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MATRIX SERVICE CO - Quarter Report: 2012 December (Form 10-Q)

Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-Q 
_______________________________________
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2012

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 700, 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 and posted on its corporate Web site, if any, every Inter Active Data File required to be submitted and posted 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 and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
o
Smaller reporting company
 
¨
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 1, 2013 there were 27,888,217 shares of the Company’s common stock, $0.01 par value per share, issued and 26,020,505 shares outstanding.
 

Table of Contents

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.
 
 
 
 


Table of Contents

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,
2012
 
December 31,
2011
 
December 31,
2012
 
December 31,
2011
Revenues
$
221,436

 
$
200,964

 
$
431,044

 
$
370,285

Cost of revenues
199,103

 
177,866

 
386,467

 
329,094

Gross profit
22,333

 
23,098

 
44,577

 
41,191

Selling, general and administrative expenses
13,561

 
11,898

 
27,881

 
23,381

Operating income
8,772

 
11,200

 
16,696

 
17,810

Other income (expense):
 
 
 
 
 
 

Interest expense
(217
)
 
(166
)
 
(400
)
 
(443
)
Interest income
12

 
3

 
20

 
6

Other
(7
)
 
301

 
50

 
(375
)
Income before income tax expense
8,560

 
11,338

 
16,366

 
16,998

Provision for federal, state and foreign income taxes
3,124

 
4,307

 
6,246

 
6,458

Net income
$
5,436

 
$
7,031

 
$
10,120

 
$
10,540

Basic earnings per common share
$
0.21

 
$
0.27

 
$
0.39

 
$
0.40

Diluted earnings per common share
$
0.21

 
$
0.27

 
$
0.39

 
$
0.40

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
25,939

 
25,819

 
25,863

 
26,110

Diluted
26,204

 
26,111

 
26,172

 
26,420

See accompanying notes.

- 1-
Table of Contents

Matrix Service Company
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
December 31,
2012
 
December 31,
2011
 
December 31,
2012
 
December 31,
2011
Net income
$
5,436

 
$
7,031

 
$
10,120

 
$
10,540

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(152
)
 
238

 
315

 
(721
)
Comprehensive income
$
5,284

 
$
7,269

 
$
10,435

 
$
9,819

See accompanying notes.

- 2-
Table of Contents

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


December 31,
2012

June 30,
2012
Assets



Current assets:



Cash and cash equivalents
$
33,209


$
39,726

Accounts receivable, less allowances (December 31, 2012—$785 and June 30, 2012—$1,201)
152,754


108,034

Costs and estimated earnings in excess of billings on uncompleted contracts
66,151


68,562

Deferred income taxes
5,487


6,024

Inventories
3,683


2,482

Income taxes receivable
1,060

 
—

Other current assets
4,974


5,688

Total current assets
267,318


230,516

Property, plant and equipment at cost:



Land and buildings
29,357


28,846

Construction equipment
64,076


59,176

Transportation equipment
31,524


25,865

Office equipment and software
17,793


16,892

Construction in progress
6,824


2,910


149,574


133,689

Accumulated depreciation
(84,100
)

(78,814
)

65,474


54,875

Goodwill
30,975


28,675

Other intangible assets
8,134


6,504

Other assets
4,173


2,565

Total assets
$
376,074


$
323,135

 
 
 
 
See accompanying notes.











- 3-
Table of Contents

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

December 31,
2012
 
June 30,
2012
Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
59,709

 
$
48,931

Billings on uncompleted contracts in excess of costs and estimated earnings
57,606

 
30,293

Accrued wages and benefits
15,779

 
15,298

Accrued insurance
7,390

 
6,912

Income taxes payable
—

 
1,115

Other accrued expenses
3,971

 
3,414

Total current liabilities
144,455

 
105,963

Deferred income taxes
5,814

 
6,075

Long term debt
3,425

 
—

Total liabilities
153,694

 
112,038

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of December 31, 2012, and June 30, 2012
279

 
279

Additional paid-in capital
117,059

 
116,693

Retained earnings
127,539

 
117,419

Accumulated other comprehensive income
1,086

 
771

 
245,963

 
235,162

Less: Treasury stock, at cost—1,869,558 shares as of December 31, 2012, and 2,141,990 shares as of June 30, 2012
(23,583
)
 
(24,065
)
Total stockholders’ equity
222,380

 
211,097

Total liabilities and stockholders’ equity
$
376,074

 
$
323,135

 
 
 
 
See accompanying notes.


- 4-
Table of Contents

Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Six Months Ended
 
December 31,
2012

December 31,
2011
Operating activities:
 
 
 
Net income
$
10,120

 
$
10,540

Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
 
Depreciation and amortization
5,796

 
5,738

Deferred income tax
178

 
(28
)
Gain on sale of property, plant and equipment
(51
)
 
(43
)
Allowance for uncollectible accounts
239

 
29

Stock-based compensation expense
1,812

 
1,735

Other
41

 
(28
)
Changes in operating assets and liabilities increasing (decreasing) cash:
 
 
 
Accounts receivable
(43,819
)
 
(12,241
)
Costs and estimated earnings in excess of billings on uncompleted contracts
2,411

 
(16,474
)
Inventories
(1,201
)
 
(332
)
Other assets
(991
)
 
(1,561
)
Accounts payable
9,763

 
12,565

Billings on uncompleted contracts in excess of costs and estimated earnings
27,313

 
(3,669
)
Accrued expenses
(657
)
 
(2,059
)
Net cash provided (used) by operating activities
10,954

 
(5,828
)
Investing activities:
 
 
 
Acquisition of property, plant and equipment
(12,041
)
 
(6,759
)
Acquisition
(8,250
)
 
—

Proceeds from asset sales
73

 
177

Net cash used by investing activities
$
(20,218
)
 
$
(6,582
)

 See accompanying notes.



















- 5-
Table of Contents




Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Six Months Ended
 
December 31,
2012
 
December 31,
2011
Financing activities:
 
 
 
Issuances of common stock
$
106

 
$
80

Capital lease payments
(36
)
 
(182
)
Excess tax benefit of exercised stock options and vesting of deferred shares
29

 
—

Payment of debt amendment fees
—

 
(573
)
Advances under credit agreement
18,475

 
—

Repayments of advances under credit agreement
(15,050
)
 
—

Treasury shares purchased by Employee Stock Purchase Plan
22

 
27

Open market purchase of treasury shares
—

 
(8,126
)
Other treasury share purchases
(1,065
)
 
(439
)
Net cash provided (used) by financing activities
2,481

 
(9,213
)
Effect of exchange rate changes on cash
266

 
(292
)
Net decrease in cash and cash equivalents
(6,517
)
 
(21,915
)
Cash and cash equivalents, beginning of period
39,726

 
59,357

Cash and cash equivalents, end of period
$
33,209

 
$
37,442

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
6,559

 
$
3,640

Interest
$
281

 
$
279

Non-cash investing and financing activities:
 
 
 
Purchases of property, plant and equipment on account
$
494

 
$
637


 See accompanying notes.


- 6-
Table of Contents

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, June 30, 2012
$
279

 
$
116,693

 
$
117,419

 
$
(24,065
)
 
$
771

 
$
211,097

Net income
—

 
—

 
10,120

 
—

 
—

 
10,120

Other comprehensive income
—

 
—

 
—

 
—

 
315

 
315

Exercise of stock options (21,600 shares)
—

 
(89
)
 
—

 
195

 
—

 
106

Tax effect of exercised stock options and vesting of deferred shares
—

 
(27
)
 
—

 
—

 
—

 
(27
)
Issuance of deferred shares (350,048 shares)
—

 
(1,347
)
 
—

 
1,347

 
—

 
—

Employee Stock Purchase Plan (2,055 shares)
—

 
17

 
—

 
5

 
—

 
22

Other treasury share purchases (101,271 shares)
—

 
—

 
—

 
(1,065
)
 
—

 
(1,065
)
Stock-based compensation expense
—

 
1,812

 
—

 
—

 
—

 
1,812

Balances, December 31, 2012
$
279

 
$
117,059

 
$
127,539

 
$
(23,583
)
 
$
1,086

 
$
222,380

Balances, June 30, 2011
$
279

 
$
113,686

 
$
100,231

 
$
(15,961
)
 
$
1,436

 
$
199,671

Net income
—

 
—

 
10,540

 
—

 
—

 
10,540

Other comprehensive loss
—

 
—

 
—

 
—

 
(721
)
 
(721
)
Exercise of stock options (15,400 shares)
—

 
40

 
—

 
40

 
—

 
80

Tax effect of exercised stock options and vesting of deferred shares
—

 
(150
)
 
—

 
—

 
—

 
(150
)
Issuance of deferred shares (161,222 shares)
—

 
(419
)
 
—

 
419

 
—

 
—

Employee Stock Purchase Plan (2,636 shares)
—

 
21

 
—

 
6

 
—

 
27

Open market purchase of treasury shares (886,503 shares)
—

 
—

 
—

 
(8,126
)
 
—

 
(8,126
)
Other treasury share purchases (45,143 shares)
—

 
—

 
—

 
(439
)
 
—

 
(439
)
Stock-based compensation expense
—

 
1,735

 
—

 
—

 
—

 
1,735

Balances, December 31, 2011
$
279

 
$
114,913

 
$
110,771

 
$
(24,061
)
 
$
715

 
$
202,617

See accompanying notes.


- 7-
Table of Contents

Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1 – 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, all of which are wholly owned. 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 generally accepted accounting principles for complete financial statements. However, the information furnished reflects all adjustments, consisting of normal recurring adjustments and other adjustments described herein, that are, in the opinion of management, necessary for a fair statement of the results of operations 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, 2012, included in the Company’s Annual Report on Form 10-K for the year then ended.
The Company’s business is cyclical due to the scope and timing of projects released by our customers. Therefore, results from year to year can vary. Turnarounds and planned outages at customer facilities are typically scheduled in the spring and the fall when the demand for energy is lower. As a result, quarterly operating results can exhibit seasonal fluctuations, especially in our Oil Gas & Chemical segment. 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. Accordingly, results for any interim period may not necessarily be indicative of future operating results.
Note 2 - Acquisition
On December 31, 2012, the Company acquired substantially all of the assets of Pelichem Industrial Cleaning Services, LLC (“Pelichem”). Pelichem is an industrial cleaning company based in Reserve, Louisiana that performs hydroblasting, vacuum services, chemical cleaning and industrial services.
The purchase price was allocated to the major categories of assets and liabilities based on their estimated fair value at the acquisition date. The purchase price is expected to be finalized and settled following a final true-up of working capital accounts that is expected to conclude during the third fiscal quarter. The following table summarizes the preliminary purchase price allocation of the acquisition which is subject to change as we complete the working capital adjustments:
Current assets
$
1,140

Property, plant and equipment
4,032

Tax deductible goodwill
2,237

Other intangible assets
1,853

Total assets acquired
9,262

Current liabilities
86

Net assets acquired
9,176

Estimated working capital adjustment
926

Purchase price before working capital adjustment
$
8,250

The operating data related to this acquisition was not material. The acquisition was funded with cash on hand.


- 8-
Table of Contents

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

Note 3 – Uncompleted Contracts
Contract terms of the Company’s construction contracts generally provide for progress billings based on project milestones. The excess of costs incurred and estimated earnings over amounts billed on uncompleted contracts is reported as a current asset. The excess of amounts billed over costs incurred and estimated earnings recognized on uncompleted contracts is reported as a current liability. Gross and net amounts on uncompleted contracts are as follows:
 
 
December 31,
2012
 
June 30,
2012
 
(in thousands)
Costs incurred and estimated earnings recognized on uncompleted contracts
$
831,053

 
$
774,749

Billings on uncompleted contracts
822,508

 
736,480

 
$
8,545

 
$
38,269

Shown on balance sheet as:
 
 
 
Costs and estimated earnings in excess of billings on uncompleted contracts
$
66,151

 
$
68,562

Billings on uncompleted contracts in excess of costs and estimated earnings
57,606

 
30,293

 
$
8,545

 
$
38,269

Progress billings in accounts receivable at December 31, 2012 and June 30, 2012 included retentions to be collected within one year of $23.3 million and $22.3 million, respectively. Contract retentions collectible beyond one year totaled $2.9 million at December 31, 2012 and $1.2 million at June 30, 2012.
 
SME Receivables
The Company continues to pursue collection of a certain receivable acquired in connection with the purchase of S.M. Electric Company, Inc. in February 2009. The recorded values at December 31, 2012 include $0.7 million in claim receivables, which represents the Company’s best estimate of the amount to be collected under a claim, and an additional $2.9 million for amounts due under the related contract. Recovering the remaining receivables will require mediation or litigation and the ultimate amount realized may be significantly different than the recorded amounts, which could result in a material adjustment to future earnings.
Western Canada Aboveground Storage Tank Project
During the three and six months ended December 31, 2012, our results of operations were materially impacted by a charge resulting from a change in estimate for a project to construct aboveground storage tanks in western Canada. The charge was primarily driven by changes in facts and circumstances regarding lower than expected labor productivity and higher than expected direct employee costs. This change in estimate resulted in a $3.3 million and $3.0 million decrease in operating income, a $2.1 million and $2.0 million decrease in our net income and a $0.08 and $0.07 decrease in our diluted earnings per common share during the three and six months ended December 31, 2012, respectively. This change was the only change in estimate considered material to our results of operations during the periods presented herein.
Billings on uncompleted contracts in excess of costs and estimated earnings included an accrued loss related to this project of $1.4 million at December 31, 2012.

- 9-
Table of Contents

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)
Goodwill
$
29,666

 
$
5,841

 
$
11,071

 
$
7,097

 
$
53,675

Cumulative impairment loss (A)
(17,653
)
 
(3,000
)
 
(922
)
 
(3,425
)
 
(25,000
)
Net balance at June 30, 2012
12,013

 
2,841

 
10,149

 
3,672

 
28,675

Purchase of Pelichem (Note 2)
—

 
2,237

 
—

 
—

 
2,237

Translation adjustment
—

 
—

 
63

 
—

 
63

Net balance at December 31, 2012
$
12,013

 
$
5,078

 
$
10,212

 
$
3,672

 
$
30,975

 
(A)
A $25.0 million impairment charge was recorded in February 2005 as a result of the Company’s operating performance in fiscal 2005.

Other Intangible Assets
Information on the carrying value of other intangible assets is as follows:
 
 
 
 
At December 31, 2012
  
Useful Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
(Years)
 
(In thousands)
Intellectual property
6 to 15
 
$
2,460

 
$
(670
)
 
$
1,790

Customer based
1 to 15
 
4,250

 
(374
)
 
3,876

Other
3 to 5
 
808

 
(210
)
 
598

Total amortizing intangibles
 
 
7,518

 
(1,254
)
 
6,264

Trade name
Indefinite     
 
1,870

 
—

 
1,870

Total intangible assets
 
 
$
9,388

 
$
(1,254
)
 
$
8,134

 
 
 
 
At June 30, 2012
 
Useful Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
(Years)
 
(In thousands)
Intellectual property
6 to 15
 
$
2,460

 
$
(586
)
 
$
1,874

Customer based
1 to 15
 
2,657

 
(285
)
 
2,372

Other
3 to 5
 
547

 
(159
)
 
388

Total amortizing intangibles
 
 
5,664

 
(1,030
)
 
4,634

Trade name
Indefinite     
 
1,870

 
—

 
1,870

Total intangible assets
 
 
$
7,534

 
$
(1,030
)
 
$
6,504


- 10-
Table of Contents

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

The increase in other intangible assets at December 31, 2012 compared to June 30, 2012, is due to the acquisition of certain assets of Pelichem. Specifically, amortizing intangible assets included customer based intangibles with a fair value of $1.6 million and other amortizing intangibles with a fair value of $0.3 million. The weighted average amortization periods are anticipated to be 15 and 5 years, respectively. Please refer to Note 2 - Acquisition for additional information.
Amortization expense totaled $0.2 million in the six months ended December 31, 2012 and $0.2 million in the six months ended December 31, 2011. Amortization expense is expected to be $0.5 million in fiscal 2013, $0.6 million annually in fiscal years 2014 to 2016, and $0.5 million in fiscal 2017.
Note 5 – Debt
The Company has a five-year, $125.0 million senior secured revolving credit facility (the “Credit Agreement”) that expires November 7, 2016. Advances under the Credit Agreement may be used for working capital, issuance of letters of credit and other lawful corporate purposes.
The Credit Agreement includes the following covenants and borrowing limitations
•
Our Senior Leverage Ratio, as defined in the agreement, may not exceed 2.50 to 1.00 as of the end of each fiscal quarter.
•
We are required to maintain a Fixed Charge Coverage Ratio, as defined in the agreement, greater than or equal to 1.25 to 1.00 as of the end of each fiscal quarter.
•
Asset dispositions (other than inventory and obsolete or unneeded equipment disposed of in the ordinary course of business) are limited to $15.0 million per 12-month period.
Amounts borrowed under the Credit Agreement bear interest at LIBOR or an Alternate Base Rate, plus in each case, an additional margin based on the Senior Leverage Ratio. The Credit Agreement includes additional margin ranges on Alternate Base Rate loans between 0.75% and 1.5% and between 1.75% and 2.5% on LIBOR-based loans.
The Credit Agreement also permits us to borrow in Canadian dollars with a sublimit of U.S. $15.0 million. Amounts borrowed in Canadian dollars will bear interest either at the CDOR Rate, plus an additional margin based on the Senior Leverage Ratio ranging from 1.75% to 2.5%, or at the Canadian Prime Rate, plus an additional margin based on the Senior Leverage Ratio ranging from 2.25% to 3.0%. The CDOR Rate is equal to the sum of the annual rate of interest, which is the rate determined as being the arithmetic average of the quotations of all institutions listed in respect of the relevant CDOR interest period for Canadian Dollar denominated bankers’ acceptances, plus 0.1%. The Canadian Prime Rate is equal to the greater of (i) the rate of interest per annum most recently announced or established by JPMorgan Chase Bank, N.A., Toronto Branch as its reference rate in effect on such day for determining interest rates for Canadian Dollar denominated commercial loans in Canada and (ii) the CDOR Rate plus 1.0%.
The Unused Credit Facility Fee is between 0.30% and 0.45% based on the Senior Leverage Ratio.
 
The Credit Agreement includes a Senior Leverage Ratio covenant which provides that Consolidated Funded Indebtedness, as of the end of any fiscal quarter, may not exceed 2.5 times Consolidated EBITDA, as defined in the Credit Agreement, over the previous four quarters. For the four quarters ended December 31, 2012, Consolidated EBITDA, as defined in the Credit Agreement, was $45.6 million. Accordingly, at December 31, 2012, Consolidated Funded Indebtedness in excess of $114.0 million would have violated the Senior Leverage Ratio covenant. Consolidated Funded Indebtedness at December 31, 2012 was $4.5 million, which includes $3.4 million of outstanding borrowings, and $1.1 million of non-workers compensation related letters of credit.

- 11-
Table of Contents

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

Availability under the senior credit facility was as follows:
 
 
December 31,
2012
 
June 30,
2012
 
(In thousands)
Senior credit facility
$
125,000

 
$
125,000

Capacity constraint due to the Senior Leverage Ratio
11,027

 
9,662

Capacity under the credit facility
113,973

 
115,338

Borrowings outstanding
3,425

 
—

Letters of credit
8,446

 
8,499

Availability under the senior credit facility
$
102,102

 
$
106,839

The Company is in compliance with all affirmative, negative, and financial covenants under the Credit Agreement.
Note 6 – Income Taxes
The Company complies with ASC 740, “Income Taxes”. Deferred income taxes are computed using the liability method whereby deferred tax assets and liabilities are recognized based on temporary differences between the financial and tax basis of assets and liabilities using presently enacted tax rates. Valuation allowances are established against deferred tax assets to the extent management believes that it is not probable the assets will be recovered.
The Company provides for income taxes regardless of whether it has received a tax assessment. Taxes are provided when it is considered probable that additional taxes will be due in excess of amounts included in the tax return. The Company regularly reviews exposure to additional income taxes due, and as further information is known or events occur, adjustments may be recorded.
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.
Unapproved Change Orders and Claims
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unapproved change orders of $9.3 million at December 31, 2012 and $8.5 million at June 30, 2012. There were no revenues related to claims included in costs and estimated earnings in excess of billings on uncompleted contracts at December 31, 2012 or June 30, 2012. Generally, collection of amounts related to unapproved change orders and claims is expected within twelve months. However, customers may not pay these amounts until final resolution of related claims, and accordingly, collection of these amounts may extend beyond one year.

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Table of Contents

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 adverse 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,
2012
 
December 31,
2011
 
December 31,
2012
 
December 31,
2011
 
(In thousands, except per share data)
Basic EPS:
 
 
 
 
 
 
 
Net income
$
5,436

 
$
7,031

 
$
10,120

 
$
10,540

Weighted average shares outstanding
25,939

 
25,819

 
25,863

 
26,110

Basic EPS
$
0.21

 
$
0.27

 
$
0.39

 
$
0.40

Diluted EPS:

 

 

 

Weighted average shares outstanding – basic
25,939

 
25,819

 
25,863

 
26,110

Dilutive stock options
59

 
64

 
65

 
76

Dilutive nonvested deferred shares
206

 
228

 
244

 
234

Diluted weighted average shares
26,204

 
26,111

 
26,172

 
26,420

Diluted EPS
$
0.21

 
$
0.27

 
$
0.39

 
$
0.40

 
The following securities are considered antidilutive and have been excluded from the calculation of Diluted EPS:
 
Three Months Ended
 
Six Months Ended
 
December 31,
2012
 
December 31,
2011
 
December 31,
2012
 
December 31,
2011
 
(In thousands)
 
 
 
 
Stock options
327

 
242

 
327

 
173

Nonvested deferred shares
71

 
41

 
36

 
40

Total antidilutive securities
398

 
283

 
363

 
213


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Table of Contents

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 primarily encompasses high voltage services to investor owned utilities, including construction of new substations, upgrades of existing substations, short-run transmission line installations, distribution upgrades and maintenance, and storm restoration services. We also provide construction and maintenance services to a variety of power generation facilities, such as combined cycle plants, nuclear facilities, coal fired power stations, and renewable energy installations.
The Oil Gas & Chemical segment includes our traditional turnaround activities, plant maintenance services and construction in the downstream petroleum industry. Another key offering is industrial cleaning services, which include hydroblasting, hydroexcavating, chemical cleaning and vacuum services. We also perform work in the renewable energy, industrial and natural gas, gas processing and compression, and upstream petroleum markets.
The Storage Solutions segment includes new construction of, as well as planned and emergency maintenance services for, crude and refined products aboveground storage tanks. Also included in the Storage Solutions segment is work related to specialty storage tanks including liquefied natural gas (“LNG”), liquid nitrogen/liquid oxygen (“LIN/LOX”), liquid petroleum (“LPG”) tanks and other specialty vessels including spheres. Finally, the Storage Solutions segment includes balance of plant work in storage terminals and tank farms.
The Industrial segment includes work in the mining and minerals industry, bulk material handling, thermal vacuum chambers, as well as work for clients in other industrial and manufacturing markets.
Other consists of corporate asset balances.
The chief operating decision maker evaluates performance and allocates resources based primarily on operating income. The results of each operating segment include an allocation of corporate costs. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales and transfers are recorded at cost and eliminated in consolidation; therefore, no intercompany profit or loss is recognized.
Segment assets consist primarily of accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, property, plant and equipment, goodwill and other intangible assets.


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Table of Contents

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


Results of Operations
(In thousands)
 
Three Months Ended

Six Months Ended
 
December 31,
2012

December 31,
2011

December 31,
2012

December 31,
2011
Gross revenues







Electrical Infrastructure
$
50,123


$
43,628


$
83,393


$
65,640

Oil Gas & Chemical
66,635


49,750


133,732


95,749

Storage Solutions
98,183


99,710


203,601


195,632

Industrial
7,033


8,076


12,008


14,651

Total gross revenues
$
221,974


$
201,164


$
432,734


$
371,672

Less: Inter-segment revenues







Electrical Infrastructure
$
—

 
$
—

 
$
—

 
$
—

Oil Gas & Chemical
—

 
33

 
—

 
208

Storage Solutions
538

 
167

 
1,690

 
1,179

Industrial
—

 
—

 
—

 
—

Total inter-segment revenues
$
538


$
200


$
1,690


$
1,387

Consolidated revenues







Electrical Infrastructure
$
50,123


$
43,628


$
83,393


$
65,640

Oil Gas & Chemical
66,635


49,717


133,732


95,541

Storage Solutions
97,645


99,543


201,911


194,453

Industrial
7,033


8,076


12,008


14,651

Total consolidated revenues
$
221,436


$
200,964


$
431,044


$
370,285

Gross profit (loss)







Electrical Infrastructure
$
6,629


$
4,991


$
11,335


$
7,776

Oil Gas & Chemical
8,045


4,936


15,912


9,283

Storage Solutions
7,748


12,689


17,717


23,076

Industrial
(89
)

482


(387
)

1,056

Total gross profit
$
22,333


$
23,098


$
44,577


$
41,191

Operating income (loss)







Electrical Infrastructure
$
3,696

 
$
2,492

 
$
6,015

 
$
3,221

Oil Gas & Chemical
3,927

 
2,410

 
7,702

 
3,822

Storage Solutions
1,550

 
6,547

 
4,999

 
10,773

Industrial
(401
)
 
(249
)
 
(2,020
)
 
(6
)
Total operating income
$
8,772


$
11,200


$
16,696


$
17,810

Segment assets







Electrical Infrastructure
$
72,229

 
$
59,919

 
$
72,229

 
$
59,919

Oil Gas & Chemical
76,044

 
50,479

 
76,044

 
50,479

Storage Solutions
163,906

 
138,550

 
163,906

 
138,550

Industrial
14,555

 
18,904

 
14,555

 
18,904

Other
49,340

 
47,746

 
49,340

 
47,746

Total segment assets
$
376,074


$
315,598


$
376,074


$
315,598



- 15-
Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes in our critical accounting policies from those reported in our fiscal 2012 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 2012 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.
Unapproved Change Orders and Claims
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unapproved change orders of $9.3 million at December 31, 2012 and $8.5 million at June 30, 2012. There were no revenues related to claims included in costs and estimated earnings in excess of billings on uncompleted contracts at December 31, 2012 or June 30, 2012. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings.
SME Receivables
The Company continues to pursue collection of certain receivables acquired in connection with the purchase of S.M. Electric Company, Inc. in February 2009. The recorded values at December 31, 2012 include $0.7 million in claim receivables, which represents the Company’s best estimate of the amount to be collected under a claim, and an additional $2.9 million for amounts due under the related contract. Recovering the remaining receivables will require mediation or litigation and the ultimate amount realized may be significantly different than the recorded amounts, which could result in an adjustment to future earnings.
Insurance Reserves
We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses through the use of deductibles, self-insured retentions and coverage limits. We establish reserves for claims using a combination of actuarially determined estimates and management judgment on a case-by-case basis and update our evaluations as further information becomes known. Judgments and assumptions, including the assumed losses for claims incurred but not reported, are inherent in our reserve accruals; as a result, changes in assumptions or claims experience could result in changes to these estimates in the future. If actual results of claim settlements are different than the amounts estimated, we may be exposed to gains and losses that could be significant.
Goodwill
The Company has four significant reporting units with goodwill representing 42%, 21%, 14% and 11% of the total goodwill balance. Our most recent annual goodwill impairment test, performed in the fourth quarter of fiscal 2012, indicated that the fair value of these reporting units exceeded their respective carrying values by 46%, 84%, 106% and 40%, respectively. The remaining 12% of total goodwill is allocated over three other reporting units. Based on the excess of estimated fair value over carrying value and the absence of any indicators of impairment at December 31, 2012, the Company does not currently anticipate recording a goodwill impairment charge for any of its operating units.
Recently Issued Accounting Standards
There are no recently issued accounting standards that we believe will have a material affect on our financial statements.

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Table of Contents

RESULTS OF OPERATIONS
Overview
We operate our business through the following four segments:

•
The Electrical Infrastructure segment primarily encompasses high voltage services to investor owned utilities, including construction of new substations, upgrades of existing substations, short-run transmission line installations, distribution upgrades and maintenance, and storm restoration services. We also provide construction and maintenance services to a variety of power generation facilities, such as combined cycle plants, nuclear facilities, coal fired power stations, and renewable energy installations.

•
The Oil Gas & Chemical segment includes our traditional turnaround activities, plant maintenance services and construction in the downstream petroleum industry. Another key offering is industrial cleaning services, which include hydroblasting, hydroexcavating, chemical cleaning and vacuum services. We also perform work in the renewable energy, industrial and natural gas, gas processing and compression, and upstream petroleum markets.

•
The Storage Solutions segment includes new construction of, as well as planned and emergency maintenance services for, crude and refined products aboveground storage tanks. Also included in the Storage Solutions segment is work related to specialty storage tanks including liquefied natural gas (“LNG”), liquid nitrogen/liquid oxygen (“LIN/LOX”), liquid petroleum (“LPG”) tanks and other specialty vessels including spheres. Finally, the Storage Solutions segment includes balance of plant work in storage terminals and tank farms.

•
The Industrial segment includes work in the mining and minerals industry, bulk material handling, thermal vacuum chambers, as well as work for clients in other industrial and manufacturing markets.
Three Months Ended December 31, 2012 Compared to the Three Months Ended December 31, 2011
Consolidated
Consolidated revenues were $221.4 million for the three months ended December 31, 2012, an increase of $20.4 million, or 10.1%, from consolidated revenues of $201.0 million in the same period in the prior fiscal year. The increase in consolidated revenues was a result of increases in Oil Gas & Chemical and Electrical Infrastructure revenues, which increased $16.9 million and $6.5 million respectively, partially offset by decreases in Storage Solutions and Industrial revenues of $1.9 million and $1.1 million, respectively.
Consolidated gross profit decreased from $23.1 million in the three months ended December 31, 2011 to $22.3 million in the three months ended December 31, 2012. The decrease of $0.8 million was due to lower gross margins which decreased to 10.1% in fiscal 2013 compared to 11.5% a year earlier. Fiscal 2013 gross margins were negatively affected by a $3.3 million charge related to a western Canada aboveground storage tank project. This project is discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report on Form 10-Q.
Consolidated SG&A expenses were $13.6 million in the three months ended December 31, 2012 compared to $11.9 million in the same period a year earlier. The increase of $1.7 million, or 14.3%, was primarily related to our planned investments in strategic growth areas and related support functions. SG&A expense as a percentage of revenue was 6.1% in the three months ended December 31, 2012 compared to 5.9% in the same period a year earlier.
Net interest expense was $0.2 million in the three months ended December 31, 2012 and December 31, 2011.
There was no other income in the three months ended December 31, 2012. Other income in the three months ended December 31, 2011 was $0.3 million and related primarily to foreign currency transaction gains.
The effective tax rate was 36.5% for the three months ended December 31, 2012 and 38.0% for the three months ended December 31, 2011. The decrease in the effective tax rate was primarily the result of an increase in the estimate of certain tax credits available to the Company, partially offset by the effect of a change in deductibility limitations applying to certain items that have been previously fully deducted.

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Table of Contents

Electrical Infrastructure
Revenues for the Electrical Infrastructure segment increased $6.5 million, or 14.9%, to $50.1 million in the three months ended December 31, 2012 compared to $43.6 million in the same period a year earlier. The higher revenue was primarily due to an increase in high voltage work related primarily to storm restoration services. Gross margins were 13.2% in the three months ended December 31, 2012 compared to 11.4% in the same period a year earlier. The improvement in gross margins in the second quarter of fiscal 2013 is due to the favorable effect of direct margins from storm restoration work and the improved recovery of overhead costs caused by a higher business volume.
Oil Gas & Chemical
Revenues for the Oil Gas & Chemical segment increased to $66.6 million in the three months ended December 31, 2012 compared to $49.7 million in the same period a year earlier. The increase of $16.9 million, or 34.0%, was primarily due to a higher level of turnaround and capital construction projects due to increased customer spending from existing customers and addition of new customers. Gross margins were 12.1% in the three months ended December 31, 2012 compared to 9.9% in the same period a year earlier. The improvement in gross margins in the second quarter of fiscal 2013 is primarily due to the favorable effect of the improved recovery of overhead costs caused by a higher business volume.
Storage Solutions
Revenues for the Storage Solutions segment decreased to $97.7 million in the three months ended December 31, 2012 compared to $99.6 million in the same period a year earlier. The decrease of $1.9 million was due to lower levels of domestic work associated with customer delays in our aboveground storage tank business largely offset by more work in western Canada. Gross margins decreased from 12.7% in the three months ended December 31, 2011 to 7.9% in the same period in the current year. The lower margins in the current quarter were due to lower direct margins caused by a $3.3 million charge related to a western Canada aboveground storage tank project. This project is discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report on Form 10-Q, and higher unrecoverable overhead costs.
Industrial
Revenues for the Industrial segment totaled $7.0 million in the three months ended December 31, 2012 compared to $8.1 million in the same period a year earlier. The decrease of $1.1 million, or 13.6%, was primarily due to the timing of projects related to legacy industrial work, partially offset by higher revenues in our mining and minerals and bulk material handling businesses. Gross margins decreased from 6.0% in the three months ended December 31, 2011 to (1.3%) in the same period in the current year. Gross margins in the current quarter were negatively impacted by startup costs related to entry into the bulk material handling and mining and minerals markets.
Six Months Ended Ended December 31, 2012 Compared to the Six Months Ended December 31, 2011
Consolidated
Consolidated revenues were $431.0 million for the six months ended December 31, 2012, an increase of $60.7 million, or 16.4%, from consolidated revenues of $370.3 million in the same period in the prior fiscal year. The increase in consolidated revenues was a result of increases in Oil Gas & Chemical, Electrical Infrastructure and Storage Solutions revenues, which increased $38.2 million, $17.8 million and $7.4 million respectively, partially offset by a decrease of $2.7 million in Industrial revenues.
Consolidated gross profit increased from $41.2 million in the six months ended December 31, 2011 to $44.6 million in the six months ended December 31, 2012. The increase of $3.4 million, or 8.3%, was due to higher revenues which increased by 16.4%, partially offset by lower gross margins which decreased to 10.3% in fiscal 2013 compared to 11.1% a year earlier. Fiscal 2013 results included a $3.0 million charge related to a western Canada aboveground storage tank project. This project is discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report on Form 10-Q.
Consolidated SG&A expenses were $27.9 million in the six months ended December 31, 2012 compared to $23.4 million in the same period a year earlier. The increase of $4.5 million, or 19.2%, was primarily related to our planned investments in the branding initiative, strategic growth areas and related support functions. The Company also incurred a bad debt charge of $0.7 million in fiscal 2013. SG&A expense as a percentage of revenue was 6.5% in the six months ended December 31, 2012 compared to 6.3% in the same period a year earlier.
Net interest expense was $0.4 million in the six months ended December 31, 2012 and December 31, 2011.

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Table of Contents

Other income in the six months ended December 31, 2012 was $0.1 million compared to a loss of $0.4 million in the six months ended December 31, 2011. The prior period loss was related to foreign currency transaction losses.
The effective tax rate was 38.2% for the six months ended December 31, 2012 and 38.0% for the six months ended December 31, 2011. The increase in the effective tax rate was due to a change in deductibility limitations applying to certain items that have previously been fully deducted, largely offset by an increase in the estimate of certain tax credits available to the Company.
Electrical Infrastructure
Revenues for the Electrical Infrastructure segment increased $17.8 million, or 27.1%, to $83.4 million in the six months ended December 31, 2012 compared to $65.6 million in the same period a year earlier. The higher revenue was primarily due to an increase in high voltage work related primarily to storm restoration services. Gross margins were 13.6% in the six months ended December 31, 2012 compared to 11.8% in the same period a year earlier. The improvement in gross margins in fiscal 2013 is due to the favorable effect of direct margins from storm restoration work and the improved recovery of overhead costs caused by a higher business volume.
Oil Gas & Chemical
Revenues for the Oil Gas & Chemical segment increased to $133.7 million in the six months ended December 31, 2012 compared to $95.5 million in the same period a year earlier. The increase of $38.2 million, or 40.0%, was primarily due to a higher level of turnaround and capital construction projects due to increased spending from existing customers and addition of new customers. Gross margins were 11.9% in the six months ended December 31, 2012 compared to 9.7% in the same period a year earlier. The improvement in gross margins is primarily due to the favorable effect of the improved recovery of overhead costs caused by a higher business volume.
Storage Solutions
Revenues for the Storage Solutions segment increased to $201.9 million in the six months ended December 31, 2012 compared to $194.5 million in the same period a year earlier. The increase of $7.4 million was due to higher levels of work in Canada in our aboveground storage tank business. Gross margins decreased from 11.9% in the six months ended December 31, 2011 to 8.8% in the same period in the current year. The lower margins for the six months ended December 31, 2012 was due to lower direct margins caused by a $3.0 million charge related to a western Canada aboveground storage tank project. This project is discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report on Form 10-Q, and higher unrecoverable overhead costs.
Industrial
Revenues for the Industrial segment totaled $12.0 million in the six months ended December 31, 2012 compared to $14.7 million in the same period a year earlier. The decrease of $2.7 million, or 18.4%, was primarily due to the timing of projects related to legacy industrial work, partially offset by higher revenues in our mining and minerals and bulk material handling businesses. Gross margins decreased from 7.2% in the six months ended December 31, 2011 to (3.2%) in the same period in the current year. Gross margins for the six months ended December 31, 2012 were negatively impacted by startup costs related to entry into the bulk material handling and mining and minerals markets.
Backlog
We define backlog as the total dollar amount of revenues 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.
For long-term maintenance contracts we include only the amounts that we expect to recognize into revenue over the next 12 months. For all other arrangements, we calculate backlog as the estimated contract amount less revenues recognized as of the reporting date.

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Table of Contents

Three Months Ended December 31, 2012

The following table provides a summary of changes in our backlog for the three months ended December 31, 2012:
 
 
Electrical
Infrastructure
 
Oil Gas &
Chemical
 
Storage
Solutions
 
Industrial
 
Total
 
(In thousands)
Backlog as of September 30, 2012
$
135,318

 
$
116,857

 
$
264,908

 
$
17,563

 
$
534,646

Net awards
32,846

 
65,246

 
169,818

 
24,001

 
291,911

Revenue recognized
(50,123
)
 
(66,635
)
 
(97,645
)
 
(7,033
)
 
(221,436
)
Backlog as of December 31, 2012
$
118,041

 
$
115,468

 
$
337,081

 
$
34,531

 
$
605,121

Six Months Ended December 31, 2012

The following table provides a summary of changes in our backlog for the six months ended December 31, 2012:
 
 
Electrical
Infrastructure
 
Oil Gas &
Chemical
 
Storage
Solutions
 
Industrial
 
Total
 
(In thousands)
Backlog as of June 30, 2012
$
127,699

 
$
117,862

 
$
236,571

 
$
15,320

 
$
497,452

Net awards
73,735

 
131,338

 
302,421

 
31,219

 
538,713

Revenue recognized
(83,393
)
 
(133,732
)
 
(201,911
)
 
(12,008
)
 
(431,044
)
Backlog as of December 31, 2012
$
118,041

 
$
115,468

 
$
337,081

 
$
34,531

 
$
605,121

Non-GAAP Financial Measure
EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. We have presented 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 necessarily 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, 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.

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Table of Contents

A reconciliation of EBITDA to net income follows:
 
 
Three Months Ended
 
Six Months Ended
 
December 31,
2012
 
December 31,
2011
 
December 31,
2012
 
December 31,
2011
 
(In thousands)
Net income
$
5,436

 
$
7,031

 
$
10,120

 
$
10,540

Interest expense
217

 
166

 
400

 
443

Provision for income taxes
3,124

 
4,307

 
6,246

 
6,458

Depreciation and amortization
2,970

 
2,912

 
5,796

 
5,738

EBITDA
$
11,747

 
$
14,416

 
$
22,562

 
$
23,179


FINANCIAL CONDITION AND LIQUIDITY
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 for the six months ended December 31, 2012 were cash on hand at the beginning of the year, capacity under our senior revolving credit facility and cash generated from operations. Cash on hand at December 31, 2012 totaled $33.2 million and availability under the senior revolving credit facility totaled $102.1 million resulting in total funding availability of $135.3 million. We expect to fund our operations for the next twelve months through the use of cash generated from operations, existing cash balances and borrowings under our credit facility.
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 significant retentions or security in the form of letters of credit.

•
Other changes in working capital

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

•
Acquisitions of new businesses

•
Strategic investments in new operations

•
Purchases of shares under our stock buyback program

•
Contract disputes or collection issues

•
Capacity constraints under our senior revolving credit facility and remaining in compliance with all covenants contained in the credit agreement
We have an effective shelf registration statement on file with the SEC under which we may issue, from time to time, up to $400 million of senior debt securities, subordinated debt securities, common stock, preferred stock and warrants. This shelf gives us additional flexibility, when capital market conditions are favorable, to grow our business, finance acquisitions or to optimize our balance sheet in order to improve or maintain our financial flexibility. We may also elect to issue term debt or increase the

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amount of our revolving credit facility. We will continue to evaluate our working capital requirements and other factors to maintain sufficient liquidity.
Cash Flow in the Six Months Ended December 31, 2012
Cash Flows Provided by Operating Activities
Cash flows provided by operating activities for the six months ended December 31, 2012 totaled $11.0 million. Major components of cash flows from operating activities are as follows:

Net Cash Provided by Operating Activities
(In thousands)
 
Net income
$
10,120

Non-cash expenses
7,944

Deferred income tax
178

Cash effect of changes in operating assets and liabilities
(7,181
)
Gain on disposition of property, plant and equipment
(51
)
Other
(56
)
Net cash provided by operating activities
$
10,954

The cash effect of significant changes in operating assets and liabilities include the following:

•
Accounts receivable increased by $43.8 million. The accounts receivable increase is due to a higher level of business and the timing of billings particularly in the Storage Solutions and Electrical Infrastructure segments. The receivable aging categories have not deteriorated and we do not anticipate any unusual collection difficulties.

•
The net change in the combined balance of costs and estimated earnings in excess of billings on uncompleted contracts and billings on uncompleted contracts in excess of costs and estimated earnings caused an increase in operating assets and liabilities and an increase to cash of $29.7 million in the six months ended December 31, 2012. This change was primarily attributable to our project portfolio permitting a higher degree of advanced billings in the first six months of fiscal 2013.

•
Accounts payable increased by $9.8 million. The increase was primarily due to an increase in business activity.
Cash Flows Used For Investing Activities
Investing activities used $20.2 million of cash in the six months ended December 31, 2012. This was due to capital expenditures of $12.0 million and the purchase of certain assets of Pelichem in the amount of $8.3 million as discussed in Note 2 - Acquisition. Capital expenditures included $6.4 million for the purchase of construction equipment, $3.3 million for transportation equipment, $2.2 million for office equipment and software and $0.1 million for land and buildings.
Cash Flows from Financing Activities
Financing activities provided $2.5 million of cash in the six months ended December 31, 2012 primarily due to net cash borrowings of $3.4 million, offset in party by treasury share purchases of $1.1 million. Cash borrowings were Canadian dollar advances under our credit agreement to mitigate foreign exchange rate risks.
Senior Revolving Credit Facility
The Company has a five-year, $125.0 million senior secured revolving credit facility (the “Credit Agreement”) that expires November 7, 2016. Advances under the Credit Agreement may be used for working capital, issuance of letters of credit and other lawful corporate purposes.
The Credit Agreement includes the following covenants and borrowing limitations:

•
Our Senior Leverage Ratio, as defined in the agreement, may not exceed 2.50 to 1.00 as of the end of each fiscal quarter.


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•
We will be required to maintain a Fixed Charge Coverage Ratio, as defined in the agreement, greater than or equal to 1.25 to 1.00 as of the end of each fiscal quarter.

•
Asset dispositions (other than inventory and obsolete or unneeded equipment disposed of in the ordinary course of business) are limited to $15.0 million per 12-month period.
Amounts borrowed under the Credit Agreement bear interest at LIBOR or an Alternate Base Rate, plus in each case, an additional margin based on the Senior Leverage Ratio. The Credit Agreement includes additional margin ranges on Alternate Base Rate loans between 0.75% and 1.5% and between 1.75% and 2.5% on LIBOR-based loans.
The Credit Agreement also permits us to borrow in Canadian dollars with a sublimit of U.S. $15.0 million. Amounts borrowed in Canadian dollars will bear interest either at the CDOR Rate, plus an additional margin based on the Senior Leverage Ratio ranging from 1.75% to 2.5%, or at the Canadian Prime Rate, plus an additional margin based on the Senior Leverage Ratio ranging from 2.25% to 3.0%. The CDOR Rate is equal to the sum of the annual rate of interest which is the rate determined as being the arithmetic average of the quotations of all institutions listed in respect of the relevant CDOR interest period for Canadian Dollar denominated bankers’ acceptances, plus 0.1%. The Canadian Prime Rate is equal to the greater of (i) the rate of interest per annum most recently announced or established by JPMorgan Chase Bank, N.A., Toronto Branch as its reference rate in effect on such day for determining interest rates for Canadian Dollar denominated commercial loans in Canada and (ii) the CDOR Rate plus 1.0%.
The Unused Credit Facility Fee is between 0.30% and 0.45% based on the Senior Leverage Ratio.
As noted previously, the Credit Agreement includes a Senior Leverage Ratio covenant which provides that Consolidated Funded Indebtedness may not exceed 2.5 times Consolidated EBITDA, as defined in the agreement, over the previous four quarters. For the four quarters ended December 31, 2012, Consolidated EBITDA was $45.6 million. Accordingly, at December 31, 2012, Consolidated Funded Indebtedness in excess of $114.0 million would have violated the Senior Leverage Ratio covenant. Consolidated Funded Indebtedness at December 31, 2012 was $4.5 million, which includes $3.4 million of outstanding borrowings, and $1.1 million of non-workers compensation related letters of credit.
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 dividends on our capital stock during any fiscal year up to an amount which, when added to all other dividends paid during such fiscal year, does not exceed 50% of our cumulative net income for such fiscal year to such 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
The Company's stock buyback program, which was approved by the Board of Directors on February 4, 2009, was scheduled to expire on December 31, 2012. The program permitted the Company to purchase up to 3,000,000 shares of common stock provided that such purchases do not exceed $25.0 million in any calendar year. Since its inception, the Company has purchased a total of 886,503 shares under the stock buyback program at an average price of $9.17. On November 6, 2012, our Board of Directors approved a two year extension of the stock buyback plan, which will allow the Company to purchase up to 2,113,497 shares through the end of calendar year 2014 if sufficient liquidity exists and we believe that it is in the best interest of the stockholders.
In addition to the stock buyback program, the Company may withhold shares of common stock to satisfy the tax withholding obligations upon vesting of an employee’s deferred shares. Matrix withheld 101,271 shares in the first six months of fiscal 2013 to satisfy these obligations. These shares were returned to the Company’s pool of treasury shares.
The Company has 1,869,558 treasury shares as of December 31, 2012 and intends to utilize these treasury shares solely in connection with equity awards under the Company’s stock incentive plans.


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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:

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

•
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 ability to generate sufficient cash from operations or to raise cash in order to meet our short and long-term capital requirements; 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, 2012 and listed from time to time in our filings with the Securities and Exchange Commission;

•
the inherently uncertain outcome of current and future litigation;

•
the adequacy of our reserves for contingencies;

•
economic, market or business conditions in general and in the oil, gas, power and mining and minerals industries in particular;

•
changes in laws or regulations; 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, 2012, filed with the Securities and Exchange Commission. For more information on market risk, see Part II, Item 7A in our fiscal 2012 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, 2012. 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, 2012.
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, 2012.

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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, 2012.
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 2013.
 
 
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
October 1 to October 31, 2012
 
 
 
 
 
 
 
Share Repurchase Program (A)
—

 
—

 
—

 
2,113,497

Employee Transactions (B)
23,842

 
$
10.36

 
—

 
 
November 1 to November 30, 2012
 
 
 
 
 
 
 
Share Repurchase Program (A)
—

 
—

 
—

 
2,113,497

Employee Transactions (B)
25,255

 
$
10.42

 
—

 
 
December 1 to December 31, 2012
 
 
 
 
 
 
 
Share Repurchase Program (A)
—

 
—

 
—

 
2,113,497

Employee Transactions (B)
18,720

 
$
10.96

 
—

 
 
 
(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.
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 dividends on our capital stock during any fiscal year up to an amount which, when added to all other dividends paid during such fiscal year, does not exceed 50% of our cumulative net income for such fiscal year to such 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.


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Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
There were no mine safety violations or other regulatory matters required to be disclosed in this Form 10-Q under Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K.
Item 5. Other Information
None
Item 6. Exhibits:
 
Exhibit 10:

Matrix Service Company Long-Term Incentive Award Agreement 2012 Plan
 
 
 
Exhibit 31.1:

Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 – CEO.
 
 
 
Exhibit 31.2:

Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 – CFO.
 
 
 
Exhibit 32.1:

Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002) – CEO.
 
 
 
Exhibit 32.2:

Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002) – CFO.
 
 
 
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.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
MATRIX SERVICE COMPANY
 
 
 
Date:
February 7, 2013
By: /s/ Kevin S. Cavanah
 
 
Kevin S. Cavanah Vice President and Chief Financial Officer signing on behalf of the registrant and as the registrant’s principal financial officer


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EXHIBIT INDEX
 
Exhibit 10:

Matrix Service Company Long-Term Incentive Award Agreement 2012 Plan
 
 
Exhibit 31.1:

Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 – CEO.
 
 
Exhibit 31.2:

Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 – CFO.
 
 
Exhibit 32.1:

Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002) – CEO.
 
 
Exhibit 32.2:

Certification Pursuant to 18 U.S.C. 1350 (section 906 of Sarbanes-Oxley Act of 2002) – CFO.
 
 
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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