Company Quick10K Filing
Quick10K
Matrix Service
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$19.54 27 $523
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-K 2015-06-30 Annual: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-K 2014-06-30 Annual: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-02-06 Earnings, Exhibits
8-K 2018-11-06 Earnings, Other Events, Exhibits
8-K 2018-10-30 Shareholder Vote, Exhibits
8-K 2018-09-10 Earnings, Exhibits
8-K 2018-06-05 Officers
8-K 2018-05-09 Earnings, Exhibits
8-K 2018-02-07 Earnings, Exhibits
CHE Chemed 5,160
AVYA Avaya Holdings 2,060
WGO Winnebago Industries 1,140
TGH Textainer Group Holdings 598
GSM Ferroglobe 402
CTRN Citi Trends 237
CSS CSS Industries 57
NHEL Natural Health Farm Holdings 0
TEP Tucson Electric Power 0
GRAS Greenfield Farms Food 0
MTRX 2018-12-31
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation and Significant Accounting Policies
Note 2 - Revenue
Note 3 - Disposals
Note 4 - Intangible Assets Including Goodwill
Note 5 - Debt
Note 6 - Income Taxes
Note 7 - Commitments and Contingencies
Note 8 - Earnings per Common Share
Note 9 - Segment Information
Note 10 - Equity
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits:
EX-31.1 exhibit311-mtrxx2018x12x31.htm
EX-31.2 exhibit312-mtrxx2018x12x31.htm
EX-32.1 exhibit321-mtrxx2018x12x31.htm
EX-32.2 exhibit322-mtrxx2018x12x31.htm
EX-95 exhibit95-mtrxx2018x12x31x.htm

Matrix Service Earnings 2018-12-31

MTRX 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 mtrx-2018x12x31x10q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-Q 
_______________________________________
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2018
or
o
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: (918) 838-8822
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
____________________________________ 
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Inter Active 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  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition 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
 
ý
 
 
 
 
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  ý
As of February 5, 2019 there were 27,888,217 shares of the Company’s common stock, $0.01 par value per share, issued and 26,784,327 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,
2018
 
December 31,
2017
 
December 31,
2018
 
December 31,
2017
Revenues
$
340,568

 
$
282,911

 
$
659,079

 
$
552,821

Cost of revenues
312,682

 
256,208

 
607,772

 
497,227

Gross profit
27,886

 
26,703

 
51,307

 
55,594

Selling, general and administrative expenses
22,359

 
21,529

 
43,560

 
43,099

Operating income
5,527

 
5,174

 
7,747

 
12,495

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(361
)
 
(819
)
 
(653
)
 
(1,437
)
Interest income
274

 
65

 
556

 
104

Other
(22
)
 
(135
)
 
524

 
14

Income before income tax expense
5,418

 
4,285

 
8,174

 
11,176

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

 
(247
)
 
1,937

 
2,820

Net income
$
3,932

 
$
4,532

 
$
6,237

 
$
8,356

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.15

 
$
0.17

 
$
0.23

 
$
0.31

Diluted earnings per common share
$
0.14

 
$
0.17

 
$
0.23

 
$
0.31

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
27,043

 
26,771

 
26,982

 
26,713

Diluted
27,582

 
27,078

 
27,628

 
26,933

See accompanying notes.

- 1-



Matrix Service Company
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
December 31,
2018
 
December 31,
2017
 
December 31,
2018
 
December 31,
2017
Net income
$
3,932

 
$
4,532

 
$
6,237

 
$
8,356

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation gain (loss) (net of tax benefit of $238 and $176 for the three and six months ended December 31, 2018, respectively, and $20 and $36 for the three and six months ended December 31, 2017, respectively)
(1,069
)
 
429

 
(668
)
 
1,536

Comprehensive income
$
2,863

 
$
4,961

 
$
5,569

 
$
9,892

See accompanying notes.

- 2-



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


December 31,
2018

June 30,
2018
Assets



Current assets:
 

 
Cash and cash equivalents
$
71,489


$
64,057

Accounts receivable, less allowances (December 31, 2018— $6,249 and June 30, 2018—$6,327)
203,574


203,388

Costs and estimated earnings in excess of billings on uncompleted contracts
72,694


76,632

Inventories
7,961


5,152

Income taxes receivable
1,543

 
3,359

Other current assets
7,578


4,458

Total current assets
364,839


357,046

Property, plant and equipment at cost:
 

 
Land and buildings
40,517


40,424

Construction equipment
89,321


89,036

Transportation equipment
48,805


48,339

Office equipment and software
42,297


41,236

Construction in progress
3,040


1,353

Total property, plant and equipment - at cost
223,980


220,388

Accumulated depreciation
(152,387
)

(147,743
)
Property, plant and equipment - net
71,593


72,645

Goodwill
93,263


96,162

Other intangible assets
21,096


22,814

Deferred income taxes
5,598

 
4,848

Other assets
13,163


4,518

Total assets
$
569,552


$
558,033

See accompanying notes.











- 3-


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

December 31,
2018
 
June 30,
2018
Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
90,712

 
$
79,439

Billings on uncompleted contracts in excess of costs and estimated earnings
115,366

 
120,740

Accrued wages and benefits
24,735

 
24,375

Accrued insurance
8,921

 
9,080

Income taxes payable

 
7

Other accrued expenses
4,698

 
4,824

Total current liabilities
244,432

 
238,465

Deferred income taxes
1,272

 
429

Other liabilities
258

 
296

Total liabilities
245,962

 
239,190

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of December 31, 2018 and June 30, 2018; 26,778,398 and 26,853,823 shares outstanding as of December 31, 2018 and June 30, 2018
279

 
279

Additional paid-in capital
131,889

 
132,198

Retained earnings
217,731

 
211,494

Accumulated other comprehensive loss
(8,079
)
 
(7,411
)
 
341,820

 
336,560

Less: Treasury stock, at cost — 1,109,819 shares as of December 31, 2018, and 1,034,394 shares as of June 30, 2018
(18,230
)
 
(17,717
)
Total stockholders' equity
323,590

 
318,843

Total liabilities and stockholders’ equity
$
569,552

 
$
558,033

See accompanying notes.


- 4-



Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Six Months Ended
 
December 31,
2018

December 31,
2017
Operating activities:
 
 
 
Net income
$
6,237

 
$
8,356

Adjustments to reconcile net income to net cash provided by operating activities, net of effects from acquisitions and disposals:
 
 
 
Depreciation and amortization
9,126

 
10,906

Stock-based compensation expense
5,738

 
4,353

Deferred income tax
(83
)
 
1,657

Gain on disposal of business (Note 3)
(427
)
 

Gain on sale of property, plant and equipment
(727
)
 
(103
)
Provision for uncollectible accounts
(34
)
 
12

Other
202

 
194

Changes in operating assets and liabilities increasing (decreasing) cash, net of effects from acquisitions and disposals:
 
 
 
Accounts receivable
(177
)
 
25,489

Costs and estimated earnings in excess of billings on uncompleted contracts
3,580

 
26,959

Inventories
(2,816
)
 
(788
)
Other assets and liabilities
(10,551
)
 
(475
)
Accounts payable
8,622

 
(34,018
)
Billings on uncompleted contracts in excess of costs and estimated earnings
(5,243
)
 
(8,751
)
Accrued expenses
37

 
(4,211
)
Net cash provided by operating activities
13,484

 
29,580

Investing activities:
 
 
 
Acquisition of property, plant and equipment
(6,055
)
 
(4,051
)
Acquisitions

 
(1,687
)
Proceeds from disposal of business (Note 3)
3,885

 

Proceeds from asset sales
923

 
420

Net cash used by investing activities
$
(1,247
)
 
$
(5,318
)

 See accompanying notes.
















- 5-








Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Six Months Ended
 
December 31,
2018
 
December 31,
2017
Financing activities:
 
 
 
Advances under senior secured revolving credit facility
$
8,383

 
$
85,669

Repayments of advances under senior secured revolving credit facility
(8,243
)
 
(79,443
)
Payment of debt amendment fees

 
(364
)
Open market purchase of treasury shares (Note 10)
(3,230
)
 

Issuances of common stock
128

 

Proceeds from issuance of common stock under employee stock purchase plan
153

 
144

Repurchase of common stock for payment of statutory taxes due on equity-based compensation
(1,651
)
 
(612
)
Net cash provided (used) by financing activities
(4,460
)
 
5,394

Effect of exchange rate changes on cash and cash equivalents
(345
)
 
626

Increase in cash and cash equivalents
7,432

 
30,282

Cash and cash equivalents, beginning of period
64,057

 
43,805

Cash and cash equivalents, end of period
$
71,489

 
$
74,087

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
255

 
$
665

Interest
$
849

 
$
1,340

Non-cash investing and financing activities:
 
 
 
Purchases of property, plant and equipment on account
$
820

 
$
105

Accrual for unsettled stock repurchases (Note 10)
$
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, 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
)
Open market purchases of treasury shares (310,532 shares)

 

 

 
(5,190
)
 

 
(5,190
)
Treasury shares sold to Employee Stock Purchase Plan (7,447 shares)

 
19

 

 
134

 

 
153

Exercise of stock options (12,500 shares)

 
(126
)
 

 
254

 

 
128

Issuance of deferred shares (292,578 shares)

 
(5,940
)
 

 
5,940

 

 

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

 
 
 
 
 
 
 
 
 
 
 
 
Balances, July 1, 2017
$
279

 
$
128,419

 
$
222,974

 
$
(22,539
)
 
$
(7,324
)
 
$
321,809

Net income

 

 
8,356

 

 

 
8,356

Other comprehensive income

 

 

 

 
1,536

 
1,536

Treasury shares sold to Employee Stock Purchase Plan (12,283 shares)

 
(109
)
 

 
253

 

 
144

Issuance of deferred shares (250,874 shares)

 
(4,428
)
 

 
4,428

 

 

Treasury shares purchased to satisfy tax withholding obligations (52,043 shares)

 

 

 
(612
)
 

 
(612
)
Stock-based compensation expense

 
4,353

 

 

 

 
4,353

Balances, December 31, 2017
$
279

 
$
128,235

 
$
231,330

 
$
(18,470
)
 
$
(5,788
)
 
$
335,586

See accompanying notes.


- 7-


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, 2018, included in the Company’s Annual Report on Form 10-K for the year then ended. The results of operations for the six-month period ended December 31, 2018 may not necessarily be indicative of the results of operations for the full year ending June 30, 2019.
Significant Accounting Policies
We have updated our revenue recognition accounting policy as a result of adopting the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) on July 1, 2018. Our 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, 2018.
Revenue Recognition
Adoption of New Revenue Recognition Standard
The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) on July 1, 2018. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most previous revenue recognition guidance, including industry-specific guidance, and is applicable to all of the Company's contracts with customers. The core principle of the revenue model is that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." The Company used the modified retrospective method of application. Under the modified retrospective method, revenue recognized on completed contracts is not restated, however contracts in progress are accounted for as if they were under this new standard at inception. Any difference between historical revenue and revenue under the new standard is recorded as a cumulative effect adjustment to retained earnings as of the date of adoption. The cumulative impact of adopting Topic 606 was immaterial and did not require an adjustment to retained earnings. See Note 2 – Revenue for new disclosures required as a result of adopting Topic 606.
General Information about our Contracts with Customers
Our revenues come from contracts to provide engineering, procurement, fabrication and construction, repair and maintenance and other services. Our engineering, procurement and fabrication and construction services are usually provided in association with capital projects, which commonly are fixed price contracts and are billed based on project milestones. Our repair and maintenance services typically are cost reimbursable or time and material based contracts and are billed monthly or, for projects of short duration, at the conclusion of the project. The elapsed time from award to completion of performance may be in excess of one year for capital projects.
Step 1: Contract Identification
We do not recognize revenue unless we have identified a contract with a customer. A contract with a customer exists when it has approval and commitment from both parties, the rights and obligations of the parties are identified, payment terms are identified, the contract has commercial substance, and collectibility is probable. We also evaluate whether a contract should be combined with other contracts and accounted for as one single contract. This evaluation requires judgment and could change the timing of the amount of revenue and profit recorded for a given period.

- 8-


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



Step 2: Identify Performance Obligations
Next, we identify each performance obligation in the contract. A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services to the customer. Revenue is recognized separately for each performance obligation in the contract. Many of our contracts have one clearly identifiable performance obligation. However, many of our contracts provide the customer an integrated service that includes two or more of the following services: engineering, procurement, fabrication, construction, repair and maintenance services. For these contracts, we do not consider the integrated services to be distinct within the context of the contract when the separate scopes of work combine into a single commercial objective or capability for the customer. Accordingly, we generally identify one performance obligation in our contracts. The determination of the number of performance obligations in a contract requires significant judgment and could change the timing of the amount of revenue recorded for a given period.
Step 3: Determine Contract Price
After determining the performance obligations in the contract, we determine the contract price. The contract price is the amount of consideration we expect to receive from the customer for completing the performance obligation(s). In a fixed price contract, the contract price is a single lump-sum amount. In reimbursable and time and materials based contracts, the contract price is determined by the agreed upon rates or reimbursements for time and materials expended in completing the performance obligation(s) in the contract.
A number of our contracts contain various cost and performance incentives and penalties that can either increase or decrease the contract price. These variable consideration amounts are generally earned or incurred based on certain performance metrics, most commonly related to project schedule or cost targets. We estimate variable consideration at the most likely amount of additional consideration to be received (or paid in the case of penalties), provided that meeting the variable condition is probable. We include estimated amounts of variable consideration in the contract price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the contract price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We reassess the amount of variable consideration each accounting period until the uncertainty associated with the variable consideration is resolved. Changes in the assessed amount of variable consideration are accounted for prospectively as a cumulative adjustment to revenue recognized in the current period.
Step 4: Assign Contract Price to Performance Obligations
After determining the contract price, we assign such price to the performance obligation(s) in the contract. If a contract has multiple performance obligations, we assign the contract price to each performance obligation based on the stand-alone selling prices of the distinct services that comprise each performance obligation.
Step 5: Recognize Revenue as Performance Obligations are Satisfied
We record revenue for contracts with our customers as we satisfy the contracts' performance obligations. We recognize revenue on performance obligations associated with fixed price contracts for engineering, procurement and construction services over time since these services create or enhance assets the customer controls as they are being created or enhanced. We measure progress of satisfying these performance obligations by using the percentage-of-completion method, which is based on costs incurred to date compared to the total estimated costs at completion, since it best depicts the transfer of control of assets being created or enhanced to the customer.
We recognize revenue over time for reimbursable and time and material based repair and maintenance contracts since the customer simultaneously receives and consumes the benefit of those services as we perform work under the contract. As a practical expedient allowed under ASC 606, 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.

- 9-


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



Costs incurred may include direct labor, direct materials, subcontractor costs and indirect costs, such as salaries and benefits, supplies and tools, equipment costs and insurance costs. Indirect costs are charged to projects based upon direct costs and overhead allocation rates per dollar of direct costs incurred or direct labor hours worked. Typically, customer contracts will include standard warranties that provide assurance that products and services will function as expected. The Company does not sell separate warranties.
We have numerous contracts that are in various stages of completion which require estimates to determine the forecasted costs at completion. Due to the nature of the work left to be performed on many of our contracts, the estimation of total cost at completion for fixed price contracts is complex, subject to many variables and requires significant judgment. Estimates of total cost at completion are made each period and changes in these estimates are accounted for prospectively as cumulative adjustments to revenue recognized in the current period. If estimates of costs to complete fixed price contracts indicate a loss, a provision is made through a contract write-down for the total loss anticipated.
Change Orders
Contracts are often modified through change orders, which are changes to the agreed upon scope of work. Most of our change orders, which may be priced or unpriced, are for goods or services that are not distinct from the existing contract due to the significant integration of services provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a change order on the contract price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. For unpriced change orders, we estimate the increase or decrease to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Unpriced change orders are more fully discussed in Note 7 - Commitments and Contingencies.
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.
Recently Issued Accounting Standards
Accounting Standards Update 2016-02, Leases (Topic 842)
On February 25, 2016, the FASB issued ASU 2016-02 that amends accounting for leases. Under the new guidance, lessees will recognize the following for all leases (with the exception of short-term leases) at the lease commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company plans to apply the new leases standard using the modified retrospective method, which recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the amendments is permitted, but we do not plan to do so at this time.
We do not expect the ASU to have a material impact to the amount or pattern of recognition of the Company's earnings or cash flows. However, we do expect the ASU to have a material impact to the Company's balance sheet. As of June 30, 2018, the Company had $33.1 million of future minimum lease payments under non-cancelable operating leases, primarily for facilities. See Note 8 of Item 8. Financial Statements and Supplementary Data in our 2018 Form 10-K for more information about the timing and amount of future operating lease payments. We also have month-to-month rentals of equipment that are used directly on our job sites. At this time, we believe most of these rentals will not be capitalized; however our analysis is not yet complete and we cannot yet quantify the impact to our balance sheet. Our conclusions are preliminary and could change as we continue with the implementation.

- 10-


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



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 amendments in this update are effective for the Company on July 1, 2020 and the Company may early adopt on July 1, 2019, but does not plan to do so at this time. The Company must apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. At this time, the Company does not expect this update to have a material impact to its estimate of the allowance for uncollectible accounts.
Accounting Standards Update 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09 which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities should apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The Company adopted ASU 2017-09 on July 1, 2018, which did not have a material impact on our financial position, results of operations or cash flows.
Note 2 – Revenue
Remaining Performance Obligations
The Company had $882.4 million of remaining performance obligations yet to be satisfied as of December 31, 2018. The Company expects to recognize $739.0 million of its remaining performance obligations as revenue within the next twelve months.
Contract Balances
Contracts 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 on 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,
2018
 
June 30,
2018
 
Change
 
(in thousands)
Costs and estimated earnings in excess of billings on uncompleted contracts
$
72,694

 
$
76,632

 
$
(3,938
)
Billings on uncompleted contracts in excess of costs and estimated earnings
(115,366
)
 
(120,740
)
 
5,374

Net contract liabilities
$
(42,672
)
 
$
(44,108
)
 
$
1,436

The difference between the beginning and ending balances of the Company's CIE and BIE primarily results from the timing of the Company's performance and its billings. The amount of revenue recognized during the six months ended December 31, 2018 that was included in the prior period BIE balance was $94.8 million. This revenue consists primarily of work performed during the period on contracts with customers that had advance billings.

- 11-


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



Gross amounts of contact assets and liabilities on uncompleted contracts are as follows:
 
December 31,
2018
 
June 30,
2018
 
(in thousands)
Costs incurred and estimated earnings recognized on uncompleted contracts
$
2,089,319

 
$
2,081,799

Billings on uncompleted contracts
2,131,991

 
2,125,907

Net contract liabilities
$
(42,672
)
 
$
(44,108
)
Progress billings in accounts receivable at December 31, 2018 and June 30, 2018 included retentions to be collected within one year of $21.3 million and $25.9 million, respectively. Contract retentions collectible beyond one year are included in other assets in the Condensed Consolidated Balance Sheet and totaled $11.7 million as of December 31, 2018 and $2.6 million as of June 30, 2018.
Disaggregated Revenue
Revenue disaggregated by reportable segment is presented in Note 9 - Segment Information. The following table presents revenue disaggregated by the geographic area where the work was performed:
 
 
Three Months Ended
 
Six Months Ended
 
 
December 31,
2018
 
December 31,
2017
 
December 31,
2018
 
December 31,
2017
 
 
(In thousands)
United States
 
$
329,513

 
$
259,072

 
$
639,650

 
$
480,845

Canada
 
9,714

 
22,996

 
16,795

 
69,855

Other international
 
1,341

 
843

 
2,634

 
2,121

Total Revenue
 
$
340,568

 
$
282,911

 
$
659,079

 
$
552,821

Note 3 – Disposals
Sale of Process Heating Business
In August 2018, the Company sold non-core assets associated with a business that marketed process heating equipment for $3.9 million in cash, including $0.2 million of customary final post-closing adjustments paid in October 2018. The Company recognized a gain of $0.4 million on the sale, which was included in Other in the Condensed Consolidated Statements of Income. The revenues and operating results of the business, which were included in the Oil Gas & Chemical segment, are not material.

- 12-


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, 2018
$
24,826

 
$
33,604

 
$
16,760

 
$
20,972

 
$
96,162

Disposal of business(1)

 
(2,775
)
 

 

 
(2,775
)
Translation adjustment(2)
(43
)
 

 
(73
)
 
(8
)
 
(124
)
Net balance at December 31, 2018
$
24,783

 
$
30,829

 
$
16,687

 
$
20,964

 
$
93,263

 
 
 
 
 
(1)
In August 2018, the Company disposed of a business that marketed process heating equipment. See Note 3 - Disposals for more information about the disposal. The business disposed of constituted its own reporting unit and the amount of goodwill written off was all of the goodwill assigned to that reporting unit. None of the goodwill was considered impaired since the Company recorded a gain on the disposal.
(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.
The Company did not note any impairment indicators as of December 31, 2018. However, if our market view of project opportunities or gross margins deteriorates materially from the date of our last test, the Company may need to perform an interim analysis, which could result in the recognition of a material impairment to goodwill in future periods.
Other Intangible Assets
Information on the carrying value of other intangible assets is as follows:
 
 
 
At December 31, 2018
  
Useful Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
(Years)
 
(In thousands)
Intellectual property
10 to 15
 
$
2,579

 
$
(1,691
)
 
$
888

Customer-based
6 to 15
 
38,416

 
(18,235
)
 
20,181

Non-compete agreements
4
 
1,453

 
(1,426
)
 
27

Total amortizing intangible assets
 
 
$
42,448

 
$
(21,352
)
 
$
21,096

 
 
 
 
At June 30, 2018
 
Useful Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
(Years)
 
(In thousands)
Intellectual property
9 to 15
 
$
2,579

 
$
(1,603
)
 
$
976

Customer-based
6 to 15
 
38,562

 
(16,763
)
 
21,799

Non-compete agreements
4
 
1,453

 
(1,414
)
 
39

Total amortizing intangible assets
 
 
$
42,594

 
$
(19,780
)
 
$
22,814


Amortization expense totaled $0.8 million and $1.7 million during the three and six months ended December 31, 2018 and $1.4 million and $3.0 million during the three and six months ended December 31, 2017, respectively.

- 13-


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




We estimate that the remaining amortization expense related to December 31, 2018 amortizing intangible assets will be as follows (in thousands):
Period ending:
 
Remainder of Fiscal 2019
$
1,858

Fiscal 2020
3,706

Fiscal 2021
3,686

Fiscal 2022
2,854

Fiscal 2023
2,405

Fiscal 2024
2,113

Thereafter
4,474

Total estimated remaining amortization expense at December 31, 2018
$
21,096

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

- 14-


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



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, 2018, Covenant EBITDA was $31.5 million. Consolidated Funded Indebtedness at December 31, 2018 was $28.7 million.
Availability under the senior secured revolving credit facility at December 31, 2018 was as follows: 
 
December 31,
2018
 
June 30,
2018
 
(In thousands)
Senior secured revolving credit facility
$
300,000

 
$
300,000

Capacity constraint due to the Leverage Ratio
205,437

 
189,741

Capacity under the credit facility
94,563

 
110,259

Borrowings outstanding

 

Letters of credit
28,716

 
37,073

Availability under the senior secured revolving credit facility
$
65,847

 
$
73,186

At December 31, 2018, the Company was in compliance with all affirmative, negative, and financial covenants under the Credit Agreement.
Note 6 – Income Taxes
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act makes broad and complex changes to the U.S. tax code, which have affected our current results and will affect our future results.
The following are significant changes in the tax code that became effective for the Company beginning July 1, 2018:
eliminating the deduction for domestic production activity;
limiting the annual deduction for business interest;
taxing global intangible low-tax income;
allowing a deduction for domestically earned foreign intangible income; and
establishing a new base erosion and anti-abuse tax on payments between U.S. taxpayers and foreign related parties.
As of December 31, 2018, we have completed our accounting for the tax effect of the Act as follows:
Deferred Taxes Remeasurement
We remeasured our domestic deferred tax assets and liabilities based on the rates at which we expect them to reverse in the future. At June 30, 2018, we completed the remeasurement of our domestic deferred tax assets and liabilities which resulted in an income tax benefit of $0.5 million included in fiscal 2018.
One-time Transition Tax on Unrepatriated Earnings of Certain Foreign Subsidiaries
The Act includes a one-time transition tax based on our total post-1986 foreign earnings and profits ("E&P") which we have previously deferred from U.S. income taxes. Based on our completed calculations surrounding this tax, we incurred no additional tax related to this provision since our foreign subsidiaries have overall negative E&P.


- 15-


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



Global Intangible Low-Tax Income (“GILTI”)
The Act creates a new requirement that certain income earned by controlled foreign corporations must be included currently in the gross income of the U.S. shareholder. Under U.S. GAAP, we have made an accounting policy election to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred instead of factoring such amounts into the measurement of our deferred taxes. For fiscal 2019, we project to have no U.S. taxable income inclusion related to GILTI.
Valuation Allowances on Foreign Tax Credit Carryforwards
We continue to assess our ability to utilize our foreign tax credits in light of the lower U.S. federal income tax rate. As of December 31, 2018, we had $1.5 million of foreign tax credit carryforwards. We have placed a valuation allowance on $0.2 million of credits expiring in fiscal 2019 and fiscal 2020. Of the remaining $1.3 million, $0.6 million will expire in fiscal 2021 and the remaining $0.7 million of credits will expire in fiscal 2023 through fiscal 2025 if not utilized. The majority of these credits were generated by our branch operations in Canada. Future operations of our Canadian branches will impact our ability to utilize these credits.
Indefinite Reinvestment Assertion
We do not provide for outside basis differences under the indefinite reinvestment assertion of ASC 740-30. Based on our analysis of the Act, we do not anticipate the need to provide for additional taxes for basis differences or withholding taxes on remitted foreign earnings in the immediate future.
Effective Tax Rate
Our effective tax rates for the three and six months ended December 31, 2018 were 27.4% and 23.7%, respectively, compared to (5.8)% and 25.2% for the same periods a year ago. The effective tax rate for the three months ended December 31, 2018 was in line with our expected effective tax rate of 27.0% for fiscal 2019. The effective tax rate for the six months ended December 31, 2018 was positively impacted by $0.3 million of excess tax benefits related to the vesting of stock-based compensation awards. The effective tax rates in fiscal 2018 were positively impacted by a one-time $1.2 million deferred taxes remeasurement adjustment in connection with accounting for the Act.
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.
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 $13.2 million million at December 31, 2018 and $15.0 million at June 30, 2018. 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.

- 16-


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



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.
The computation of basic and diluted earnings per share is as follows:
 
Three Months Ended
 
Six Months Ended
 
December 31,
2018
 
December 31,
2017
 
December 31,
2018
 
December 31,
2017
 
(In thousands, except per share data)
Basic EPS:
 
 
 
 
 
 
 
Net income
$
3,932

 
$
4,532

 
$
6,237

 
$
8,356

Weighted average shares outstanding
27,043

 
26,771

 
26,982

 
26,713

Basic earnings per share
$
0.15

 
$
0.17

 
$
0.23

 
$
0.31

Diluted EPS:

 

 

 

Weighted average shares outstanding – basic
27,043

 
26,771

 
26,982

 
26,713

Dilutive stock options
27

 
34

 
29

 
24

Dilutive nonvested deferred shares
512

 
273

 
617

 
196

Diluted weighted average shares
27,582

 
27,078

 
27,628

 
26,933

Diluted earnings per share
$
0.14

 
$
0.17

 
$
0.23

 
$
0.31

 
The following securities are considered antidilutive and have been excluded from the calculation of Diluted EPS:
 
Three Months Ended
 
Six Months Ended
 
December 31,
2018
 
December 31,
2017
 
December 31,
2018
 
December 31,
2017
 
(In thousands)
Nonvested deferred shares
1,543

 
342

 
1,458

 
442


- 17-


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



Note 9 – Segment Information
We operate our business through four reportable segments: Electrical Infrastructure; Oil Gas & Chemical; Storage Solutions; and Industrial.
The Electrical Infrastructure segment consists of high voltage services provided to investor owned utilities, including construction of new substations, upgrades of existing substations, short-run transmission line installations, distribution upgrades and maintenance, as well as emergency and storm restoration services. We also provide construction and maintenance services to a variety of power generation facilities, such as combined cycle plants and other natural gas fired power stations.
The Oil Gas & Chemical segment serves customers primarily in the downstream and midstream petroleum industries who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. We also perform work in the petrochemical, upstream petroleum, and sulfur extraction, recovery and processing markets. Our services include turnarounds, plant maintenance, engineering and capital construction. We also offer industrial cleaning services including hydro-blasting, hydro-excavating, advanced chemical cleaning and vacuum services.
The Storage Solutions segment consists of work related to aboveground storage tanks ("AST") and terminals. Also included in this segment are cryogenic and other specialty storage tanks and terminals including liquefied natural gas, liquid nitrogen/liquid oxygen, liquid petroleum, other specialty vessels such as spheres as well as marine structures and truck and rail loading/offloading facilities. Our services include engineering, fabrication and construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, we offer AST products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.
The Industrial segment consists of work for integrated iron and steel companies, major mining and minerals companies engaged primarily in the extraction of copper, as well as other companies in aerospace and defense, cement, agriculture and grain, food and other industries. Our services include engineering, fabrication and construction, and maintenance and repair, which includes planned and emergency services. We also design instrumentation and control systems and offer specialized expertise in the design and construction of bulk material handling systems.
The Company evaluates performance and allocates resources based on operating income. The accounting policies of the reportable segments are the same as those described in the Summary of Significant Accounting Policies footnote included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2018. Intersegment sales and transfers are recorded at cost; therefore, no intersegment profit or loss is recognized.
Segment assets consist primarily of cash and cash equivalents, accounts receivable, CIE/BIE, property, plant and equipment, goodwill and other intangible assets.


- 18-


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



Results of Operations
(In thousands)
 
Three Months Ended

Six Months Ended
 
December 31,
2018

December 31,
2017

December 31,
2018

December 31,
2017
Gross revenues







Electrical Infrastructure
$
58,173


$
64,852


$
102,874


$
144,823

Oil Gas & Chemical
87,521


88,396


163,083


174,257

Storage Solutions
126,198


71,233


239,965


142,805

Industrial
70,385


59,260


155,942


92,531

Total gross revenues
$
342,277


$
283,741


$
661,864


$
554,416

Less: Inter-segment revenues







Oil Gas & Chemical
$
1,234

 
$
37

 
$
1,305

 
$
245

Storage Solutions
475

 
792

 
1,480

 
1,349

Industrial

 
1

 

 
1

Total inter-segment revenues
$
1,709


$
830


$
2,785


$
1,595

Consolidated revenues







Electrical Infrastructure
$
58,173


$
64,852


$
102,874


$
144,823

Oil Gas & Chemical
86,287


88,359


161,778


174,012

Storage Solutions
125,723


70,441


238,485


141,456

Industrial
70,385


59,259


155,942


92,530

Total consolidated revenues
$
340,568


$
282,911


$
659,079


$
552,821

Gross profit







Electrical Infrastructure
$
3,562


$
5,541


$
6,945


$
13,808

Oil Gas & Chemical
9,157


11,768


14,782


22,806

Storage Solutions
11,147


5,298


20,700


12,838

Industrial
4,020


4,096


8,880


6,142

Total gross profit
$
27,886


$
26,703


$
51,307


$
55,594

Operating income (loss)







Electrical Infrastructure
$
438

 
$
1,079

 
$
1,095

 
$
4,656

Oil Gas & Chemical
3,585

 
5,198

 
4,099

 
9,332

Storage Solutions
1,356

 
(2,609
)
 
1,641

 
(2,684
)
Industrial
148

 
1,506

 
912

 
1,191

Total operating income
$
5,527


$
5,174


$
7,747


$
12,495

Total assets by segment were as follows:

 
December 31,
2018

June 30,
2018
Electrical Infrastructure
 
$
147,246

 
$
161,207

Oil Gas & Chemical
 
96,801

 
111,064

Storage Solutions
 
176,634

 
149,695

Industrial
 
61,250

 
58,816

Unallocated assets
 
87,621

 
77,251

Total segment assets
 
$
569,552


$
558,033


- 19-


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



Note 10 – Equity
In December 2018, the Company repurchased 310,532 shares of its common stock for $5.2 million. However, only $3.2 million of the repurchases were cash settled by December 31, 2018. As a result, the Company recorded a $2.0 million accrual to treasury stock for the unsettled shares that were cash settled in January 2019. This accrual has been disclosed as a non-cash financing activity in the supplemental disclosures section of the Consolidated Statements of Cash Flows.

- 20-


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CRITICAL ACCOUNTING POLICIES
Except for the Revenue Recognition accounting policy which has been updated for the adoption the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) on July 1, 2018, there have been no material changes in our critical accounting policies from those reported in our fiscal 2018 Annual Report on Form 10-K filed with the SEC. For more information on our critical accounting policies, see Part II, Item 7 of our fiscal 2018 Annual Report on Form 10-K. The following section provides certain information with respect to our critical accounting estimates as of the close of our most recent quarterly period.
Revenue Recognition
General Information about our Contracts with Customers
Our revenues come from contracts to provide engineering, procurement, fabrication and construction, repair and maintenance and other services. Our engineering, procurement and fabrication and construction services are usually provided in association with capital projects, which commonly are fixed price contracts and are billed based on project milestones. Our repair and maintenance services typically are cost reimbursable or time and material based contracts and are billed monthly or, for projects of short duration, at the conclusion of the project. The elapsed time from award to completion of performance may be in excess of one year for capital projects.
Step 1: Contract Identification
We do not recognize revenue unless we have identified a contract with a customer. A contract with a customer exists when it has approval and commitment from both parties, the rights and obligations of the parties are identified, payment terms are identified, the contract has commercial substance, and collectibility is probable. We also evaluate whether a contract should be combined with other contracts and accounted for as one single contract. This evaluation requires judgment and could change the timing of the amount of revenue and profit recorded for a given period.
Step 2: Identify Performance Obligations
Next, we identify each performance obligation in the contract. A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services to the customer. Revenue is recognized separately for each performance obligation in the contract. Many of our contracts have one clearly identifiable performance obligation. However, many of our contracts provide the customer an integrated service that includes two or more of the following services: engineering, procurement, fabrication, construction, repair and maintenance services. For these contracts, we do not consider the integrated services to be distinct within the context of the contract when the separate scopes of work combine into a single commercial objective or capability for the customer. Accordingly, we generally identify one performance obligation in our contracts. The determination of the number of performance obligations in a contract requires significant judgment and could change the timing of the amount of revenue recorded for a given period.
Step 3: Determine Contract Price
After determining the performance obligations in the contract, we determine the contract price. The contract price is the amount of consideration we expect to receive from the customer for completing the performance obligation(s). In a fixed price contract, the contract price is a single lump-sum amount. In reimbursable and time and materials based contracts, the contract price is determined by the agreed upon rates or reimbursements for time and materials expended in completing the performance obligation(s) in the contract.
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.

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Step 4: Assign Contract Price to Performance Obligations
After determining the contract price, we assign such price to the performance obligation(s) in the contract. If a contract has multiple performance obligations, we assign the contract price to each performance obligation based on the stand-alone selling prices of the distinct services that comprise each performance obligation.
Step 5: Recognize Revenue as Performance Obligations are Satisfied
We record revenue for contracts with our customers as we satisfy the contracts' performance obligations. We recognize revenue on performance obligations associated with fixed price contracts for engineering, procurement and construction services over time since these services create or enhance assets the customer controls as they are being created or enhanced. We measure progress of satisfying these performance obligations by using the percentage-of-completion method, which is based on costs incurred to date compared to the total estimated costs at completion, since it best depicts the transfer of control of assets being created or enhanced to the customer.
We recognize revenue over time for reimbursable and time and material based repair and maintenance contracts since the customer simultaneously receives and consumes the benefit of those services as we perform work under the contract. As a practical expedient allowed under ASC 606, we record revenue for these contracts in the amount to which we have a right to invoice for the services performed provided that we have a right to consideration from the customer in an amount that corresponds directly with the value of the performance completed to date.
Costs incurred may include direct labor, direct materials, subcontractor costs and indirect costs, such as salaries and benefits, supplies and tools, equipment costs and insurance costs. Indirect costs are charged to projects based upon direct costs and overhead allocation rates per dollar of direct costs incurred or direct labor hours worked. Typically, customer contracts will include standard warranties that provide assurance that products and services will function as expected. The Company does not sell separate warranties.
We have numerous contracts that are in various stages of completion which require estimates to determine the forecasted costs at completion. Due to the nature of the work left to be performed on many of our contracts, the estimation of total cost at completion for fixed price contracts is complex, subject to many variables and requires significant judgment. Estimates of total cost at completion are made each period and changes in these estimates are accounted for prospectively as cumulative adjustments to revenue recognized in the current period. If estimates of costs to complete fixed price contracts indicate a loss, a provision is made through a contract write-down for the total loss anticipated.
Change Orders
Contracts are often modified through change orders, which are changes to the agreed upon scope of work. Most of our change orders, which may be priced or unpriced, are for goods or services that are not distinct from the existing contract due to the significant integration of services provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a change order on the contract price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. For unpriced change orders, we estimate the increase or decrease to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Unpriced change orders are more fully discussed in Note 7 - Commitments and Contingencies.
Claims
Sometimes we seek claims for amounts in excess of the contract price for delays, errors in specifications and designs, contract terminations, change orders in dispute or other causes of additional costs incurred by us. Recognition of amounts as additional contract price related to claims is appropriate only if there is a legal basis for the claim. The determination of our legal basis for a claim requires significant judgment. We estimate the change to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Claims are more fully discussed in Note 7 - Commitments and Contingencies.
Unpriced Change Orders and Claims
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $13.2 million at December 31, 2018 and $15.0 million at June 30, 2018. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings.

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Loss Contingencies
Various legal actions, claims, and other contingencies arise in the normal course of our business. Contingencies are recorded in the consolidated financial statements, or are otherwise disclosed, in accordance with Accounting Standard Codification ("ASC") Topic 450-20, “Loss Contingencies”. Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and estimable. We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes known. We believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results of operations or liquidity. However, the results of litigation are inherently unpredictable and the possibility exists that the ultimate resolution of one or more of these matters could result in a material effect on our financial position, results of operations or liquidity.
Legal costs are expensed as incurred.
Goodwill
Goodwill represents the excess of the purchase price of acquisitions over the acquisition date fair value of the net identifiable tangible and intangible assets acquired. In accordance with current accounting guidance, goodwill is not amortized, but 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 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.
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 carrying values of our reporting units to our market capitalization.
The Company did not note any impairment indicators as of December 31, 2018. However, if our market view of project opportunities or gross margins deteriorates materially from the date of our last test, the Company may need to perform an interim analysis, which could result in the recognition of a material impairment to goodwill in future periods.
Income Taxes
We use the asset and liability approach for financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances based on our judgments and estimates are established when necessary to reduce deferred tax assets to the amount expected to be realized in future operating results. Company management believes that realization of deferred tax assets in excess of the valuation allowance is more likely than not. Our estimates are based on facts and circumstances in existence as well as interpretations of existing tax regulations and laws applied to the facts and circumstances, with the help of professional tax advisors. Therefore, we estimate and provide for amounts of additional income taxes that may be assessed by the various taxing authorities.

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Recently Issued Accounting Standards
Accounting Standards Update 2016-02, Leases (Topic 842)
On February 25, 2016, the FASB issued ASU 2016-02 that amends accounting for leases. Under the new guidance, lessees will recognize the following for all leases (with the exception of short-term leases) at the lease commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company plans to apply the new leases standard using the modified retrospective method, which recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the amendments is permitted, but we do not plan to do so at this time.
We do not expect the ASU to have a material impact to the amount or pattern of recognition of the Company's earnings or cash flows. However, we do expect the ASU to have a material impact to the Company's balance sheet. As of June 30, 2018, the Company had $33.1 million of future minimum lease payments under non-cancelable operating leases, primarily for facilities. See Note 8 of Item 8. Financial Statements and Supplementary Data in our 2018 Form 10-K for more information about the timing and amount of future operating lease payments. We also have month-to-month rentals of equipment that are used directly on our job sites. At this time, we believe most of these rentals will not be capitalized; however our analysis is not yet complete and we cannot yet quantify the impact to our balance sheet. Our conclusions are preliminary and could change as we continue with the implementation.
Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
On June 16, 2016, the FASB issued ASU 2016-13, which will change how the Company accounts for its allowance for uncollectible accounts. The amendments in this update require a financial asset (or a group of financial assets) to be presented at the net amount expected to be collected. The income statement will reflect any increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount.
Current GAAP delays the recognition of the full amount of credit losses until the loss is probable of occurring. The amendments in this update eliminate the probable initial recognition threshold and, instead, reflect the Company's current estimate of all expected credit losses. In addition, current guidance limits the information the Company may consider in measuring a credit loss to its past events and current conditions. The amendments in this update broaden the information the Company may consider in developing its expected credit loss estimate to include forecasted information.
The amendments in this update are effective for the Company on July 1, 2020 and the Company may early adopt on July 1, 2019, but does not plan to do so at this time. The Company must apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. At this time, the Company does not expect this update to have a material impact to its estimate of the allowance for uncollectible accounts.
Accounting Standards Update 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09 which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Entities should apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The Company adopted ASU 2017-09 on July 1, 2018, which did not have a material impact on our financial position, results of operations or cash flows.

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RESULTS OF OPERATIONS
Overview
We operate our business through four reportable segments: Electrical Infrastructure; Oil Gas & Chemical; Storage Solutions; and Industrial.
The Electrical Infrastructure segment consists of high voltage services provided to investor owned utilities, including construction of new substations, upgrades of existing substations, short-run transmission line installations, distribution upgrades and maintenance, as well as emergency and storm restoration services. We also provide construction and maintenance services to a variety of power generation facilities, such as combined cycle plants and other natural gas fired power stations.
The Oil Gas & Chemical segment serves customers primarily in the downstream and midstream petroleum industries who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. We also perform work in the petrochemical, upstream petroleum, and sulfur extraction, recovery and processing markets. Our services include turnarounds, plant maintenance, engineering and capital construction. We also offer industrial cleaning services including hydro-blasting, hydro-excavating, advanced chemical cleaning and vacuum services.
The Storage Solutions segment consists of work related to aboveground storage tanks ("AST") and terminals. Also included in this segment are cryogenic and other specialty storage tanks and terminals including liquefied natural gas, liquid nitrogen/liquid oxygen, liquid petroleum, other specialty vessels such as spheres as well as marine structures and truck and rail loading/offloading facilities. Our services include engineering, fabrication and construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, we offer AST products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.
The Industrial segment consists of work for integrated iron and steel companies, major mining and minerals companies engaged primarily in the extraction of copper, as well as other companies in aerospace and defense, cement, agriculture and grain, food and other industries. Our services include engineering, fabrication and construction, and maintenance and repair, which includes planned and emergency services. We also design instrumentation and control systems and offer specialized expertise in the design and construction of bulk material handling systems.
Three Months Ended December 31, 2018 Compared to the Three Months Ended December 31, 2017
Consolidated
Consolidated revenue was $340.6 million for the three months ended December 31, 2018, compared to $282.9 million in the same period in the prior fiscal year. On a segment basis, consolidated revenue increased in the Storage Solutions and Industrial segments by $55.3 million and $11.2 million, respectively. These increases were partially offset by decreases in consolidated revenue in the Electrical Infrastructure and Oil Gas & Chemical segments of $6.7 million and $2.1 million, respectively.
Consolidated gross profit increased to $27.9 million in the three months ended December 31, 2018 compared to $26.7 million in the same period in the prior fiscal year. Gross margin decreased to 8.2% in the three months ended December 31, 2018 compared to 9.4% in the same period in the prior fiscal year. Fiscal 2019 gross margin was negatively impacted by the wind down of lower margin work awarded in a highly competitive environment in prior periods.
Consolidated SG&A expenses were $22.4 million in the three months ended December 31, 2018 compared to $21.5 million in the same period a year earlier. The increase was attributable to higher compensation expense, partially offset by lower amortization expense on intangible assets that fully amortized in fiscal 2018.
Interest expense was $0.4 million in the three months ended December 31, 2018 compared to $0.8 million in the same period a year ago. The decrease was due to a lower average debt balance during the three months ended December 31, 2018. Interest income was $0.3 million in the three months ended December 31, 2018 compared to $0.1 million in the same period a year ago due to an increase in our average cash balance and higher interest rates.
Our effective tax rate for the three months ended December 31, 2018 was 27.4% compared to (5.8)% in the same period last year. The effective tax rate in fiscal 2019 was in line with our expected effective tax rate of 27.0%. The effective tax rate in fiscal 2018 was positively impacted by a one-time $1.2 million deferred taxes remeasurement adjustment in connection with accounting for the Tax Cuts and Jobs Act.
For the three months ended December 31, 2018, net income and the related fully diluted earnings per share were $3.9 million and $0.14, respectively, compared to net income and related fully diluted earnings per share of $4.5 million and $0.17, respectively, in the same period a year earlier.

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Electrical Infrastructure
Revenue for the Electrical Infrastructure segment decreased $6.7 million to $58.2 million in the three months ended December 31, 2018 compared to $64.9 million in the same period a year earlier. The decrease is primarily due to the expected reduction in power generation EPC work, partially offset by an increase in power delivery work. The segment gross margin was 6.1% in fiscal 2019 and 8.5% in fiscal 2018. Fiscal 2019 segment gross margin was negatively impacted by lower than previously forecasted margins on a limited number of projects, lower direct margins due to working off the backlog that was awarded during a period of increased competition and a reduction in the expected recovery on a claim.
Oil Gas & Chemical
Revenue for the Oil Gas & Chemical segment was $86.3 million in the three months ended December 31, 2018 compared to $88.4 million in the same period a year earlier. The decrease of $2.1 million is primarily due to lower levels of capital and engineering work, partially offset by higher volumes of turnarounds and maintenance work. The segment gross margin was 10.6% for the three months ended December 31, 2018 compared to 13.3% in the same period last year. Fiscal 2018 segment gross margin benefited from strong project execution on a capital project.
Storage Solutions
Revenue for the Storage Solutions segment was $125.7 million in the three months ended December 31, 2018 compared to $70.4 million in the same period a year earlier, an increase of $55.3 million. The increase in segment revenue is primarily a result of increased tank and terminal construction work. The segment gross margin was 8.9% in the three months ended December 31, 2018 and 7.5% in the three months ended December 31, 2017. Although improved, fiscal 2019 gross margins were negatively impacted by the wind down of lower margin work awarded in a highly competitive environment in prior periods. The fiscal 2018 segment gross margin was negatively impacted by the under-recovery of construction overhead costs.
Industrial
Revenue for the Industrial segment increased $11.2 million to $70.4 million in the three months ended December 31, 2018 compared to $59.2 million in the same period a year earlier. The increase in revenue is primarily attributable to higher volumes of thermal vacuum chamber work. The segment gross margin was 5.7% in the three months ended December 31, 2018 compared to 6.9% in the same period a year earlier. The fiscal 2019 segment gross margin was negatively impacted by cost escalation on a capital project that was bid in a highly competitive environment and a high volume of lower margin reimbursable work on a capital project.
Six Months Ended December 31, 2018 Compared to the Six Months Ended December 31, 2017
Consolidated    
Consolidated revenue was $659.1 million for the six months ended December 31, 2018, compared to $552.8 million in the same period in the prior fiscal year. On a segment basis, consolidated revenue increased in the Storage Solutions and Industrial segments by $97.0 million and $63.4 million, respectively. These increases were partially offset by decreases in consolidated revenue in the Electrical Infrastructure and Oil Gas & Chemical segments of $41.9 million and $12.3 million, respectively.
Consolidated gross profit decreased to $51.3 million in the six months ended December 31, 2018 compared to $55.6 million in the same period in the prior fiscal year. Gross margin decreased to 7.8% in the six months ended December 31, 2018 compared to 10.1% in the same period in the prior fiscal year. Fiscal 2019 gross margin was negatively impacted by the wind down of lower margin work awarded in a highly competitive environment in prior periods and lower than previously forecasted margins on a limited number of those projects.
Consolidated SG&A expenses were $43.6 million in the six months ended December 31, 2018 compared to $43.1 million in the same period a year earlier. The increase was attributable to higher compensation expense, partially offset by lower amortization expense on intangible assets that fully amortized in fiscal 2018.
Interest expense was $0.7 million in the six months ended December 31, 2018 compared to $1.4 million in the same period a year ago. The decrease was due to a lower average debt balance during the six months ended December 31, 2018. Interest income was $0.6 million in the six months ended December 31, 2018 compared to $0.1 million in the same period a year ago due to an increase in our average cash balance and higher interest rates.

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Our effective tax rate for the six months ended December 31, 2018 was 23.7% compared to 25.2% in the same period last year. The effective tax rate for the six months ended December 31, 2018 was positively impacted by $0.3 million of excess tax benefits related to the vesting of stock-based compensation awards. The effective tax rate in fiscal 2018 was positively impacted by a one-time $1.2 million deferred taxes remeasurement adjustment in connection with accounting for the Tax Cuts and Jobs Act. We expect our effective income tax rate to be approximately 27.0% for the balance of fiscal 2019.
For the six months ended December 31, 2018, net income and the related fully diluted earnings per share were $6.2 million and $0.23, respectively, compared to net income and related fully diluted earnings per share of $8.4 million and $0.31, respectively, in the same period a year earlier.
Electrical Infrastructure
Revenue for the Electrical Infrastructure segment decreased $41.9 million to $102.9 million in the six months ended December 31, 2018 compared to $144.8 million in the same period a year earlier. The decrease is primarily due to the expected reduction in power generation EPC work, partially offset by an increase in power delivery work. The segment gross margin was 6.8% in fiscal 2019 and 9.5% in fiscal 2018. Fiscal 2019 segment gross margin was negatively impacted by lower than previously forecasted margins on a limited number of projects and lower direct margins due to working off the backlog that was awarded during a period of increased competition.
Oil Gas & Chemical
Revenue for the Oil Gas & Chemical segment was $161.8 million in the six months ended December 31, 2018 compared to $174.1 million in the same period a year earlier. The decrease of $12.3 million is primarily due to lower levels of capital and engineering work, partially offset by higher volumes of turnarounds and maintenance work. The segment gross margin was 9.1% for the six months ended December 31, 2018 compared to 13.1% in the same period last year. Fiscal 2018 segment gross margin benefited from strong project execution on a capital project.
Storage Solutions
Revenue for the Storage Solutions segment was $238.5 million in the six months ended December 31, 2018 compared to $141.5 million in the same period a year earlier, an increase of $97.0 million. The increase in segment revenue is primarily a result of increased tank and terminal construction work. The segment gross margin was 8.7% in the six months ended December 31, 2018 and 9.1% in the six months ended December 31, 2017. Fiscal 2019 gross margins were negatively impacted by the completion of projects awarded at lower margins and lower than previously forecasted margins on a limited number of projects. The fiscal 2018 segment gross margin was negatively impacted by the under-recovery of construction overhead costs.
Industrial
Revenue for the Industrial segment increased $63.4 million to $155.9 million in the six months ended December 31, 2018 compared to $92.5 million in the same period a year earlier. The increase in revenue is primarily attributable to higher volumes of iron and steel and thermal vacuum chamber work. The segment gross margin was 5.7% in the six months ended December 31, 2018 compared to 6.6% in the same period a year earlier. The fiscal 2019 segment gross margin was negatively impacted by cost escalation on a capital project that was bid in a highly competitive environment and a high volume of lower margin reimbursable work on a capital project.
Backlog
We define backlog as the total dollar amount of revenue that we expect to recognize as a result of performing work that has been awarded to us through a signed contract, notice to proceed or other type of assurance that we consider firm. The following arrangements are considered firm:

fixed-price awards;

minimum customer commitments on cost plus arrangements; and

certain time and material arrangements in which the estimated value is firm or can be estimated with a reasonable amount of certainty in both timing and amounts.

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For long-term maintenance contracts with no minimum commitments and other established customer agreements, we include only the amounts that we expect to recognize as revenue over the next 12 months. For arrangements in which we have received a limited notice to proceed, we include the entire scope of work in our backlog if the notice is significant relative to the overall project and if we conclude that the likelihood of the full project proceeding as high. For all other arrangements, we calculate backlog as the estimated contract amount less revenues recognized as of the reporting date.
The following table provides a summary of changes in our backlog for the three months ended December 31, 2018: 
 
Electrical
Infrastructure
 
Oil Gas &
Chemical
 
Storage
Solutions
 
Industrial
 
Total
 
(In thousands)
Backlog as of September 30, 2018
$
108,845

 
$
189,492

 
$
585,737

 
$
225,398

 
$
1,109,472

Project awards
52,066

 
74,656

 
85,190

 
65,580

 
277,492

Revenue recognized
(58,173
)
 
(86,287
)
 
(125,723
)
 
(70,385
)
 
(340,568
)
Backlog as of December 31, 2018
$
102,738

 
$
177,861

 
$
545,204

 
$
220,593

 
$
1,046,396

Book-to-bill ratio(1)
0.9

 
0.9

 
0.7

 
0.9

 
0.8

 
 
 
 
 
(1)
Calculated by dividing project awards by revenue recognized during the period.

The following table provides a summary of changes in our backlog for the six months ended December 31, 2018:
 
Electrical
Infrastructure
 
Oil Gas &
Chemical
 
Storage
Solutions
 
Industrial
 
Total
 
(In thousands)
Backlog as of June 30, 2018
$
113,957

 
$
227,452

 
$
613,360

 
$
263,827

 
1,218,596

Project awards
91,655

 
112,187

 
170,329

 
112,708

 
486,879

Revenue recognized
(102,874
)
 
(161,778
)
 
(238,485
)
 
(155,942
)
 
(659,079
)
Backlog as of December 31, 2018
$
102,738

 
$
177,861

 
$
545,204

 
$
220,593

 
$
1,046,396

Book-to-bill ratio(1)
0.9

 
0.7

 
0.7

 
0.7

 
0.7

 
 
 
 
 
(1)
Calculated by dividing project awards by revenue recognized during the period.
Project awards in all segments are cyclical and are typically the result of a sales process that can take several months or years to complete. It is common for awards to shift from one period to another as the timing of awards is dependent upon a number of factors including changes in market conditions, permitting, off take agreements, project financing and other factors. Backlog volatility may increase for some segments from time to time when individual project awards are less frequent, but more significant. The level of awards presented above only represent interim periods and, based on our view of the market and project funnel, is not indicative of the longer term opportunities available to us.
Seasonality and Other Factors
Our operating results can exhibit seasonal fluctuations, especially in our Oil Gas & Chemical segment, for a variety of reasons. Turnarounds and planned outages at customer facilities are typically scheduled in the spring and the fall when the demand for energy is lower. Within the Electrical Infrastructure segment, transmission and distribution work is generally scheduled by the public utilities when the demand for electricity is at its lowest. Therefore, revenue volume in the summer months is typically lower than in other periods throughout the year. Also, we typically see a lower level of operating activity relating to construction projects during the winter months and early in the calendar year because many of our customers’ capital budgets have not been finalized. Our business can also be affected, both positively and negatively, by seasonal factors such as energy demand or weather conditions including hurricanes, snowstorms, and abnormally low or high temperatures. Some of these seasonal factors may cause some of our offices and projects to close or reduce activities temporarily. In addition to the above noted factors, the general timing of project starts and completions could exhibit significant fluctuations. Accordingly, results for any interim period may not necessarily be indicative of operating results for the full year.
Other factors impacting operating results in all segments include work site permitting delays or customers accelerating or postponing work. The differing types, sizes, and durations of our contracts, combined with their geographic diversity and stages of completion, often results in fluctuations in the Company's operating results.

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Non-GAAP Financial Measure
EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as net income (loss) before interest expense, income taxes, depreciation and amortization. We present EBITDA because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses. We believe that the line item on our Consolidated Statements of Income entitled “Net income” is the most directly comparable GAAP measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. EBITDA, as we calculate it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure is not a measure of our ability to fund our cash needs. As EBITDA excludes certain financial information compared with net income, the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions that are excluded. Our non-GAAP performance measure, EBITDA, has certain material limitations as follows:

It does not include interest expense. Because we have borrowed money to finance our operations and acquisitions, pay commitment fees to maintain our credit facility, and incur fees to issue letters of credit under the credit facility, interest expense is a necessary and ongoing part of our costs and has assisted us in generating revenue. Therefore, any measure that excludes interest expense has material limitations.

It does not include income taxes. Because the payment of income taxes is a necessary and ongoing part of our operations, any measure that excludes income taxes has material limitations.

It does not include depreciation or amortization expense. Because we use capital and intangible assets to generate revenue, depreciation and amortization expense is a necessary element of our cost structure. Therefore, any measure that excludes depreciation or amortization expense has material limitations.
A reconciliation of EBITDA to net income follows:
 
 
Three Months Ended
 
Six Months Ended
 
December 31,
2018
 
December 31,
2017
 
December 31,
2018
 
December 31,
2017
 
(In thousands)
Net income
$
3,932

 
$
4,532

 
$
6,237

 
$
8,356

Interest expense
361

 
819

 
653

 
1,437

Provision for income taxes
1,486

 
(247
)
 
1,937

 
2,820

Depreciation and amortization
4,583

 
5,313

 
9,126

 
10,906

EBITDA
$
10,362

 
$
10,417

 
$
17,953

 
$
23,519



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LIQUIDITY AND CAPITAL RESOURCES
Overview
We define liquidity as the ongoing ability to pay our liabilities as they become due, fund business operations and meet all monetary contractual obligations. Our primary sources of liquidity as of December 31, 2018 were cash on hand, capacity under our senior secured revolving credit facility and cash generated from operations before consideration of changes in working capital. Cash on hand at December 31, 2018 totaled $71.5 million and availability under the senior secured revolving credit facility totaled $65.8 million resulting in available liquidity of $137.3 million as of December 31, 2018. The Company's liquidity continues to be adequate to support its short-term needs and long-term strategic growth plans.
The following table provides a summary of changes in our liquidity for the three months ended December 31, 2018 (in thousands):
Liquidity as of September 30, 2018
$
129,295

Net decrease in cash
(3,247
)
Decrease in credit facility capacity constraint
771

Net repayments on credit facility
1,393

Decrease in letters of credit outstanding
8,968

Foreign currency translation of outstanding borrowings
156

Liquidity as of December 31, 2018
$
137,336

The following table provides a summary of changes in our liquidity for the six months ended December 31, 2018 (in thousands):
Liquidity as of June 30, 2018
$
137,243

Net increase in cash
7,432

Increase in credit facility capacity constraint
(15,696
)
Net borrowings on credit facility
(140
)
Decrease in letters of credit outstanding
8,357

Foreign currency translation of outstanding borrowings
140

Liquidity as of December 31, 2018
$
137,336

A detailed discussion of our credit agreement is provided under the caption "Senior Secured Revolving Credit Facility" included in this Liquidity and Capital Resources section of the Form 10-Q.
Factors that routinely impact our short-term liquidity and may impact our long-term liquidity include, but are not limited to:
Changes in costs and estimated earnings in excess of billings on uncompleted contracts and billings on uncompleted contracts in excess of costs due to contract terms that determine the timing of billings to customers and the collection of those billings:

Some cost plus and fixed price customer contracts are billed based on milestones which may require us to incur significant expenditures prior to collections from our customers.

Time and material contracts are normally billed in arrears. Therefore, we are routinely required to carry these costs until they can be billed and collected.

Some of our large construction projects may require security in the form of letters of credit or significant retentions. The timing of collection of retentions is often uncertain.

Other changes in working capital

Capital expenditures
Other factors that may impact both short and long-term liquidity include:

Acquisitions and disposals of businesses


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Strategic investments in new operations

Purchases of shares under our stock buyback program

Contract disputes, which can be significant

Collection issues, including those caused by weak commodity prices or other factors which can lead to credit deterioration of our customers

Capacity constraints under our senior secured revolving credit facility and remaining in compliance with all covenants contained in the credit agreement

Cash on hand outside of the United States that cannot be repatriated without incremental taxation.
Cash Flow for the Six Months Ended December 31, 2018
Cash Flows Provided by Operating Activities
Cash provided by operating activities for the six months ended December 31, 2018 totaled $13.5 million. The various components are as follows:

Net Cash Provided by Operating Activities
(In thousands)
 
Net income
$
6,237

Non-cash expenses
13,676

Deferred income tax
(83
)
Cash effect of changes in working capital
(6,548
)
Other
202

Net cash provided by operating activities
$
13,484

Working capital changes, net of the effects of a disposal of a business (see Item 1. Financial Statements, Note 3 - Disposals), at December 31, 2018 in comparison to June 30, 2018 include the following:

Costs and estimated earnings in excess of billings on uncompleted contracts ("CIE") decreased $3.6 million, which increased cash flows from operating activities. Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") decreased $5.2 million, which decreased cash flows from operating activities. The net change in CIE and BIE decreased cash $1.6 million for the six months ended December 31, 2018. CIE and BIE balances can experience significant fluctuations based on the timing of when job costs are incurred and the invoicing of those job costs to the customer.

Inventories increased $2.8 million, which decreased cash flows from operating activities. The increase in inventories is primarily related to aluminum coil purchased to support our storage tank products business.

Other assets and liabilities increased $10.6 million, which decreased cash flows from operating activities. The increase is primarily related to an increase in retentions that are expected to be collected beyond one year in connection with large projects and the annual prepayment of insurance that occurs during the first fiscal quarter.

Accounts payable increased by $8.6 million, net of a $2.0 million accrual for unsettled stock repurchases, during the six months ended December 31, 2018, which increased cash flows from operating activities. The variance is primarily attributable to the timing of vendor payments.


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Cash Flows Used by Investing Activities
Investing activities used $1.2 million of cash in the six months ended December 31, 2018 primarily due to $6.0 million of capital expenditures, partially offset by $3.9 million of proceeds from the disposal of a business (see Item 1. Financial Statements, Note 3 - Disposals) and $0.9 million of proceeds from other assets sales. Capital expenditures consisted of: $2.7 million for transportation and fabrication equipment, $1.7 million for construction equipment, $1.4 million for software and office equipment, and $0.2 million for buildings.
Cash Flows Used by Financing Activities
Financing activities used $4.5 million of cash in the six months ended December 31, 2018 primarily due to share repurchases of $5.2 million, of which $3.2 million was cash settled by December 31, 2018, and the repurchase of $1.5 million of Company stock for payment of withholding taxes due on equity-based compensation.
Senior Secured Revolving Credit Facility
As noted previously in Note 5 of the Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q, on February 8, 2017, the Company entered into the Fourth Amended and Restated Credit Agreement (the "Credit Agreement"), by and among the Company and certain foreign subsidiaries, as Borrowers, various subsidiaries of the Company, as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole Bookrunner, and the other Lenders party thereto.
The Credit Agreement provides for a five-year senior secured revolving credit facility of $300.0 million that expires February 8, 2022. The credit facility may be used for working capital, acquisitions, capital expenditures, issuances of letters of credit and other lawful purposes.
The Credit Agreement includes the following covenants and borrowing limitations:
Our Leverage Ratio, determined as of the end of each fiscal quarter, may not exceed 3.00 to 1.00.
We are required to maintain a Fixed Charge Coverage Ratio, determined as of the end of each fiscal quarter, greater than or equal to 1.25 to 1.00.
Asset dispositions (other than dispositions in which all of the net cash proceeds therefrom are reinvested into the Company and dispositions of inventory and obsolete or unneeded equipment in the ordinary course of business) are limited to $20.0 million per 12-month period.
The credit facility includes a sub-facility for revolving loans denominated in Australian Dollars, Canadian Dollars, Euros and Pounds Sterling in an aggregate amount not to exceed the U.S. Dollar equivalent of $75.0 million and a $200.0 million sublimit for letters of credit.
Each revolving borrowing under the Credit Agreement will bear interest at a rate per annum equal to:
The ABR or the Adjusted LIBO Rate, in the case of revolving loans denominated in U.S. Dollars;
The Canadian Prime Rate or the CDOR rate, in the case of revolving loans denominated in Canadian Dollars;
The Adjusted LIBO Rate, in the case of revolving loans denominated in Pounds Sterling or Australian Dollars; 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.

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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, 2018, Covenant EBITDA was $31.5 million. Consolidated Funded Indebtedness at December 31, 2018 was $28.7 million.
Covenant EBITDA differs from EBITDA, as reported under "Results of Operations - Non-GAAP Financial Measure," in Item 7 primarily because it permits the Company to:
exclude non-cash stock-based compensation expense,
include pro forma EBITDA of acquired businesses as if the acquisition occurred at the beginning of the previous four quarters, and
exclude certain other extraordinary items, as defined in the Credit Agreement.
Availability under the senior secured revolving credit facility at December 31, 2018 was as follows: 
 
December 31,
2018
 
June 30,
2018
 
(In thousands)
Senior secured revolving credit facility
$
300,000

 
$
300,000

Capacity constraint due to the Senior Leverage Ratio
205,437

 
189,741

Capacity under the credit facility
94,563

 
110,259

Borrowings outstanding

 

Letters of credit
28,716

 
37,073

Availability under the senior secured revolving credit facility
$
65,847

 
$
73,186

At December 31, 2018, the Company was in compliance with all affirmative, negative, and financial covenants under the Credit Agreement.
Dividend Policy
We have never paid cash dividends on our common stock, and the terms of our Credit Agreement limit the amount of cash dividends we can pay. Under our Credit Agreement, we may declare and pay cash dividends on our capital stock during any fiscal year up to an amount which, when added to all other cash dividends paid during such fiscal year, does not exceed 50% of our cumulative net income for such fiscal year to date. While we currently do not intend to pay cash dividends, any future dividend payments will depend on our financial condition, capital requirements and earnings as well as other relevant factors.
Stock Repurchase Program and Treasury Shares
Treasury Shares
On November 6, 2018, the Board of Directors approved a new stock buyback program (the "November 2018 Program"), which replaced the previous program that had been in place since December 2016 and was set to expire in December 2018. Under the November 2018 Program, the Company may repurchase common stock of the Company in any calendar year commencing with calendar year 2018, up to a maximum of $30.0 million per calendar year provided that the aggregate number of shares repurchased may not exceed 10%, or approximately 2.7 million, of the Company's shares outstanding as of November 6, 2018. The Company may repurchase its stock from time to time in the open market at prevailing market prices or in privately negotiated transactions and is not obligated to purchase any shares. The November 2018 Program will continue unless and until it is modified or revoked by the Board of Directors.
In December 2018, the Company repurchased 310,532 shares of its common stock for $5.2 million. However, only $3.2 million of the repurchases were cash settled by December 31, 2018. As a result, the Company recorded a $2.0 million accrual to treasury stock for the unsettled shares that were cash settled in January 2019. This accrual has been disclosed as a non-cash financing activity in the supplemental disclosures section of the Consolidated Statements of Cash Flows.
The Company has 1,109,819 treasury shares as of December 31, 2018 and intends to utilize these treasury shares in connection with equity awards under the Company’s stock incentive plans and for sales to the Employee Stock Purchase Plan.

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FORWARD-LOOKING STATEMENTS
This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Form 10-Q which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements. The words “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts” and similar expressions are also intended to identify forward-looking statements.
These forward-looking statements include, among others, such things as:
our ability to generate sufficient cash from operations, access our credit facility, or raise cash in order to meet our short and long-term capital requirements;

the impact to our business of crude oil, natural gas and other commodity prices;

amounts and nature of future revenues and margins from each of our segments;

the potential impact of the Tax Cuts and Jobs Act on our business;

trends in the industries we serve;

the likely impact of new or existing regulations or market forces on the demand for our services;

expansion and other trends of the industries we serve;

our expectations with respect to the likelihood of a future impairment; and

our ability to comply with the covenants in our credit agreement.

These statements are based on certain assumptions and analyses we made in light of our experience and our historical trends, current conditions and expected future developments as well as other factors we believe are appropriate. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including:

the risk factors discussed in our Form 10-K for the fiscal year ended June 30, 2018 and listed from time to time in our filings with the Securities and Exchange Commission;

economic, market or business conditions in general and in the oil, gas, power, iron and steel, agricultural and mining industries in particular;

delays in the commencement of major projects, whether due to permitting issues or other factors;

reduced creditworthiness of our customer base and the higher risk of non-payment of receivables due to volatility of crude oil and other commodity prices which affect our customers' businesses;

the inherently uncertain outcome of current and future litigation;

the adequacy of our reserves for claims and contingencies;

changes in laws or regulations, including the imposition, cancellation or delay of tariffs on imported goods; and

other factors, many of which are beyond our control.
Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences or effects on our business operations. We assume no obligation to update publicly, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk faced by us from those reported in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018, filed with the Securities and Exchange Commission. For more information on market risk, see Part II, Item 7A in our fiscal 2018 Annual Report on Form 10-K.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e).
The disclosure controls and procedures are designed to provide reasonable, not absolute, assurance of achieving the desired control objectives. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the disclosure controls and procedures or our internal controls over financial reporting will prevent or detect all errors or fraud. The design of our internal control system takes into account the fact that there are resource constraints and the benefits of controls must be weighed against the costs. Additionally, controls can be circumvented by the acts of key individuals, collusion or management override.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2018. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level at December 31, 2018.
There have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting during the quarter ended December 31, 2018.

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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to a number of legal proceedings. We believe that the nature and number of these proceedings are typical for a company of our size engaged in our type of business and that none of these proceedings will result in a material effect on our business, results of operations, financial condition, cash flows or liquidity.
Item 1A. Risk Factors
There were no material changes in our Risk Factors from those reported in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The table below sets forth the information with respect to purchases made by the Company of its common stock during the second quarter of fiscal year 2019.
 
Total Number
of Shares
Purchased
 
Average Price
Paid
Per Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Maximum
Number of
Shares That
May Yet Be
Purchased
Under the Plans
or Programs (C)
October 1 to October 31, 2018
 
 
 
 
 
 
 
Share Repurchase Program (A)

 
$

 

 
1,229,709

Employee Transactions (B)
293

 
$
20.56

 

 

November 1 to November 30, 2018
 
 
 
 
 
 
 
Share Repurchase Program (A)

 
$

 

 
2,707,175

Employee Transactions (B)
275

 
$
20.44

 

 

December 1 to December 31, 2018
 
 
 
 
 
 
 
Share Repurchase Program (A)
310,532

 
$
16.71

 
310,532

 
2,396,643

Employee Transactions (B)
4,246

 
$
18.92

 

 

 
(A)
Represents shares purchased under our stock buyback program.
(B)
Represents shares withheld to satisfy the employee’s tax withholding obligation that is incurred upon the vesting of deferred shares granted under the Company’s stock incentive plans.
(C)
In December 2016, the Board of Directors approved a stock buyback program (the "December 2016 Program"). Under the December 2016 Program, the Company may repurchase common stock of the Company in any calendar year commencing with calendar year 2016 and continuing through calendar year 2018, up to a maximum of $25.0 million per calendar year. The Company may repurchase its stock from time to time in the open market at prevailing market prices or in privately negotiated transactions. As described under the caption “Stock Repurchase Program and Treasury Shares” in the Liquidity and Capital Resources section of Part I, Item 2 of this Form 10-Q, on November 6, 2018, the Board of Directors approved a new stock buyback program (the “November 2018 Program”), which replaced the December 2016 Program. Under the November 2018 Program, the Company may repurchase common stock of the Company in any calendar year commencing with calendar year 2018, up to a maximum of $30.0 million per calendar year provided that the aggregate number of shares repurchased may not exceed 10%, or approximately 2.7 million, of the Company's shares outstanding as of November 6, 2018. The November 2018 Program will continue unless and until it is modified or revoked by the Board of Directors. The amount shown as the maximum number of shares that may yet be purchased at October 31, 2018 was calculated using the closing price of our stock on the last trading day of October and the cumulative limit of $25.0 million remaining under the December 2016 Program, which was still in place as of the end of October. The amount shown as the maximum number of shares that may yet be purchased at November 30, 2018 and December 31, 2018 is equal to the total number of shares which may be purchased under the November 2018 Program, less the total number of shares that have previously been purchased under the November 2018 Program.

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Dividend Policy
We have never paid cash dividends on our common stock, and the terms of our Credit Agreement limit the amount of cash dividends we can pay. Under our Credit Agreement, we may declare and pay cash dividends on our capital stock during any fiscal year up to an amount which, when added to all other cash dividends paid during such fiscal year, does not exceed 50% of our cumulative net income for such fiscal year to date. While we currently do not intend to pay cash dividends, any future dividend payments will depend on our financial condition, capital requirements and earnings as well as other relevant factors.

Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires domestic mine operators to disclose violations and orders issued under the Federal Mine Safety and Health Act of 1977 (the "Mine Act") by the Federal Mine Safety and Health Administration. We do not act as the owner of any mines, but as a result of our performing services or construction at mine sites as an independent contractor, we are considered an "operator" within the meaning of the Mine Act.
Information concerning mine safety violations or other regulatory matters required to be disclosed in this quarterly report under Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K is included in Exhibit 95.
Item 5. Other Information
None
Item 6. Exhibits: 
The following documents are included as exhibits to the Quarterly Report on Form 10-Q. These exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical hereafter.
Exhibit No.
 
Description
 
 
 
Exhibit 10:
 
 
 
 
Exhibit 31.1:
 
 
 
 
Exhibit 31.2:
 
 
 
 
Exhibit 32.1:
 
 
 
 
Exhibit 32.2:
 
 
 
 
Exhibit 95:
 
 
 
 
Exhibit 101.INS:
 
XBRL Instance Document.
 
 
 
Exhibit 101.SCH:
 
XBRL Taxonomy Schema Document.
 
 
 
Exhibit 101.CAL:
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
Exhibit 101.DEF:
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
Exhibit 101.LAB:
 
XBRL Taxonomy Extension Labels Linkbase Document.
 
 
 
Exhibit 101.PRE:
 
XBRL Taxonomy Extension Presentation Linkbase Document.

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