excess of billings on uncompleted contracts
57,223


96,083

Inventories
7,185


8,017

Income taxes receivable
98

 
29

Other current assets
7,444


5,034

Total current assets
381,511


417,310

Property, plant and equipment at cost:
 

 
Land and buildings
41,560


41,179

Construction equipment
95,354


91,793

Transportation equipment
55,377


52,526

Office equipment and software
44,207


43,632

Construction in progress
8,627


7,619

Total property, plant and equipment - at cost
245,125


236,749

Accumulated depreciation
(161,185
)

(157,414
)
Property, plant and equipment - net
83,940


79,335

Operating lease right-of-use assets
32,491

 

Goodwill
60,504


93,368

Other intangible assets, net of accumulated amortization
11,955


19,472

Deferred income taxes
5,542

 
2,683

Other assets
15,945


21,226

Total assets
$
591,888


$
633,394

See accompanying notes.











- 3-








Matrix Service Company
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)

December 31,
2019
 
June 30,
2019
Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
74,461

 
$
114,647

Billings on uncompleted contracts in excess of costs and estimated earnings
110,562

 
105,626

Accrued wages and benefits
22,121

 
38,357

Accrued insurance
7,649

 
9,021

Operating lease liabilities
9,425

 

Income taxes payable
166

 
2,517

Other accrued expenses
5,440

 
5,331

Total current liabilities
229,824

 
275,499

Deferred income taxes
186

 
298

Operating lease liabilities
23,949

 

Borrowings under senior secured revolving credit facility
14,817

 
5,347

Other liabilities
317

 
293

Total liabilities
269,093

 
281,437

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of December 31, 2019 and June 30, 2019; 26,672,114 and 26,807,203 shares outstanding as of December 31, 2019 and June 30, 2019
279

 
279

Additional paid-in capital
135,057

 
137,712

Retained earnings
217,619

 
239,476

Accumulated other comprehensive loss
(7,622
)
 
(7,751
)
 
345,333

 
369,716

Less: Treasury stock, at cost — 1,216,103 shares as of December 31, 2019, and 1,081,014 shares as of June 30, 2019
(22,538
)
 
(17,759
)
Total stockholders' equity
322,795

 
351,957

Total liabilities and stockholders’ equity
$
591,888

 
$
633,394

See accompanying notes.


- 4-








Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Six Months Ended
 
December 31,
2019

December 31,
2018
Operating activities:
 
 
 
Net income (loss)
$
(21,857
)
 
$
6,237

Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of effects from acquisitions and disposals:
 
 
 
Depreciation and amortization
9,702

 
9,126

Goodwill and other intangible asset impairment
38,515

 

Stock-based compensation expense
5,813

 
5,738

Deferred income tax
(2,934
)
 
(83
)
Gain on disposal of business

 
(427
)
Gain on sale of property, plant and equipment
(285
)
 
(727
)
Provision for uncollectible accounts
1,193

 
(34
)
Other
(213
)
 
202

Changes in operating assets and liabilities increasing (decreasing) cash, net of effects from acquisitions and disposals:
 
 
 
Accounts receivable
18,173

 
(177
)
Costs and estimated earnings in excess of billings on uncompleted contracts
38,860

 
3,580

Inventories
832

 
(2,816
)
Other assets and liabilities
1,547

 
(10,551
)
Accounts payable
(38,182
)
 
8,622

Billings on uncompleted contracts in excess of costs and estimated earnings
4,936

 
(5,243
)
Accrued expenses
(17,475
)
 
37

Net cash provided by operating activities
38,625

 
13,484

Investing activities:
 
 
 
Capital expenditures
(14,492
)
 
(6,055
)
Proceeds from disposal of business

 
3,885

Proceeds from asset sales
377

 
923

Net cash used by investing activities
$
(14,115
)
 
$
(1,247
)

 See accompanying notes.
















- 5-








Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Six Months Ended
 
December 31,
2019
 
December 31,
2018
Financing activities:
 
 
 
Advances under senior secured revolving credit facility
$
17,395

 
$
8,383

Repayments of advances under senior secured revolving credit facility
(8,126
)
 
(8,243
)
Open market purchase of treasury shares
(9,913
)
 
(3,230
)
Issuances of common stock

 
128

Proceeds from issuance of common stock under employee stock purchase plan
157

 
153

Repurchase of common stock for payment of statutory taxes due on equity-based compensation
(3,491
)
 
(1,651
)
Net cash used by financing activities
(3,978
)
 
(4,460
)
Effect of exchange rate changes on cash and cash equivalents
248

 
(345
)
Increase in cash and cash equivalents
20,780

 
7,432

Cash and cash equivalents, beginning of period
89,715

 
64,057

Cash and cash equivalents, end of period
$
110,495

 
$
71,489

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
4,751

 
$
255

Interest
$
947

 
$
849

Non-cash investing and financing activities:
 
 
 
Purchases of property, plant and equipment on account
$
682

 
$
820

Accrual for unsettled stock repurchases
$

 
$
1,960


 See accompanying notes.


- 6-








Matrix Service Company
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share data)
(unaudited)

 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income(Loss)
 
Total
Balances, September 30, 2019
$
279

 
$
132,936

 
$
245,627

 
$
(13,270
)
 
$
(8,145
)
 
$
357,427

Net loss
 

 

 
(28,008
)
 

 

 
(28,008
)
Other comprehensive income

 

 

 

 
523

 
523

Issuance of deferred shares (40,786 shares)

 
(673
)
 

 
673

 

 

Treasury shares sold to Employee Stock Purchase Plan (4,468 shares)

 
5

 

 
69

 

 
74

Open market purchases of treasury shares (500,000 shares)

 

 

 
(9,913
)
 

 
(9,913
)
Treasury shares purchased to satisfy tax withholding obligations (4,586 shares)

 

 

 
(97
)
 

 
(97
)
Stock-based compensation expense

 
2,789

 

 

 

 
2,789

Balances, December 31, 2019
$
279

 
$
135,057

 
$
217,619

 
$
(22,538
)
 
$
(7,622
)
 
$
322,795

 
 
 
 
 
 
 
 
 
 
 
 
Balances, September 30, 2018
$
279

 
$
129,885

 
$
213,799

 
$
(14,172
)
 
$
(7,010
)
 
$
322,781

Net income

 

 
3,932

 

 

 
3,932

Other comprehensive loss

 

 

 

 
(1,069
)
 
(1,069
)
Issuance of deferred shares (70,803 shares)

 
(1,172
)
 

 
1,172

 

 

Treasury shares sold to Employee Stock Purchase Plan (3,124 shares)

 
23

 

 
52

 

 
75

Open market purchases of treasury shares (310,532 shares)

 

 

 
(5,190
)
 

 
(5,190
)
Treasury shares purchased to satisfy tax withholding obligations (4,814 shares)

 

 

 
(92
)
 

 
(92
)
Stock-based compensation expense

 
3,153

 

 

 

 
3,153

Balances, December 31, 2018
$
279

 
$
131,889

 
$
217,731

 
$
(18,230
)
 
$
(8,079
)
 
$
323,590


See accompanying notes.


























- 7-







Matrix Service Company
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share data)
(unaudited)
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income(Loss)
 
Total
Balances, July 1, 2019
$
279

 
$
137,712

 
$
239,476

 
$
(17,759
)
 
$
(7,751
)
 
$
351,957

Net loss

 

 
(21,857
)
 

 

 
(21,857
)
Other comprehensive income

 

 

 

 
129

 
129

Issuance of deferred shares (535,060 shares)

 
(8,486
)
 

 
8,486

 

 

Treasury shares sold to Employee Stock Purchase Plan (8,521 shares)

 
18

 

 
139

 

 
157

Open market purchases of treasury shares (500,000 shares)

 

 

 
(9,913
)
 

 
(9,913
)
Treasury shares purchased to satisfy tax withholding obligations (178,670 shares)

 

 

 
(3,491
)
 

 
(3,491
)
Stock-based compensation expense

 
5,813

 

 

 

 
5,813

Balances, December 31, 2019
$
279

 
$
135,057

 
$
217,619

 
$
(22,538
)
 
$
(7,622
)
 
$
322,795

 
 
 
 
 
 
 
 
 
 
 
 
Balances, July 1, 2018
$
279

 
$
132,198

 
$
211,494

 
$
(17,717
)
 
$
(7,411
)
 
$
318,843

Net income

 

 
6,237

 

 

 
6,237

Other comprehensive loss

 

 

 

 
(668
)
 
(668
)
Exercise of stock options (12,500 shares)

 
(126
)
 

 
254

 

 
128

Issuance of deferred shares (292,578 shares)

 
(5,940
)
 

 
5,940

 

 

Treasury shares sold to Employee Stock Purchase Plan (7,447 shares)

 
19

 

 
134

 

 
153

Open market purchase of treasury shares (310,532 shares)

 

 

 
(5,190
)
 

 
(5,190
)
Treasury shares purchased to satisfy tax withholding obligations (77,418 shares)

 

 

 
(1,651
)
 

 
(1,651
)
Stock-based compensation expense

 
5,738

 

 

 

 
5,738

Balances, December 31, 2018
$
279

 
$
131,889

 
$
217,731

 
$
(18,230
)
 
$
(8,079
)
 
$
323,590


See accompanying notes.



- 8-







Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1 – Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of Matrix Service Company (“Matrix”, “we”, “our”, “us”, “its” or the “Company”) and its subsidiaries, unless otherwise indicated. Intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. The information furnished reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations, cash flows and financial position for the interim periods presented. The accompanying condensed financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2019, included in the Company’s Annual Report on Form 10-K for the year then ended. The results of operations for the three and six month periods ended December 31, 2019 may not necessarily be indicative of the results of operations for the full year ending June 30, 2020.
Significant Accounting Policies
The Company has updated its significant accounting policies to include its lease accounting policy as a result of adopting the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) on July 1, 2019. The Company's other significant accounting policies are detailed in “Note 1 - Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended June 30, 2019.
Leases
Adoption of New Leases Standard
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under this guidance, lessees are required to recognize virtually all leases on the balance sheet as a right-of-use asset and an associated operating lease liability or finance lease liability. The right-of-use asset represents the lessee's right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee's obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as operating leases or finance leases. Operating lease liabilities and right-of-use assets are adjusted to result in a single straight-line lease expense over the life of the lease. Finance lease liabilities and right-of-use assets, which contain provisions similar to capital leases under the prior accounting standards, result in the recognition of interest expense on the lease liability and amortization expense on the right-of-use asset over the term of the lease.
On July 1, 2019, the Company adopted the standard using the modified retrospective method. The modified retrospective method permits the Company to record right-of-use assets and lease liabilities for existing leases as of the date of adoption rather than at the beginning of the earliest period presented. The Company recorded operating lease right-of-use assets of $24.6 million and operating lease liabilities of $25.8 million as of July 1, 2019. The adoption of the standard did not have a material impact on the Company’s retained earnings, Condensed Consolidated Statements of Income or Condensed Consolidated Statements of Cash Flows. Financial results reported in prior periods are unchanged and reflect the prior lease accounting standards in place at the time.
The Company elected the package of practical expedients permitted under the transition guidance for the new standard, which among other things, allowed the Company to carry forward the historical lease classification of its existing leases. All of the Company's existing leases were classified as operating leases prior to adoption and have retained this classification after adoption. In addition, the Company elected not to utilize the hindsight practical expedient to determine the lease term for existing leases at adoption.

- 9-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)



Lease Accounting Policy
The Company enters into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. The Company determines if an arrangement is or contains a lease at inception of the arrangement. An arrangement is determined to be a lease if it conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. If certain criteria are satisfied, the lease is classified as a financing lease. If none of these criteria are satisfied, the lease is considered an operating lease. All of the Company's leases are classified as operating leases.
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 right-of-use assets are presented as noncurrent in the Condensed Consolidated Balance Sheets. Operating lease liabilities are recognized as the present value of the future lease payments over the lease term as of the commencement date and are presented as current and noncurrent in the Condensed Consolidated Balance Sheets. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases with an initial term of 12 months or less.
The lease term used to measure the right-of-use assets and lease liabilities is generally the non-cancelable lease term for real estate leases and information technology equipment. Construction equipment is typically rented on a "month-to-month" basis and the lease term is estimated based on the expected duration of the rental. An option to renew or terminate a lease is included in the lease term when it is reasonably certain that the Company will exercise the option. Renewal options for real estate leases are typically for five years or less.
Future lease payments are discounted based on the Company's estimate of its incremental borrowing rate at lease commencement. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments.
Determinations with respect to lease term, including any renewals, incremental borrowing rate, and future lease payments require the use of judgment based on the facts and circumstances related to each lease. The Company considers various factors, including economic incentives, intent, past history and business need, to determine the likelihood that a renewal option will be exercised.
After 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. Lease expense is included in cost of revenue and in selling, general and administrative expenses in the Condensed Consolidated Statements of Income.
See Note 3 - Leases for the required periodic disclosures about the Company's leases.
Recently Issued Accounting Standards
Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
On June 16, 2016, the FASB issued ASU 2016-13, which will change how the Company accounts for credit losses, including those related to its trade accounts receivable. The amendments in this update require a financial asset (or a group of financial assets) to be presented at the net amount expected to be collected. The income statement will reflect any increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount.
Current GAAP delays the recognition of the full amount of credit losses until the loss is probable of occurring. The amendments in this update eliminate the probable initial recognition threshold and, instead, reflect the Company's current estimate of all expected credit losses. In addition, current guidance limits the information the Company may consider in measuring a credit loss to its past events and current conditions.
The amendments in this update broaden the information the Company may consider in developing its expected credit loss estimate to include forecasted information. The Company will adopt these amendments on July 1, 2020. The Company must apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. At this time, the Company does not expect this update will have a material impact on its estimate of the allowance for uncollectible accounts.

- 10-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)



Note 2 – Revenue
Remaining Performance Obligations
The Company had $645.0 million of remaining performance obligations yet to be satisfied as of December 31, 2019. The Company expects to recognize $540.9 million of its 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 advance payments and billings in excess of revenue recognized. The following table provides information about CIE and BIE:
 
December 31,
2019
 
June 30,
2019
 
Change
 
(in thousands)
Costs and estimated earnings in excess of billings on uncompleted contracts
$
57,223

 
$
96,083

 
$
(38,860
)
Billings on uncompleted contracts in excess of costs and estimated earnings
(110,562
)
 
(105,626
)
 
(4,936
)
Net contract liabilities
$
(53,339
)
 
$
(9,543
)
 
$
(43,796
)

The difference between the beginning and ending balances of the Company's CIE and BIE primarily results from the timing of revenue recognized relative to its billings. The amount of revenue recognized during the six months ended December 31, 2019 that was included in the prior period BIE balance was $97.0 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 December 31, 2019 and June 30, 2019 included retentions to be collected within one year of $29.9 million and $21.9 million, respectively. Contract retentions collectible beyond one year are included in other assets in the Condensed Consolidated Balance Sheet and totaled $12.5 million as of December 31, 2019 and $17.7 million as of June 30, 2019.
Disaggregated Revenue
Revenue disaggregated by reportable segment is presented in Note 9 - Segment Information. The following series of tables presents revenue disaggregated by geographic area where the work was performed and by contract type:
Geographic Disaggregation:
 
 
Three Months Ended
 
Six Months Ended
 
 
December 31,
2019
 
December 31,
2018
 
December 31,
2019
 
December 31,
2018
 
 
(In thousands)
United States
 
$
291,348

 
$
329,513

 
$
605,765

 
$
639,650

Canada
 
24,703

 
9,714

 
45,872

 
16,795

Other international
 
2,626

 
1,341

 
5,137

 
2,634

Total Revenue
 
$
318,677

 
$
340,568

 
$
656,774

 
$
659,079



- 11-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)



Contract Type Disaggregation:
 
 
Three Months Ended
 
Six Months Ended
 
 
December 31,
2019
 
December 31,
2018
 
December 31,
2019
 
December 31,
2018
 
 
(In thousands)
Fixed-price contracts
 
$
174,773

 
$
182,811

 
$
351,093

 
$
361,933

Time and materials and other cost reimbursable contracts
 
143,904

 
157,757

 
305,681

 
297,146

Total Revenue
 
$
318,677

 
$
340,568

 
$
656,774

 
$
659,079


Typically, the Company assumes more risk with fixed-price contracts since increases in cost to perform the work may not be recoverable. However, these types of contracts typically offer higher profits than time and materials and other cost reimbursable contracts when completed at or below the costs originally estimated. The profitability of time and materials and other cost reimbursable contracts is typically lower than fixed-price contracts and is usually less volatile than fixed-price contracts since the profit component is factored into the rates charged for labor, equipment and materials, or is expressed in the contract as a percentage of the reimbursable costs incurred.
Note 3 – Leases
The Company enters into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. Real estate leases accounted for approximately 86% of all right-of-use assets as of December 31, 2019. Most real estate and information technology equipment leases generally have fixed payments that follow an agreed upon payment schedule and have remaining lease terms ranging from less than a year to 16 years. Construction equipment leases generally have "month-to-month" lease terms that automatically renew as long as the equipment remains in use.
The components of lease expense in the Condensed Consolidated Statements of Income are as follows:
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
December 31, 2019
 
December 31, 2019
Lease expense
 
Location of Expense in Statements of Income
 
(in thousands)
Operating lease expense
 
Cost of revenues and selling, general and administrative expenses
 
$
3,256

 
$
6,372

Short-term lease expense(1)
 
Cost of revenues
 
11,007

 
20,615

Total lease expense
 
 
 
$
14,263

 
$
26,987

 
 
 
 
 
(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.


- 12-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)



The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in the Company's Condensed Consolidated Balance Sheets, were as follows:
 
 
December 31, 2019
Maturity Analysis:
 
(in thousands)
Remainder of Fiscal 2020
 
$
5,761

Fiscal 2021
 
8,503

Fiscal 2022
 
6,164

Fiscal 2023
 
4,559

Fiscal 2024
 
2,968

Thereafter
 
11,866

Total future operating lease payments
 
39,821

Less: imputed interest
 
(6,447
)
Net present value of future lease payments
 
33,374

Less: current portion of operating lease liabilities
 
9,425

Non-current operating lease liabilities
 
$
23,949


The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of December 31, 2019:
Weighted-average remaining lease term (in years)
 
6

Weighted-average discount rate
 
5.6
%
Supplemental cash flow information related to leases is as follows:
 
 
Six Months Ended
 
 
December 31, 2019
 
 
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
6,788

Right-of-use assets obtained in exchange for lease liabilities:
 
 
Operating leases
 
$
39,338




- 13-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)



Note 4 – Intangible Assets Including Goodwill
Goodwill
The changes in the carrying value of goodwill by segment are as follows:
 
Electrical
Infrastructure
 
Oil Gas &
Chemical
 
Storage
Solutions
 
Industrial
 
Total
 
(In thousands)
Net balance at June 30, 2019
$
24,830

 
$
30,829

 
$
16,736

 
$
20,973

 
$
93,368

Goodwill impairment
(24,900
)
 

 

 
(7,981
)
 
(32,881
)
Translation adjustment(1)
70

 

 
(17
)
 
(36
)
 
17

Net balance at December 31, 2019
$

 
$
30,829

 
$
16,719

 
$
12,956

 
$
60,504

 
 
 
 
 
(1)
The translation adjustments relate to the periodic translation of Canadian Dollar and South Korean Won denominated goodwill recorded as a part of prior acquisitions in Canada and South Korea, in which the local currency was determined to be the functional currency.

The Company tests its goodwill for impairment annually in May. Except for the impairments discussed below, the Company concluded that no other impairment indicators existed as of December 31, 2019. However, if our market view of project opportunities or gross margins deteriorates, then additional interim goodwill impairment tests will be performed, which could result in the recognition of additional impairments to goodwill.
In the second quarter, the Company concluded that a goodwill impairment indicator existed in the Electrical Infrastructure segment based on the recent history of depressed gross margins and the second quarter’s downward acceleration of revenue and gross margin. Accordingly, the Company performed an interim impairment test as of December 31, 2019, reflecting updated revenue and gross margin assumptions, and concluded that the reporting unit's $24.9 million of goodwill was fully impaired.
Additionally, in December 2019, the Company concluded that a goodwill impairment indicator existed for an Industrial segment reporting unit based on several second quarter events. These events included the deterioration of the relationship with a significant customer in the iron and steel industry in the second quarter. As a result, the customer canceled other previously awarded work and the Company is expecting little to no business from this customer in the foreseeable future. Accordingly, the Company performed an interim impairment test as of December 31, 2019 and concluded that the reporting unit's $8.0 million of goodwill was fully impaired. The remaining goodwill in the Industrial segment is related to a separate reporting unit that serves a broader customer base beyond iron and steel.
The estimated fair value of each reporting unit was derived by utilizing a discounted cash flow analysis. The key assumptions used are described in Part II, Item 8. Financial Statements and Supplementary Data, Note 1 - Summary of Significant Accounting Policies, Goodwill in our fiscal 2019 Annual Report on Form 10-K.
Other Intangible Assets
In connection with the factors disclosed for the Industrial segment goodwill impairment above, the Company fully impaired a customer relationship with a net book value of $5.6 million and a remaining useful life of 9 years.  This intangible asset had 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 condensed consolidated statements of income.

- 14-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)



Information on the carrying value of other intangible assets is as follows:
 
 
 
At December 31, 2019
  
Useful Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
(Years)
 
(In thousands)
Intellectual property
10 to 15
 
$
2,579

 
$
(1,867
)
 
$
712

Customer-based
6 to 15
 
29,180

 
(17,939
)
 
11,241

Non-compete agreements
4
 
1,453

 
(1,451
)
 
2

Total amortizing intangible assets
 
 
$
33,212

 
$
(21,257
)
 
$
11,955

 
 
 
 
At June 30, 2019
 
Useful Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
(Years)
 
(In thousands)
Intellectual property
10 to 15
 
$
2,579

 
$
(1,779
)
 
$
800

Customer-based
6 to 15
 
38,572

 
(19,915
)
 
18,657

Non-compete agreements
4
 
1,453

 
(1,438
)
 
15

Total amortizing intangible assets
 
 
$
42,604

 
$
(23,132
)
 
$
19,472


Amortization expense totaled $0.9 million and $1.9 million during the three and six months ended December 31, 2019 and $0.8 million and $1.7 million for the three and six months ended December 31, 2018, respectively.

We estimate that the remaining amortization expense related to December 31, 2019 amortizing intangible assets will be as follows (in thousands):
Period ending:
 
Remainder of Fiscal 2020
$
1,567

Fiscal 2021
3,125

Fiscal 2022
2,272

Fiscal 2023
1,819

Fiscal 2024
1,506

Fiscal 2025
1,111

Thereafter
555

Total estimated remaining amortization expense at December 31, 2019
$
11,955



- 15-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)



Note 5 – Debt
On February 8, 2017, the Company entered into the Fourth Amended and Restated Credit Agreement (the "Credit Agreement"), by and among the Company and certain foreign subsidiaries, as Borrowers, various subsidiaries of the Company, as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole Bookrunner, and the other Lenders party thereto.
The Credit Agreement provides for a five-year senior secured revolving credit facility of $300.0 million that expires February 8, 2022. The credit facility may be used for working capital, acquisitions, capital expenditures, issuances of letters of credit and other lawful purposes.
The Credit Agreement includes the following covenants and borrowing limitations:
Our Leverage Ratio, determined as of the end of each fiscal quarter, may not exceed 3.00 to 1.00.
We are required to maintain a Fixed Charge Coverage Ratio, determined as of the end of each fiscal quarter, greater than or equal to 1.25 to 1.00.
Asset dispositions (other than dispositions in which all of the net cash proceeds therefrom are reinvested into the Company and dispositions of inventory and obsolete or unneeded equipment in the ordinary course of business) are limited to $20.0 million per 12-month period.
The credit facility includes a U.S. Dollar equivalent sublimit of $75.0 million for revolving loans denominated in Australian Dollars, Canadian Dollars, Euros and Pounds Sterling and letters of credit in Australian Dollars, Euros, and Pounds Sterling. The credit facility also includes a $200.0 million sublimit for total letters of credit.
Each revolving borrowing under the Credit Agreement will bear interest at a rate per annum equal to:
The ABR or the Adjusted LIBO Rate, in the case of revolving loans denominated in U.S. Dollars;
The Canadian Prime Rate or the CDOR rate, in the case of revolving loans denominated in Canadian Dollars;
The Adjusted LIBO Rate, in the case of revolving loans denominated in Pounds Sterling or Australian Dollars; or
The EURIBO Rate, in the case of revolving loans denominated in Euros,

in each case, plus the Applicable Margin, which is based on the Company's Leverage Ratio. The Applicable Margin on ABR loans ranges between 0.625% and 1.625%. The Applicable Margin for Adjusted LIBO, EURIBO and CDOR loans ranges between 1.625% and 2.625% and the Applicable Margin for Canadian Prime Rate loans ranges between 2.125% and 3.125%.
The unused credit facility fee is between 0.25% and 0.45% based on the Leverage Ratio.
The Credit Agreement includes a Leverage Ratio covenant, which provides that Consolidated Funded Indebtedness, as of the end of any fiscal quarter, may not exceed 3.0 times Consolidated EBITDA, as defined in the Credit Agreement, or "Covenant EBITDA," over the previous four quarters. For the four quarters ended December 31, 2019, Covenant EBITDA was $78.2 million. Consolidated Funded Indebtedness at December 31, 2019 was $68.5 million.

- 16-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)



Availability under the senior secured revolving credit facility at December 31, 2019 was as follows: 
 
December 31,
2019
 
June 30,
2019
 
(In thousands)
Senior secured revolving credit facility
$
300,000

 
$
300,000

Capacity constraint due to the Leverage Ratio
65,544

 
94,323

Capacity under the credit facility
234,456

 
205,677

Letters of credit
53,636

 
48,147

Borrowings outstanding
14,817

 
5,347

Availability under the senior secured revolving credit facility
$
166,003

 
$
152,183


At December 31, 2019, the Company was in compliance with all affirmative, negative, and financial covenants under the Credit Agreement.
Note 6 – Income Taxes
Effective Tax Rate
Our effective tax rates for the three and six months ended December 31, 2019 were 10.5% and 2.6%, respectively, compared to 27.4% and 23.7%, respectively, for the same period a year ago. We previously expected our fiscal 2020 effective tax rate to be approximately 27.0%. The effective tax rate in both periods in fiscal 2020 was negatively impacted by a $2.4 million valuation allowance placed on a deferred tax asset that was created by net operating loss carryforwards and other tax credits in Canada that was triggered by the second quarter cancellation of a Canadian iron and steel project that significantly impacted the fiscal 2020 financial forecast. Additionally, the effective tax rate in both periods in fiscal 2020 was negatively impacted by the non-deductible portion of the goodwill impairments. We expect the effective tax rate to be approximately 28.0% for the remainder of the fiscal year.
The effective tax rate for the three months ended December 31, 2018 was in line with expected statutory rate. The effective tax rate for the sixth months ended December 31, 2018 was positively impacted by $0.3 million of excess tax benefits related to the vesting of stock-based compensation.
Note 7 – Commitments and Contingencies
Insurance Reserves
The Company maintains insurance coverage for various aspects of its operations. However, exposure to potential losses is retained through the use of deductibles, self-insured retentions and coverage limits.
Typically, our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of our services and provide warranties for materials and workmanship. The Company may also be required to name the customer as an additional insured up to the limits of insurance available, or we may be required to purchase special insurance policies or surety bonds for specific customers or provide letters of credit in lieu of bonds to satisfy performance and financial guarantees on some projects. Matrix maintains a performance and payment bonding line sufficient to support the business. The Company generally requires its subcontractors to indemnify the Company and the Company’s customer and name the Company as an additional insured for activities arising out of the subcontractors’ work. We also require certain subcontractors to provide additional insurance policies, including surety bonds in favor of the Company, to secure the subcontractors’ work or as required by the subcontract.
There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against a valid claim or loss under the contracts with our customers.

- 17-


Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)



Unpriced Change Orders and Claims
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $9.1 million at December 31, 2019 and $10.1 million at June 30, 2019. Generally, collection of amounts related to unpriced change orders and claims is expected within twelve months. However, since customers may not pay these amounts until final resolution of related claims, collection of these amounts may extend beyond one year.
Other
The Company and its subsidiaries are participants in various legal actions. It is the opinion of management that none of the known legal actions will have a material impact on the Company’s financial position, results of operations or liquidity.
Note 8 – Earnings per Common Share
Basic earnings per share (“Basic EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share (“Diluted EPS”) includes the dilutive effect of stock options and nonvested deferred shares. In the event we report a loss, stock options and nonvested deferred shares are not included since they are anti-dilutive.
The computation of basic and diluted earnings per share is as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31,
2019
 
December 31,
2018
 
December 31,
2019
 
December 31,
2018
 
(In thousands, except per share data)
Basic EPS:
 
 
 
 
 
 
 
Net income (loss)
$
(28,008
)
 
$
3,932

 
$
(21,857
)
 
$
6,237

Weighted average shares outstanding
26,925

 
27,043

 
26,930

 
26,982

Basic earnings (loss) per share
$
(1.04
)
 
$
0.15

 
$
(0.81
)
 
$
0.23

Diluted EPS:

 

 

 

Weighted average shares outstanding – basic
26,925

 
27,043

 
26,930

 
26,982

Dilutive stock options

 
27

 

 
29

Dilutive nonvested deferred shares

 
512

 

 
617

Diluted weighted average shares
26,925

 
27,582

 
26,930

 
27,628

Diluted earnings (loss) per share
$
(1.04
)
 
$
0.14

 
$
(0.81
)
 
$
0.23

 
The following securities are considered antidilutive and have been excluded from the calculation of Diluted EPS:
 
Three Months Ended
 
Six Months Ended
 
December 31,
2019
 
December 31,
2018
 
December 31,
2019
 
December 31,
2018
 
(In thousands)
Stock options
26

 

 
25

 

Nonvested deferred shares
718

 
1,543

 
870

 
1,458

Total antidilutive securities
744

 
1,543

 
895

 
1,458



- 18-


Matrix Service Company