Quarterly Report



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 March 31, 2017
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 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, 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
 
o
Smaller reporting company
 
¨
 
 
 
 
 
 
Emerging growth company
 
o
 
 
 
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. o
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 May 8, 2017 there were 27,888,217 shares of the Company’s common stock, $0.01 par value per share, issued and 26,600,094 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
 
Nine Months Ended
 
March 31,
2017
 
March 31,
2016
 
March 31,
2017
 
March 31,
2016
Revenues
$
251,237

 
$
309,422

 
$
905,673

 
$
952,282

Cost of revenues
253,851

 
282,119

 
847,797

 
860,390

Gross profit (loss)
(2,614
)
 
27,303

 
57,876

 
91,892

Selling, general and administrative expenses
18,596

 
20,956

 
56,548

 
65,509

Operating income (loss)
(21,210
)
 
6,347

 
1,328

 
26,383

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(833
)
 
(241
)
 
(1,573
)
 
(756
)
Interest income
73

 
56

 
111

 
147

Other
(51
)
 
(109
)
 
3

 
(311
)
Income (loss) before income tax expense
(22,021
)
 
6,053

 
(131
)
 
25,463

Provision (benefit) for federal, state and foreign income taxes
(8,521
)
 
2,507

 
(1,223
)
 
9,060

Net income (loss)
(13,500
)
 
3,546

 
1,092

 
16,403

Less: Net income (loss) attributable to noncontrolling interest
321

 
(811
)
 
321

 
(3,326
)
Net income (loss) attributable to Matrix Service Company
$
(13,821
)
 
$
4,357

 
$
771

 
$
19,729

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
(0.52
)
 
$
0.16

 
$
0.03

 
$
0.74

Diluted earnings (loss) per common share
$
(0.52
)
 
$
0.16

 
$
0.03

 
$
0.73

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
26,594

 
26,758

 
26,511

 
26,651

Diluted
26,594

 
27,054

 
26,838

 
27,191

See accompanying notes.

- 1 -





Matrix Service Company
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
March 31,
2017
 
March 31,
2016
 
March 31,
2017
 
March 31,
2016
Net income (loss)
$
(13,500
)
 
$
3,546

 
$
1,092

 
$
16,403

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation gain (loss) (net of tax expense (benefit) of ($5) and $100 for the three and nine months ended March 31, 2017, respectively, and ($166) and $218 for the three and nine months ended March 31, 2016, respectively)
1,035

 
2,754

 
(962
)
 
(1,061
)
Comprehensive income (loss)
(12,465
)
 
6,300

 
130

 
15,342

Less: Comprehensive income (loss) attributable to noncontrolling interest
321

 
(811
)
 
321

 
(3,326
)
Comprehensive income (loss) attributable to Matrix Service Company
$
(12,786
)
 
$
7,111

 
$
(191
)
 
$
18,668

See accompanying notes.

- 2 -





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


March 31,
2017

June 30,
2016
Assets



Current assets:
 

 
Cash and cash equivalents
$
39,697


$
71,656

Accounts receivable, less allowances (March 31, 2017— $9,247 and June 30, 2016—$8,403)
223,338


190,434

Costs and estimated earnings in excess of billings on uncompleted contracts
69,986


104,001

Inventories
3,926


3,935

Income taxes receivable
5,314

 
9

Other current assets
7,373


5,411

Total current assets
349,634


375,446

Property, plant and equipment at cost:
 

 
Land and buildings
39,826


39,224

Construction equipment
93,178


90,386

Transportation equipment
48,156


49,046

Office equipment and software
36,284


29,577

Construction in progress
5,827


7,475

Total property, plant and equipment - at cost
223,271


215,708

Accumulated depreciation
(141,308
)

(130,977
)
Property, plant and equipment - net
81,963


84,731

Goodwill
113,182


78,293

Other intangible assets
27,781


20,999

Deferred income taxes
5,663

 
3,719

Other assets
2,045


1,779

Total assets
$
580,268


$
564,967

See accompanying notes.











- 3 -





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

March 31,
2017
 
June 30,
2016
Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
97,271

 
$
141,445

Billings on uncompleted contracts in excess of costs and estimated earnings
75,424

 
58,327

Accrued wages and benefits
25,102

 
27,716

Accrued insurance
8,804

 
9,246

Income taxes payable
148

 
2,675

Other accrued expenses
8,314

 
6,621

Total current liabilities
215,063

 
246,030

Deferred income taxes
377

 
3,198

Borrowings under senior revolving credit facility
44,139

 

Other liabilities
472

 
173

Total liabilities
260,051

 
249,401

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Matrix Service Company stockholders' equity:
 
 
 
Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of March 31, 2017, and June 30, 2016; 26,594,319 and 26,297,145 shares outstanding as of March 31, 2017 and June 30, 2016
279

 
279

Additional paid-in capital
126,513

 
127,058

Retained earnings
223,928

 
223,157

Accumulated other comprehensive loss
(7,807
)
 
(6,845
)
 
342,913

 
343,649

Less: Treasury stock, at cost — 1,293,898 shares as of March 31, 2017, and 1,591,072 shares as of June 30, 2016
(22,696
)
 
(26,907
)
Total Matrix Service Company stockholders’ equity
320,217

 
316,742

Noncontrolling interest

 
(1,176
)
Total stockholders' equity
320,217

 
315,566

Total liabilities and stockholders’ equity
$
580,268

 
$
564,967

See accompanying notes.


- 4 -





Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Nine Months Ended
 
March 31,
2017

March 31,
2016
Operating activities:
 
 
 
Net income
$
1,092

 
$
16,403

Adjustments to reconcile net income to net cash used by operating activities, net of effects from acquisitions:
 
 
 
Depreciation and amortization
15,839

 
16,139

Deferred income tax
(4,665
)
 
1,413

Gain on sale of property, plant and equipment
(366
)
 
(111
)
Provision for uncollectible accounts
900

 
5,684

Stock-based compensation expense
5,467

 
5,023

Other
211

 
179

Changes in operating assets and liabilities increasing (decreasing) cash, net of effects from acquisitions:
 
 
 
Accounts receivable
(23,531
)
 
23,684

Costs and estimated earnings in excess of billings on uncompleted contracts
34,761

 
(6,575
)
Inventories
9

 
568

Other assets and liabilities
(9,668
)
 
(5,461
)
Accounts payable
(45,690
)
 
(3,492
)
Billings on uncompleted contracts in excess of costs and estimated earnings
5,449

 
(29,895
)
Accrued expenses
(5,417
)
 
983

Net cash provided (used) by operating activities
(25,609
)
 
24,542

Investing activities:
 
 
 
Acquisitions (Note 2)
(40,819
)
 
(13,049
)
Acquisition of property, plant and equipment
(8,475
)
 
(11,746
)
Proceeds from asset sales
1,145

 
258

Net cash used by investing activities
$
(48,149
)
 
$
(24,537
)

  See accompanying notes.



















- 5 -








Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Nine Months Ended
 
March 31,
2017
 
March 31,
2016
Financing activities:
 
 
 
Advances under senior revolving credit facility
$
106,168

 
$
2,753

Repayments of advances under senior revolving credit facility
(62,029
)
 
(7,712
)
Payment of debt amendment fees
(822
)
 

Open market purchase of treasury shares

 
(5,460
)
Issuances of common stock
234

 
578

Proceeds from issuance of common stock under employee stock purchase plan
253

 
261

Repurchase of common stock for payment of statutory taxes due on equity-based compensation
(2,288
)
 
(4,540
)
Capital contributions from noncontrolling interest
855

 
10,892

Repayment of acquired long-term debt

 
(1,858
)
Net cash provided (used) by financing activities
42,371

 
(5,086
)
Effect of exchange rate changes on cash and cash equivalents
(572
)
 
(755
)
Decrease in cash and cash equivalents
(31,959
)
 
(5,836
)
Cash and cash equivalents, beginning of period
71,656

 
79,239

Cash and cash equivalents, end of period
$
39,697

 
$
73,403

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
11,679

 
$
9,192

Interest
$
1,266

 
$
789

Non-cash investing and financing activities:
 
 
 
Purchases of property, plant and equipment on account
$
846

 
$
401

Acquisition of long-term debt
$

 
$
1,858


  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)
 
Non-Controlling Interest
 
Total
Balances, July 1, 2016
$
279

 
$
126,958

 
$
223,257

 
$
(26,907
)
 
$
(6,845
)
 
$
(1,176
)
 
$
315,566

Retrospective adjustment upon adoption of ASU 2016-09 (see Note 1)

 
100

 
(100
)
 

 

 

 

Balances, July 1, 2016, as adjusted
279

 
127,058

 
223,157

 
(26,907
)
 
(6,845
)
 
(1,176
)
 
315,566

Capital contributions from noncontrolling interest

 

 

 

 

 
855

 
855

Net income

 

 
771

 

 

 
321

 
1,092

Other comprehensive loss

 

 

 

 
(962
)
 

 
(962
)
Treasury shares sold to Employee Stock Purchase Plan (12,734 shares)

 
18

 

 
235

 

 

 
253

Exercise of stock options (22,913 shares)

 
(290
)
 

 
524

 

 

 
234

Issuance of deferred shares (395,780 shares)

 
(5,740
)
 

 
5,740

 

 

 

Treasury shares purchased to satisfy tax withholding obligations (134,253 shares)

 

 

 
(2,288
)
 

 

 
(2,288
)
Stock-based compensation expense

 
5,467

 

 

 

 

 
5,467

Balances, March 31, 2017
$
279

 
$
126,513

 
$
223,928

 
$
(22,696
)
 
$
(7,807
)
 
$

 
$
320,217

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, July 1, 2015
$
279

 
$
123,038

 
$
194,394

 
$
(18,489
)
 
$
(5,926
)
 
$
(8,742
)
 
$
284,554

Capital contributions from noncontrolling interest

 

 

 

 

 
10,892

 
10,892

Net income (loss)

 

 
19,729

 

 

 
(3,326
)
 
16,403

Other comprehensive loss

 

 

 

 
(1,061
)
 

 
(1,061
)
Treasury shares sold to Employee Stock Purchase Plan (13,003 shares)

 
142

 

 
119

 

 

 
261

Exercise of stock options (62,137 shares)

 
7

 

 
571

 

 

 
578

Issuance of deferred shares (623,443 shares)

 
(5,777
)
 

 
5,777

 

 

 

Treasury shares purchased to satisfy tax withholding obligations (202,916 shares)

 

 

 
(4,540
)
 

 

 
(4,540
)
Tax effect of exercised stock options and vesting of deferred shares

 
3,222

 

 

 

 

 
3,222

Open market purchase of treasury shares ( 330,000 shares)

 

 

 
(5,460
)
 

 

 
(5,460
)
Stock-based compensation expense

 
5,023

 

 

 

 

 
5,023

Balances, March 31, 2016
$
279

 
$
125,655

 
$
214,123

 
$
(22,022
)
 
$
(6,987
)
 
$
(1,176
)
 
$
309,872

See accompanying notes.


- 7 -





Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1 – Basis of Presentation and Accounting Policies
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 generally accepted accounting principles 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, 2016 , included in the Company’s Annual Report on Form 10-K for the year then ended. The results of operations for the nine month period ended March 31, 2017 may not necessarily be indicative of the results of operations for the full year ending June 30, 2017 .
Recently Issued Accounting Standards
Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The ASU also requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU's disclosure requirements are significantly more comprehensive than those in existing revenue standards. The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification ("ASC"). The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted on a limited basis.
Management is currently evaluating the impact of adopting the ASU on the Company's financial position, results of operations, cash flows and related disclosures. Adoption of this ASU is expected to affect the manner in which the Company determines the unit of account for its projects (i.e., performance obligations). Under existing guidance, the Company typically has multiple units of account for large complex projects. Upon adoption, the Company expects that similar projects may have fewer units of account, possibly just one unit of account in some cases, which will result in a more constant recognition of revenue and profit over the term of the project. The Company will adopt this standard on July 1, 2018 using the modified retrospective method of application, which may result in a cumulative effect adjustment to retained earnings as of the date of adoption.
Accounting Standards Update 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
On August 27, 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements. Further, an entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern.” The FASB believes that requiring management to perform the assessment will enhance the timeliness, clarity, and consistency of related disclosures and improve convergence with international financial reporting standards ("IFRS") (which emphasize management’s responsibility for performing the going-concern assessment). However, the time horizon for the assessment (look-forward period) and the disclosure thresholds under U.S. GAAP and IFRS will continue to differ. The ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter; early adoption is permitted.

- 8 -


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


The ASU was adopted during the Company's first fiscal quarter ending September 30, 2016. In connection with the adoption of the ASU, the Company now performs an assessment of its ability to continue as a going concern on a quarterly basis. Disclosure regarding the status of the Company's ability to continue as a going concern is required when there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the date that the financial statements are issued.
Accounting Standards Update 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
On September 25, 2015, the FASB issued ASU 2015-16 to simplify the accounting for measurement-period adjustments. The ASU was issued in response to stakeholder feedback that restatements of prior periods to reflect adjustments made to provisional amounts recognized in a business combination increase the cost and complexity of financial reporting but do not significantly improve the usefulness of the information. Under the ASU, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. We adopted this standard on July 1, 2016 with no material impact to the Company's financial statements.
Accounting Standards Update 2016-02, Leases (Topic 842)
On February 25, 2016, the FASB issued ASU 2016-02. The amendments in this update require, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, but we do not plan to do so at this time.
We are currently evaluating the ASU's expected impact on our financial statements. Note 8 of Item 8. Financial Statements and Supplementary Data in our 2016 Form 10-K provides information about the timing and amount of future operating lease payments, which we believe is indicative of the materiality of adoption of the ASU to our financial statements.
Accounting Standards Update 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
On March 30, 2016, the FASB issued ASU 2016-09, which simplified several aspects of accounting for stock-based compensation transactions, including the accounting for income taxes and forfeitures and statutory tax withholding requirements. The Company adopted the ASU during its first fiscal quarter ending September 30, 2016. The following is a description of the key provisions of the ASU and their impacts to the Company's financial statements:
Accounting for Income Taxes : The amendments require the Company to recognize excess tax benefits or tax deficiencies in its provision for income taxes in its consolidated statements of income during the period of vesting or exercise of its nonvested deferred share awards and stock options, respectively, for which it expects to receive an income tax deduction. Previously, the Company recognized any excess tax benefits in additional paid-in capital ("APIC") in the balance sheet and any tax deficiencies were recognized as a reduction of APIC to the extent the Company has accumulated excess tax benefits. Any tax deficiencies in excess of accumulated excess tax benefits in APIC were recognized in the provision for income taxes. The amendments also require the Company to only present excess tax benefits and tax deficiencies in the operating section of its statements of cash flows as a component of deferred tax activity. Previously, the Company was required to present such items in both the financing section and operating section of its statements of cash flows. Amendments related to the recognition of excess tax benefits and tax deficiencies in income are required to be applied prospectively, and amendments related to the cash flow statement presentation of excess tax benefits and tax deficiencies may be applied either retrospectively or prospectively.

- 9 -


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


The Company applied the amendments requiring the recognition of excess tax benefits and tax deficiencies in income prospectively. As a result, the Company recognized $0.5 million of excess tax benefits in its provision for income taxes during the nine months ended March 31, 2017, which increased basic and diluted earnings per share by $0.02 . No material excess tax benefits or deficiencies were recognized during the three months ended March 31, 2017. Under the prior accounting standard, the Company would have recognized the excess tax benefits in equity as additional paid-in capital. The amendments relating to the presentation of excess tax benefits and tax deficiencies in the statement of cash flows were applied retrospectively. The effect of the retrospective adjustment was to eliminate the presentation of an operating cash outflow and a financing cash inflow for excess tax benefits on exercised stock options and vesting of deferred shares. These eliminations increased net cash provided by operating activities by $3.2 million and decreased net cash provided by financing activities by $3.2 million for the nine months ended March 31, 2016. Net cash flows did not change as a result of the retrospective adjustment.
Accounting for Forfeitures : The amendments in this ASU allow the Company to elect, as a company-wide accounting policy, either to continue to estimate the amount of forfeitures to exclude from compensation expense or to exclude forfeitures from compensation expense as they occur. Upon the adoption of the ASU during the first quarter of fiscal 2017, the Company elected to account for forfeitures as they occur. The Company is required to apply these amendments on a modified retrospective basis with a cumulative adjustment to retained earnings as of the beginning of the fiscal year. The Company recorded a modified retrospective adjustment to reduce the June 30, 2016 retained earnings balance and increase the additional paid-in capital balance by $0.1 million each.
Statutory Tax Withholding Requirements : Under the prior accounting standard, an entire award must be classified as a liability if the fair value of the shares withheld exceeds the Company's minimum statutory withholding obligation. Under the ASU, the Company is allowed to withhold shares with a fair value up to the amount of tax owed using the maximum statutory tax rate in the employee's applicable jurisdictions. The Company is allowed to determine one maximum rate for all employees in each jurisdiction, rather than a rate for each employee in the jurisdiction. Also, the ASU requires that cash outflows to reacquire shares withheld for taxes to be classified in the financing section of the statement of cash flows.
The Company adopted the ASU during the first quarter of fiscal 2017. Since the Company did not have any awards classified as liabilities due to statutory tax withholding requirements as of December 31, 2016, and since the Company already presented its cash outflows for reacquiring shares withheld for taxes as a financing activity in its statements of cash flows, these amendments did not have any impact on its financial statements upon adoption. The Company does not expect changes to employee withholdings for stock compensation to have a material impact to the financial statements.
Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
On June 16, 2016, the FASB issued ASU 2016-13, which will change how the Company accounts for its allowance for uncollectible accounts. The amendments in this update require a financial asset (or a group of financial assets) to be presented at the net amount expected to be collected. The income statement will reflect any increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount.
Current GAAP delays the recognition of the full amount of credit losses until the loss is probable of occurring. The amendments in this update eliminate the probable initial recognition threshold and, instead, reflect the Company's current estimate of all expected credit losses. In addition, current guidance limits the information the Company may consider in measuring a credit loss to its past events and current conditions. The amendments in this update broaden the information the Company may consider in developing its expected credit loss estimate to include forecasted information.
The amendments in this update are effective for the Company on July 1, 2020 and the Company may early adopt on July 1, 2019. The Company must apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. At this time, the Company does not expect this update to have a material impact to its estimate of the allowance for uncollectible accounts.

- 10 -


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


Accounting Standards Update 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
On January 26, 2017, the FASB issued ASU 2017-04, which simplifies the goodwill impairment test by eliminating step two from the procedure. Previously, goodwill was tested for impairment by performing a two-step test. The first step involves determining the fair value of a reporting unit and comparing it to the carrying amount of the reporting unit's net assets. If the fair value of the reporting unit is less than its carrying amount, then the goodwill assigned to that reporting unit is determined to be impaired and step two must then be completed to measure the amount of the impairment. Step two involved measuring the reporting unit's assets and liabilities at fair value following a process similar to determining the fair value of assets acquired and liabilities assumed in a business combination. The net fair value of the assets acquired and liabilities assumed was then compared to the fair value of the reporting unit in order to compute the implied goodwill for the reporting unit. The difference between the carrying amount of the reporting unit's goodwill and the amount of the implied goodwill computed was the amount of the goodwill impairment to be recognized. Under ASU 2017-04, instead of performing step two of the test, the Company will recognize an impairment charge to the extent a reporting unit's fair value is less than the carrying amount of its net assets, as indicated by step one of the test.
The standard must be applied prospectively and must by adopted in fiscal years beginning after December 15, 2019. Early adoption is permitted and the Company is currently evaluating whether to adopt early. The Company's annual goodwill impairment test will be performed as of May 31, 2017.
Note 2 – Acquisitions
Purchase of Houston Interests, LLC
On December 12, 2016 , the Company completed the acquisition of Houston Interests, LLC ("Houston Interests"), a premier global solutions company that provides consulting, engineering, design, construction services and systems integration. Houston Interests brings expertise to the Company in natural gas processing; sulfur recovery, processing and handling; liquid terminals, silos and other bulk storage; process plant design; power generation environmental controls and material handling; industrial power distribution; electrical, instrumentation and controls; marine structures; material handling systems and terminals for cement, sulfur, fertilizer, coal and grain; and process heaters. The business has been included in our Matrix PDM Engineering, Inc. subsidiary, and its operating results have been allocated between the Oil Gas & Chemical and Industrial segments.
The Company purchased all of the equity interests of Houston Interests for $40.8 million in cash, net of working capital adjustments and cash acquired. The consideration paid is as follows (in thousands):
Cash paid for equity interest
$
46,000

Cash paid for working capital
5,150

Less: cash acquired
(10,331
)
Net purchase price
$
40,819

The Company funded the equity interest portion of the consideration paid from borrowings under the Company's senior secured revolving credit facility (See Note 5). The purchase of working capital was paid with cash on hand.

- 11 -


The net purchase price was allocated to the major categories of assets and liabilities based on their estimated fair value at the acquisition date.
The following table summarizes the preliminary net purchase price allocation (in thousands):
Current assets
$
21,804

Property, plant and equipment
942

Goodwill
35,048

Other intangible assets
10,220

Total assets acquired
68,014

Current liabilities
16,674

Other liabilities
190

Net assets acquired
51,150

Cash
10,331

Net purchase price
$
40,819

The goodwill recognized from the acquisition is primarily attributable to the technical expertise of the acquired workforce and the complementary nature of Houston Interests' operations, which the Company believes will enable the combined entity to expand its service offerings and enter new markets. All of the goodwill recognized is deductible for income tax purposes. The fair value of the net assets acquired is preliminary pending the final valuation of those assets. As a result, goodwill is also preliminary since it has been recorded as the excess of the purchase price over the estimated fair value of the net assets acquired.
The Company has agreed to pay the previous owners up to $2.6 million for any unused portion of acquired warranty obligations outstanding as of June 30, 2017. In addition, the sellers have agreed to reimburse the Company for any warranty costs incurred in connection with the acquired warranties in excess of $2.6 million. All acquired warranties will expire by June 30, 2017. Any amounts paid to or received from the seller will be accounted for as a working capital adjustment, which will be reflected as a change to the net purchase price. No payments have been made to the seller for any unused portion of acquired warranty obligations as of March 31, 2017.
The Company incurred $0.1 million and $0.5 million of expenses related to closing the acquisition during the three and nine months ended March 31, 2017, which were included within selling, general and administrative expenses in the consolidated statements of income. During the three and nine months ended March 31, 2017, the acquired business contributed revenues of $14.1 million and $16.4 million , respectively, and operating losses of $0.1 million and $0.4 million , respectively.

- 12 -


The unaudited financial information in the table below summarizes the combined results of operations of Matrix Service Company and Houston Interests for the three and nine months ended March 31, 2017 and 2016, on a pro forma basis, as though the companies had been combined as of July 1, 2015. The pro forma financial information presented in the table below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at July 1, 2015 nor should it be taken as indicative of future consolidated results of operations.
 
Three Months Ended
Nine Months Ended

March 31, 2017
March 31, 2016
March 31, 2017
March 31, 2016

(In thousands, except per share data)
Revenues
$
251,237

$
334,228

$
941,536

$
1,047,246

Net income (loss) attributable to Matrix Service Company
$
(13,202
)
$
4,113

$
5,231

$
22,623

Basic earnings (loss) per common share
$
(0.50
)
$
0.15

$
0.20

$
0.85

Diluted earnings (loss) per common share
$
(0.50
)
$
0.15

$
0.19

$
0.83

The pro forma financial information presented in the table above includes the following adjustments to the combined entities' historical financial statements:
The combined entities recorded approximately $0.4 million and $3.4 million of acquisition and integration expenses during the three and nine months ended March 31, 2017, respectively, which were transferred in the pro forma earnings to the nine months ended March 31, 2016 in order to report them as if they were incurred on July 1, 2015. Pro forma earnings were adjusted to include integration expenses that would have been recognized had the acquisition occurred on July 1, 2015 of $0.4 million and $1.1 million during the three and nine months ended March 31, 2017, respectively, and $0.3 million and $0.8 million during the three and nine months ended March 31, 2016, respectively.
Interest expense for the combined entities was increased by $0.7 million during the nine months ended March 31, 2017 and by $0.4 million and $1.0 million during the three and nine months ended March 31, 2016, respectively. The increase was attributable to the assumption that the Company's borrowings of $46.0 million used to fund a portion of the net purchase price had been outstanding as of July 1, 2015. This increase was partially offset by the assumption that Houston Interests' former debt was extinguished as of July 1, 2015.
Depreciation and intangible asset amortization expense for the combined entities was reduced by $0.6 million and $0.8 million during the three and nine months ended March 31, 2017, respectively, and was increased by $0.5 million and $1.4 million during the three and nine months ended March 31, 2016, respectively. These adjustments are primarily due to the recognition of amortizable intangible assets as part of the acquisition and the effect of fair value adjustments to acquired property, plant and equipment.
Pro forma earnings were adjusted to include additional income tax expense of $4.3 million during the nine months ended March 31, 2017. Income tax expense was reduced by $0.6 million during the three months ended March 31, 2016 and increased by $1.8 million during the nine months ended March 31, 2016. Houston Interests was previously an exempt entity and income taxes were not assessed in its historical financial information.
Purchase of Baillie Tank Equipment, Ltd.
On February 1, 2016 , the Company completed the acquisition of all outstanding stock of Baillie Tank Equipment, Ltd. (“BTE”) , an internationally-based company with nearly 20 years of experience in the design and manufacture of products for use on aboveground storage tanks. Founded in 1998, BTE is a provider of tank products including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems, and seals. BTE is headquartered in Sydney, Australia with a manufacturing facility in Seoul, South Korea. The Company acquired BTE to expand its service offerings of certain technical solutions for aboveground storage tanks. The business is now known as Matrix Applied Technologies, and its operating results are included in the Storage Solutions segment.
The Company purchased BTE with cash on-hand for a net purchase price of $13.0 million . The Company paid $15.4 million when including the subsequent repayment of long-term debt acquired and the settlement of certain other liabilities acquired, and excluding the cash acquired and certain amounts owed to the former owners for working capital adjustments. The net purchase price was allocated to the major categories of assets and liabilities based on their estimated fair value at the acquisition date.

- 13 -


The following table summarizes the final purchase price allocation (in thousands):
Current assets
$
5,574

Property, plant and equipment
4,347

Goodwill
7,030

Other intangible assets
720

Other assets
233

Total assets acquired
17,904

Current liabilities
1,669

Deferred income taxes
329

Long-term debt
1,858

Other liabilities
407

Net assets acquired
13,641

Cash acquired
592

Net purchase price
$
13,049

The goodwill recognized from the acquisition is attributable to the synergies of combining our operations and the technical expertise of the acquired workforce. None of the goodwill recognized is deductible for income tax purposes.
The Company incurred $0.8 million and $0.9 million of expenses related to the acquisition during the three and nine months ended March 31, 2016, which were included within selling, general and administrative expenses in the consolidated statements of income. The acquired business contributed revenues of $3.0 million and $5.8 million during the three and nine months ended March 31, 2017, respectively, and contributed break-even operating income during the three months ended March 31, 2017 and $0.3 million during the nine months ended March 31, 2017. The acquired business contributed revenues of $3.5 million and operating income of $0.7 million for the period February 1, 2016 to March 31, 2016.
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:  
 
March 31,
2017
 
June 30,
2016
 
(in thousands)
Costs incurred and estimated earnings recognized on uncompleted contracts
$
1,266,388

 
$
1,875,014

Billings on uncompleted contracts
1,271,826

 
1,829,340

 
$
(5,438
)
 
$
45,674

Shown in balance sheet as:
 
 
 
Costs and estimated earnings in excess of billings on uncompleted contracts
$
69,986

 
$
104,001

Billings on uncompleted contracts in excess of costs and estimated earnings
75,424

 
58,327

 
$
(5,438
)
 
$
45,674

Progress billings in accounts receivable at March 31, 2017 and June 30, 2016 included retentions to be collected within one year of $55.0 million and $29.7 million , respectively. Contract retentions collectible beyond one year are included in other assets in the condensed consolidated balance sheet and totaled $0.3 million as of June 30, 2016 . There were no retentions collectible beyond one year as of March 31, 2017 .

- 14 -


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


Other
Our results were negatively impacted by an increased cost estimate related to a large project in the Electrical Infrastructure segment, which resulted in a decrease in gross profit. The financial impact of the project was a gross profit (loss) of ($18.9) million and ($13.7) million for the three and nine months ended March 31, 2017, respectively. The profit on future revenue related to this project will be recognized based on the current project forecast, which is at a greatly reduced gross profit margin. The change in cost estimate resulted from a deterioration in the financial forecast of the project during the third quarter and was caused by various factors that have delayed schedule progress and reduced productivity. The adjustment in the current period represents the Company’s estimate, based on the information currently available, of the impact of the increased forecasted cost to complete the project. The current forecast includes estimates for the expected outcome regarding reimbursement from the customer of additional costs incurred and expected to be incurred, as well as the receipt of schedule based incentive revenue currently included in the contract.
Work on the project continues to progress; however, critical work remains, which is at risk from continued impacts to project costs and schedule. Therefore, it is possible that future changes in contract estimates, including those related to project costs, project timeline, receipt of schedule based incentive revenue, and the estimated recovery of additional costs, could occur and have a material positive or negative impact to our results of operations and financial position in subsequent accounting periods.
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, 2016
$
42,170

 
$
14,008

 
$
16,681

 
$
5,434

 
$
78,293

Purchase of Houston Interests (Note 2)

 
28,739

 

 
6,309

 
35,048

Purchase price adjustment for BTE (Note 2)

 

 
88

 

 
88

Translation adjustment (1)
(175
)
 

 
(39
)
 
(33
)
 
(247
)
Net balance at March 31, 2017
$
41,995

 
$
42,747

 
$
16,730

 
$
11,710

 
$
113,182

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

The goodwill allocation attributable to the purchase of Houston Interests is preliminary. The Company is currently evaluating the long-term value by segment and the allocation may be adjusted upon completion of the evaluation, which is expected to occur in the fourth fiscal quarter.

The Company performed its annual goodwill impairment test as of May 31, 2016, which did not indicate the existence of an impairment at that time. While the fiscal year-to-date financial performance of our Electrical Infrastructure, Oil Gas & Chemical and Industrial segments are disappointing and have not met our expectations, the Company does not consider these results to be a triggering event requiring the performance of an interim goodwill impairment test. We believe the financial performance of our Oil Gas & Chemical and Industrial segments is attributable to a cyclical, rather than structural, slowdown in the business and the financial performance of our Electrical Infrastructure segment is attributable to issues relating to one major project (as discussed in Note 3 - Uncompleted Contracts). The Company continues to consider these segments as core to its business and believes current operating results are not indicative of future performance. The Company will continue to monitor its operating results for indicators of impairment and perform additional tests as necessary. The Company's fiscal 2017 annual impairment test will be performed as of May 31, 2017, which could result in an impairment to goodwill depending on the Company’s finalized forecast for fiscal 2018 and other market conditions.


- 15 -


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


Other Intangible Assets
Information on the carrying value of other intangible assets is as follows:
 
 
 
At March 31, 2017
   
Useful Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
(Years)
 
(In thousands)
Intellectual property
9 to 15
 
$
2,579

 
$
(1,380
)
 
$
1,199

Customer-based
1 to 15
 
38,094

 
(12,209
)
 
25,885

Non-compete agreements
4 to 5
 
1,453

 
(1,245
)
 
208

Trade names
1 to 3
 
1,795

 
(1,306
)
 
489

Total amortizing intangible assets
 
 
$
43,921

 
$
(16,140
)
 
$
27,781

 
 
 
 
At June 30, 2016
 
Useful Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
(Years)
 
(In thousands)
Intellectual property
9 to 15
 
$
2,579

 
$
(1,246
)
 
$
1,333

Customer-based
1.5 to 15
 
28,179

 
(9,655
)
 
18,524

Non-compete agreements
4 to 5
 
1,453

 
(1,102
)
 
351

Trade names
3 to 5
 
1,615

 
(824
)
 
791

Total amortizing intangible assets
 
 
$
33,826

 
$
(12,827
)
 
$
20,999

The increase in the gross carrying amount of other intangible assets at March 31, 2017 compared to June 30, 2016 is primarily due to the December 12, 2016 acquisition of Houston Interests (See Note 2). The specifically identifiable intangible assets recognized in the Houston Interests acquisition consist of:
customer-based intangibles with a fair value of $10.0 million and useful life of between 1 and 9 years; and
trade name with a fair value of $0.2 million and useful life of 1 year.

Amortization expense totaled $1.6 million and $3.4 million during the three and nine months ended March 31, 2017 , respectively, and $1.0 million and $2.6 million during the three and nine months ended March 31, 2016, respectively. The Company recognized $0.7 million and $0.9 million of amortization expense during the three and nine months ended March 31, 2017 for intangible assets recorded as part of the Houston Interests acquisition.

We estimate that the remaining amortization expense related to March 31, 2017 amortizing intangible assets will be as follows (in thousands):
Period ending:
 
Remainder of Fiscal 2017
$
1,543

Fiscal 2018
4,728

Fiscal 2019
3,487

Fiscal 2020
3,477

Fiscal 2021
3,459

Fiscal 2022
2,616

Thereafter
8,471

Total estimated remaining amortization expense at March 31, 2017
$
27,781


- 16 -


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


Note 5 – Debt
On February 8, 2017, the Company entered into the Fourth Amended and Restated Credit Agreement (the "Credit Agreement"), by and among the Company and certain foreign subsidiaries, as Borrowers, various subsidiaries of the Company, as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole Bookrunner, and the other Lenders party thereto, which replaced the Third Amended and Restated Credit Agreement dated as of November 7, 2011, as previously amended (the "Prior Credit Agreement").
The Credit Agreement provides for a five-year senior secured revolving credit facility of $300.0 million that expires February 8, 2022 , which replaces the $250.0 million senior secured revolving credit facility under the Prior Credit Agreement. The new credit facility may be used for working capital, acquisitions, capital expenditures, issuances of letters of credit and other lawful purposes.
The Credit Agreement includes the following covenants and borrowing limitations:
A Leverage Ratio, determined as of the end of each fiscal quarter, may not exceed 3.00 to 1.00 .
As with the Prior Credit Agreement, 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 new credit facility includes a sub-facility for revolving loans denominated in Australian Dollars, Canadian Dollars, Euros and Pounds Sterling in an aggregate amount not to exceed the U.S. Dollar equivalent of $75.0 million and a $200.0 million sublimit for letters of credit.
Each revolving borrowing under the Credit Agreement will bear interest at a rate per annum equal to:
The ABR or the Adjusted LIBO Rate, in the case of revolving loans denominated in U.S. Dollars;
The Canadian Prime Rate or the CDOR rate, in the case of revolving loans denominated in Canadian Dollars;
The Adjusted LIBO Rate, in the case of revolving loans denominated in Pounds Sterling or Australian Dollars;
The EURIBO Rate, in the case of revolving loans denominated in Euros,

in each case, plus the Applicable Margin, which is based on the Company's Leverage Ratio. The Applicable Margin on ABR loans ranges between 0.625% and 1.625% . The Applicable Margin for Adjusted LIBO, EURIBO and CDOR loans ranges between 1.625% and 2.625% and the Applicable Margin for Canadian Prime Rate loans ranges between 2.125% and 3.125% .
The unused credit facility fee is between 0.25% and 0.45% based on the Leverage Ratio.
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 3.0 times Consolidated EBITDA, as defined in the Credit Agreement, over the previous four quarters. For the four quarters ended March 31, 2017 , Consolidated EBITDA was $55.4 million . Consolidated Funded Indebtedness at March 31, 2017 was $51.7 million .

- 17 -


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


Availability under the senior revolving credit facility at March 31, 2017 was as follows:  
 
March 31,
2017
 
June 30,
2016
 
(In thousands)
Senior revolving credit facility
$
300,000

 
$
200,000

Capacity constraint due to the Senior Leverage Ratio
133,713

 
20,138

Capacity under the credit facility
166,287

 
179,862

Borrowings outstanding
44,139

 

Letters of credit
15,378

 
20,755

Availability under the senior revolving credit facility
$
106,770

 
$
159,107

Outstanding borrowings at March 31, 2017 under our Credit Agreement were primarily used to fund the acquisition of Houston Interests (See Note 2) and working capital needs in our Canadian business due to the timing of collections and disbursements on the previously announced Electrical Infrastructure project.
At March 31, 2017 , the Company was in compliance with all affirmative, negative, and financial covenants under the Credit Agreement.
Note 6 – 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.
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.
Our effective tax rate for the three and nine months ended March 31, 2017 was 38.7% and 933.6% , respectively, compared to 41.4% and 35.6% in the same periods a year earlier. The Company recorded discrete benefits of $0.3 million and $0.9 million during the three and nine months ended March 31, 2017 , respectively, and recorded $0.1 million and $1.3 million of discrete benefits during the three and nine months ended March 31, 2016 , respectively. The fiscal 2017 discrete benefits primarily relate to the application of ASU 2016-09 (See Note 1), adjustments to state net operating loss carryforwards, a reduction in the blended state income tax rate and an increase in actual tax credits over estimated tax credits for fiscal 2016.  These benefits were partially offset by a valuation allowance on deferred tax assets related to foreign tax credit carryforwards and stock compensation expense.  The fiscal 2016 tax rate was positively impacted by a discrete item related to the retroactive application of the R&D tax credit and a foreign currency item related to our Canadian operations.
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.

- 18 -


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


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 and claims of $18.1 million at March 31, 2017 and $10.3 million at June 30, 2016 . Generally, collection of amounts related to unapproved change orders and claims is expected within twelve months. However, since customers may not pay these amounts until final resolution of related claims, collection of these amounts may extend beyond one year.
Other
The Company and its subsidiaries are participants in various legal actions. It is the opinion of management that none of the known legal actions will have a material impact on the Company’s financial position, results of operations or liquidity.
Note 8 – Earnings per Common Share
Basic earnings per share (“Basic EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share (“Diluted EPS”) includes the dilutive effect of stock options and nonvested deferred shares.
The computation of basic and diluted earnings per share is as follows:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
2017
 
March 31,
2016
 
March 31,
2017
 
March 31,
2016
 
(In thousands, except per share data)
Basic EPS:
 
 
 
 
 
 
 
Net income (loss) attributable to Matrix Service Company
$
(13,821
)
 
$
4,357

 
$
771

 
$
19,729

Weighted average shares outstanding
26,594

 
26,758

 
26,511

 
26,651

Basic earnings (loss) per share
$
(0.52
)
 
$
0.16

 
$
0.03

 
$
0.74

Diluted EPS:

 

 

 

Weighted average shares outstanding – basic
26,594

 
26,758

 
26,511

 
26,651

Dilutive stock options

 
57

 
51

 
73

Dilutive nonvested deferred shares

 
239

 
276

 
467

Diluted weighted average shares
26,594

 
27,054

 
26,838

 
27,191

Diluted earnings (loss) per share
$
(0.52
)
 
$
0.16

 
$
0.03

 
$
0.73

 
The following securities are considered antidilutive and have been excluded from the calculation of Diluted EPS:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
2017
 
March 31,
2016
 
March 31,
2017
 
March 31,
2016
 
(In thousands)
Stock options
46

 

 

 

Nonvested deferred shares
533

 
269

 
173

 
113


- 19 -


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 construction and maintenance services to a variety of power generation facilities, such as combined cycle plants, natural gas fired power stations, and renewable energy installations. We also provide 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.
The Oil Gas & Chemical segment includes turnaround activities, plant maintenance, engineering and construction in the downstream and midstream petroleum industries. Our customers in these industries are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. Another key offering is industrial cleaning services, which include hydroblasting, hydroexcavating, chemical cleaning and vacuum services. We also perform work in the petrochemical and upstream petroleum markets.
The Storage Solutions segment includes new construction of crude and refined products aboveground storage tanks (“ASTs”), as well as planned and emergency maintenance services. The Storage Solutions segment also includes balance of plant work in storage terminals and tank farms. Also included in the Storage Solutions segment is work related to specialty storage tanks, including liquefied natural gas (“LNG”), liquid nitrogen/liquid oxygen (“LIN/LOX”), liquid petroleum (“LPG”) tanks and other specialty vessels, including spheres. Finally, we offer AST products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.
The Industrial segment primarily includes construction and maintenance work in the iron and steel, mining and minerals, and agricultural industries. Our work in the mining and minerals industry is primarily for customers engaged in the extraction of copper. Our work in the agricultural industry includes the engineering and design of grain silos, docks and handling systems; the design of control system automation and materials handling for the food industry; and engineering, construction, process design and balance of plant work for fertilizer production facilities. We also perform work in bulk material handling, thermal vacuum chambers, and other industrial markets.
The Company evaluates performance and allocates resources based on operating income. The accounting policies of the reportable segments are the same as those described in the Summary of Significant Accounting Policies footnote included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016 . 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, costs and estimated earnings in excess of billings on uncompleted contracts, property, plant and equipment, goodwill and other intangible assets.


- 20 -


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


Results of Operations
(In thousands)
 
Three Months Ended

Nine Months Ended
 
March 31,
2017

March 31,
2016

March 31,
2017

March 31,
2016
Gross revenues







Electrical Infrastructure
$
82,032


$
94,414


$
273,215


$
251,437

Oil Gas & Chemical
69,295


56,251


164,036


188,682

Storage Solutions
74,431


132,857


403,008


400,074

Industrial
26,501


26,650


74,254


116,375

Total gross revenues
$
252,259


$
310,172


$
914,513


$
956,568

Less: Inter-segment revenues







Oil Gas & Chemical
$
407

 
$
522

 
$
6,892

 
$
3,102

Storage Solutions
379

 
228

 
677

 
1,040

Industrial
236

 

 
1,271

 
144

Total inter-segment revenues
$
1,022


$
750


$
8,840


$
4,286

Consolidated revenues







Electrical Infrastructure
$
82,032


$
94,414


$
273,215


$
251,437

Oil Gas & Chemical
68,888


55,729


157,144


185,580

Storage Solutions
74,052


132,629


402,331


399,034

Industrial
26,265


26,650


72,983


116,231

Total consolidated revenues
$
251,237


$
309,422


$
905,673


$
952,282

Gross profit (loss)







Electrical Infrastructure
$
(13,371
)

$
10,407


$
(896
)

$
19,136

Oil Gas & Chemical
4,333


2,616


6,765


14,270

Storage Solutions
5,456


15,108


48,980


49,766

Industrial
968


(828
)

3,027


8,720

Total gross profit (loss)
$
(2,614
)

$
27,303


$
57,876


$
91,892

Operating income (loss)







Electrical Infrastructure
$
(16,306
)
 
$
4,948

 
$
(13,085
)
 
$
5,425

Oil Gas & Chemical
(2,199
)
 
(1,964
)
 
(7,054
)
 
(3,577
)
Storage Solutions
(1,552
)
 
6,382

 
23,463

 
24,305

Industrial
(1,153
)
 
(3,019
)
 
(1,996
)
 
230

Total operating income (loss)
$
(21,210
)

$
6,347


$
1,328


$
26,383

Total assets by segment were as follows:

 
March 31,
2017

June 30,
2016
Electrical Infrastructure
 
$
167,280

 
$
135,298

Oil Gas & Chemical
 
142,551

 
91,350

Storage Solutions
 
169,829

 
201,875

Industrial
 
45,623

 
67,569

Unallocated assets
 
54,985

 
68,875

Total segment assets
 
$
580,268


$
564,967


- 21 -





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 2016 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 2016 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
Under percentage of completion accounting for fixed-priced contracts, contract revenues and earnings are recognized ratably over the contract term based on the proportion of actual costs incurred to total estimated costs. Our results were negatively impacted by an increased cost estimate related to a large project in the Electrical Infrastructure segment, which resulted in a decrease in gross profit. The financial impact of the project was a gross profit (loss) of ($18.9) million and ($13.7) million for the three and nine months ended March 31, 2017, respectively. The profit on future revenue related to this project will be recognized based on the current project forecast, which is at a greatly reduced gross profit margin. The change in cost estimate resulted from a deterioration in the financial forecast of the project during the third quarter and was caused by various factors that have delayed schedule progress and reduced productivity. The adjustment in the current period represents the Company’s estimate, based on the information currently available, of the impact of the increased forecasted cost to complete the project. The current forecast includes estimates for the expected outcome regarding reimbursement from the customer of additional costs incurred and expected to be incurred, as well as the receipt of schedule based incentive revenue currently included in the contract.
Work on the project continues to progress; however, critical work remains, which is at risk from continued impacts to project costs and schedule. Therefore, it is possible that future changes in contract estimates, including those related to project costs, project timeline, receipt of schedule based incentive revenue, and the estimated recovery of additional costs, could occur and have a material positive or negative impact to our results of operations and financial position in subsequent accounting periods.
Goodwill
We performed our annual impairment test in the fourth quarter of fiscal 2016 to determine whether an impairment existed 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 amount of headroom varies by reporting unit. Approximately 54% of our goodwill balance at May 31, 2016 was attributable to one reporting unit. This unit had headroom of 158%. The remaining goodwill was attributable to six reporting units, with headroom of between 17% and 488%. Our significant assumptions, including revenue growth rates, gross margins, discount rate, interest expense and other factors may change in light of changes in the economic and competitive environment in which we operate.

The Company performed its annual goodwill impairment test as of May 31, 2016, which did not indicate the existence of an impairment at that time. While the fiscal year-to-date financial performance of our Electrical Infrastructure, Oil Gas & Chemical and Industrial segments are disappointing and have not met our expectations, the Company does not consider these results to be a triggering event requiring the performance of an interim goodwill impairment test. We believe the financial performance of our Oil Gas & Chemical and Industrial segments is attributable to a cyclical, rather than structural, slowdown in the business and the financial performance of our Electrical Infrastructure segment is attributable to issues relating to one major project (as discussed in Note 3 - Uncompleted Contracts). The Company continues to consider these segments as core to its business and believes current operating results are not indicative of future performance. The Company will continue to monitor its operating results for indicators of impairment and perform additional tests as necessary. The Company's fiscal 2017 annual impairment test will be performed as of May 31, 2017, which could result in an impairment to goodwill depending on the Company’s finalized forecast for fiscal 2018 and other market conditions.
Other Intangible Assets
Intangible assets that have finite useful lives are amortized by the straight-line method over their useful lives ranging from 1 to 15 years. The Company evaluates intangible assets with finite lives for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. The Company did not observe any events or circumstances during the three months ended March 31, 2017 that would indicate that the carrying value of its intangible assets may not be recoverable. The Company's evaluation included values assigned to customer relationships in the iron and steel industry that, while improving, is still experiencing short to medium term weakness. If the Company's view of this market adversely changes or if other factors develop which change our view of the value of these relationships, the Company will reevaluate this conclusion.

- 22 -





Unapproved Change Orders and Claims
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unapproved change orders and claims of $18.1 million at March 31, 2017 and $10.3 million at June 30, 2016 . The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material 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 judgments 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.
Recently Issued Accounting Standards
Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The ASU also requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASU's disclosure requirements are significantly more comprehensive than those in existing revenue standards. The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification ("ASC"). The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted on a limited basis.
Management is currently evaluating the impact of adopting the ASU on the Company's financial position, results of operations, cash flows and related disclosures. Adoption of this ASU is expected to affect the manner in which the Company determines the unit of account for its projects (i.e., performance obligations). Under existing guidance, the Company typically has multiple units of account for large complex projects. Upon adoption, the Company expects that similar projects may have fewer units of account, possibly just one unit of account in some cases, which will result in a more constant recognition of revenue and profit over the term of the project. The Company will adopt this standard on July 1, 2018 using the modified retrospective method of application, which may result in a cumulative effect adjustment to retained earnings as of the date of adoption.
Accounting Standards Update 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
On August 27, 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements. Further, an entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern.” The FASB believes that requiring management to perform the assessment will enhance the timeliness, clarity, and consistency of related disclosures and improve convergence with international financial reporting standards ("IFRS") (which emphasize management’s responsibility for performing the going-concern assessment). However, the time horizon for the assessment (look-forward period) and the disclosure thresholds under U.S. GAAP and IFRS will continue to differ. The ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter; early adoption is permitted.

- 23 -





The ASU was adopted during the Company's first fiscal quarter ending September 30, 2016. In connection with the adoption of the ASU, the Company now performs an assessment of its ability to continue as a going concern on a quarterly basis. Disclosure regarding the status of the Company's ability to continue as a going concern is required when there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the date that the financial statements are issued.
Accounting Standards Update 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
On September 25, 2015, the FASB issued ASU 2015-16 to simplify the accounting for measurement-period adjustments. The ASU was issued in response to stakeholder feedback that restatements of prior periods to reflect adjustments made to provisional amounts recognized in a business combination increase the cost and complexity of financial reporting but do not significantly improve the usefulness of the information. Under the ASU, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. We adopted this standard on July 1, 2016 with no material impact to the Company's financial statements.
Accounting Standards Update 2016-02, Leases (Topic 842)
On February 25, 2016, the FASB issued ASU 2016-02. The amendments in this update require, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, but we do not plan to do so at this time.
We are currently evaluating the ASU's expected impact on our financial statements. Note 8 of Item 8. Financial Statements and Supplementary Data in our 2016 Form 10-K provides information about the timing and amount of future operating lease payments, which we believe is indicative of the materiality of adoption of the ASU to our financial statements.
Accounting Standards Update 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
On March 30, 2016, the FASB issued ASU 2016-09, which simplified several aspects of accounting for stock-based compensation transactions, including the accounting for income taxes and forfeitures and statutory tax withholding requirements. The Company adopted the ASU during its first fiscal quarter ending September 30, 2016. The following is a description of the key provisions of the ASU and their impacts to the Company's financial statements:
Accounting for Income Taxes : The amendments require the Company to recognize excess tax benefits or tax deficiencies in its provision for income taxes in its consolidated statements of income during the period of vesting or exercise of its nonvested deferred share awards and stock options, respectively, for which it expects to receive an income tax deduction. Previously, the Company recognized any excess tax benefits in additional paid-in capital ("APIC") in the balance sheet and any tax deficiencies were recognized as a reduction of APIC to the extent the Company has accumulated excess tax benefits. Any tax deficiencies in excess of accumulated excess tax benefits in APIC were recognized in the provision for income taxes. The amendments also require the Company to only present excess tax benefits and tax deficiencies in the operating section of its statements of cash flows as a component of deferred tax activity. Previously, the Company was required to present such items in both the financing section and operating section of its statements of cash flows. Amendments related to the recognition of excess tax benefits and tax deficiencies in income are required to be applied prospectively, and amendments related to the cash flow statement presentation of excess tax benefits and tax deficiencies may be applied either retrospectively or prospectively.

- 24 -





The Company applied the amendments requiring the recognition of excess tax benefits and tax deficiencies in income prospectively. As a result, the Company recognized $0.5 million of excess tax benefits in its provision for income taxes during the nine months ended March 31, 2017, which increased basic and diluted earnings per share by $0.02 . No material excess tax benefits or deficiencies were recognized during the three months ended March 31, 2017. Under the prior accounting standard, the Company would have recognized the excess tax benefits in equity as additional paid-in capital. The amendments relating to the presentation of excess tax benefits and tax deficiencies in the statement of cash flows were applied retrospectively. The effect of the retrospective adjustment was to eliminate the presentation of an operating cash outflow and a financing cash inflow for excess tax benefits on exercised stock options and vesting of deferred shares. These eliminations increased net cash provided by operating activities by $3.2 million and decreased net cash provided by financing activities by $3.2 million for the nine months ended March 31, 2016. Net cash flows did not change as a result of the retrospective adjustment.
Accounting for Forfeitures : The amendments in this ASU allow the Company to elect, as a company-wide accounting policy, either to continue to estimate the amount of forfeitures to exclude from compensation expense or to exclude forfeitures from compensation expense as they occur. Upon the adoption of the ASU during the first quarter of fiscal 2017, the Company elected to account for forfeitures as they occur. The Company is required to apply these amendments on a modified retrospective basis with a cumulative adjustment to retained earnings as of the beginning of the fiscal year. The Company recorded a modified retrospective adjustment to reduce the June 30, 2016 retained earnings balance and increase the additional paid-in capital balance by $0.1 million each.
Statutory Tax Withholding Requirements : Under the prior accounting standard, an entire award must be classified as a liability if the fair value of the shares withheld exceeds the Company's minimum statutory withholding obligation. Under the ASU, the Company is allowed to withhold shares with a fair value up to the amount of tax owed using the maximum statutory tax rate in the employee's applicable jurisdictions. The Company is allowed to determine one maximum rate for all employees in each jurisdiction, rather than a rate for each employee in the jurisdiction. Also, the ASU requires that cash outflows to reacquire shares withheld for taxes to be classified in the financing section of the statement of cash flows.
The Company adopted the ASU during the first quarter of fiscal 2017. Since the Company did not have any awards classified as liabilities due to statutory tax withholding requirements as of December 31, 2016, and since the Company already presented its cash outflows for reacquiring shares withheld for taxes as a financing activity in its statements of cash flows, these amendments did not have any impact on its financial statements upon adoption. The Company does not expect changes to employee withholdings for stock compensation to have a material impact to the financial statements.
Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
On June 16, 2016, the FASB issued ASU 2016-13, which will change how the Company accounts for its allowance for uncollectible accounts. The amendments in this update require a financial asset (or a group of financial assets) to be presented at the net amount expected to be collected. The income statement will reflect any increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount.
Current GAAP delays the recognition of the full amount of credit losses until the loss is probable of occurring. The amendments in this update eliminate the probable initial recognition threshold and, instead, reflect the Company's current estimate of all expected credit losses. In addition, current guidance limits the information the Company may consider in measuring a credit loss to its past events and current conditions. The amendments in this update broaden the information the Company may consider in developing its expected credit loss estimate to include forecasted information.
The amendments in this update are effective for the Company on July 1, 2020 and the Company may early adopt on July 1, 2019. The Company must apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. At this time, the Company does not expect this update to have a material impact to its estimate of the allowance for uncollectible accounts.

- 25 -





Accounting Standards Update 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
On January 26, 2017, the FASB issued ASU 2017-04, which simplifies the goodwill impairment test by eliminating step two from the procedure. Previously, goodwill was tested for impairment by performing a two-step test. The first step involves determining the fair value of a reporting unit and comparing it to the carrying amount of the reporting unit's net assets. If the fair value of the reporting unit is less than its carrying amount, then the goodwill assigned to that reporting unit is determined to be impaired and step two must then be completed to measure the amount of the impairment. Step two involved measuring the reporting unit's assets and liabilities at fair value following a process similar to determining the fair value of assets acquired and liabilities assumed in a business combination. The net fair value of the assets acquired and liabilities assumed was then compared to the fair value of the reporting unit in order to compute the implied goodwill for the reporting unit. The difference between the carrying amount of the reporting unit's goodwill and the amount of the implied goodwill computed was the amount of the goodwill impairment to be recognized. Under ASU 2017-04, instead of performing step two of the test, the Company will recognize an impairment charge to the extent a reporting unit's fair value is less than the carrying amount of its net assets, as indicated by step one of the test.
The standard must be applied prospectively and must by adopted in fiscal years beginning after December 15, 2019. Early adoption is permitted and the Company is currently evaluating whether to adopt early. The Company's annual goodwill impairment test will be performed as of May 31, 2017.
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 primarily encompasses construction and maintenance services to a variety of power generation facilities, such as combined cycle plants, natural gas fired power stations, and renewable energy installations. We also provide 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.
The Oil Gas & Chemical segment includes turnaround activities, plant maintenance, engineering and construction in the downstream and midstream petroleum industries. Our customers in these industries are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. Another key offering is industrial cleaning services, which include hydroblasting, hydroexcavating, chemical cleaning and vacuum services. We also perform work in the petrochemical and upstream petroleum markets.
The Storage Solutions segment includes new construction of crude and refined products aboveground storage tanks (“ASTs”), as well as planned and emergency maintenance services. The Storage Solutions segment also includes balance of plant work in storage terminals and tank farms. Also included in the Storage Solutions segment is work related to specialty storage tanks, including liquefied natural gas (“LNG”), liquid nitrogen/liquid oxygen (“LIN/LOX”), liquid petroleum (“LPG”) tanks and other specialty vessels, including spheres. Finally, we offer AST products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.
The Industrial segment primarily includes construction and maintenance work in the iron and steel, mining and minerals, and agricultural industries. Our work in the mining and minerals industry is primarily for customers engaged in the extraction of copper. Our work in the agricultural industry includes the engineering and design of grain silos, docks and handling systems; the design of control system automation and materials handling for the food industry; and engineering, construction, process design and balance of plant work for fertilizer production facilities. We also perform work in bulk material handling, thermal vacuum chambers, and other industrial markets.
Three Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2016
Consolidated
Consolidated revenue was $251.2 million for the three months ended March 31, 2017 , compared to $309.4 million in the same period in the prior fiscal year. On a segment basis, consolidated revenue decreased in the Storage Solutions, Electrical Infrastructure and Industrial segments by $58.5 million, $12.4 million and $0.4 million, respectively. These decreases were partially offset by an increase in the Oil Gas & Chemical segment of $13.2 million.

- 26 -





Consolidated gross profit (loss) decreased from $ 27.3 million in the three months ended March 31, 2016 to $(2.6) million in the three months ended March 31, 2017 . Gross margin decreased to (1.0)% in the three months ended March 31, 2017 compared to 8.8% in the same period in the prior fiscal year. The reduction in gross margin in fiscal 2017 is primarily attributable to the financial impact of an Electrical Infrastructure project, which decreased gross profit by $18.9 million (more fully discussed in Item 1. Financial Statements, Note 3 - Uncompleted Contracts) and lower volumes, which led to increased under recovery of construction overhead costs.
Consolidated SG&A expenses were $18.6 million in the three months ended March 31, 2017 compared to $21.0 million in the same period a year earlier. The decrease in fiscal 2017 was primarily attributable to the reversal of incentive compensation expense. Fiscal 2017 SG&A expense included $0.4 million of acquisition and integration costs from the Houston Interests, LLC ("Houston Interests") acquisition (See Item 1. Financial Statements, Note 2 - Acquisitions) and fiscal 2016 SG&A expense included $0.8 million of acquisition and integration costs from the Baillie Tank Equipment acquisition (See Item 1. Financial Statements, Note 2 - Acquisitions).
Net interest expense was $0.8 million and $0.2 million in the three months ended March 31, 2017 and 2016, respectively. The higher interest expense in fiscal 2017 is primarily attributable to the higher average debt balance in the current year, which is largely attributable to the borrowings used to fund the Houston Interests acquisition.
Our effective tax rate for the three months ended March 31, 2017 was 38.7% and 41.4% in the same period a year earlier. The fiscal 2017 tax rate was positively impacted by discrete benefits of $0.3 million primarily related to adjustments to state net operating loss carryforwards, a reduction in the blended state income tax rate and an increase in actual tax credits over estimated tax credits for fiscal 2016.  These benefits were offset by a valuation allowance on deferred tax assets related to foreign tax credit carryforwards and stock compensation expense.  The fiscal 2016 tax rate was positively impacted by a discrete benefits of $0.1 million related to the retroactive application of the R&D tax credit and a foreign currency item related to our Canadian operations.
For the three months ended March 31, 2017 , net loss attributable to Matrix Service Company and the related fully diluted loss per share were $13.8 million and $0.52 , respectively, compared to net income attributable to Matrix Service Company and related fully diluted earnings per share of $4.4 million and $0.16 , respectively, in the same period a year earlier.
Electrical Infrastructure
Revenue for the Electrical Infrastructure segment decreased $12.4 million to $82.0 million in the three months ended March 31, 2017 compared to $94.4 million in the same period a year earlier. The decrease is due to lower transmission and distribution and power generation revenue. The gross margin of (16.3)% in fiscal 2017 was primarily attributable to the financial impact of the project mentioned in the consolidated discussion above, which decreased gross profit by $18.9 million (more fully discussed in Item 1. Financial Statements, Note 3 - Uncompleted Contracts). The fiscal 2016 gross margin was 11.0% during the same period.
Oil Gas & Chemical
Revenue for the Oil Gas & Chemical segment was $68.9 million in the three months ended March 31, 2017 compared to $55.7 million in the same period a year earlier. The increase of $13.2 million is primarily attributable to incremental revenues associated with the Houston Interests acquisition (See Item 1. Financial Statements, Note 2 - Acquisitions) and higher capital work, partially offset by lower turnaround and maintenance volumes. The gross margin was 6.3% for the three months ended March 31, 2017 compared to 4.7% in the same period last year. The gross margin for fiscal 2017 was positively impacted by the mix of higher margin work associated with the Houston Interests acquisition.
Storage Solutions
Revenue for the Storage Solutions segment was $74.1 million in the three months ended March 31, 2017 compared to $132.6 million in the same period a year earlier, a decrease of $58.5 million. The decrease is primarily attributable to decreased activity on the previously announced project for the construction of crude gathering terminals that support the Dakota Access pipeline compared to this same period a year ago, as well as lower volumes across the rest of our domestic storage business. The gross margin was 7.4% in the three months ended March 31, 2017 and 11.4% in the three months ended March 31, 2016 . The lower gross margin in fiscal 2017 is primarily attributable to lower volumes, which led to increased under recovery of construction overhead costs. Work on the terminals that support the Dakota Access Pipeline is expected to be completed in fiscal 2017 and revenue will continue to decline on this project as it nears completion.

- 27 -





Industrial
Revenue for the Industrial segment decreased $0.4 million to $26.3 million in the three months ended March 31, 2017 compared to $26.7 million in the same period a year earlier. The decline in revenue is primarily attributable to lower business volumes in iron and steel and material handling, largely offset by work on a thermal vacuum chamber and increased revenues associated with the Houston Interests acquisition. The gross margin was 3.7% in the three months ended March 31, 2017 compared to (3.1)% in the same period a year earlier. The fiscal 2017 gross margin was positively impacted by the mix of higher margin work associated with the Houston Interests acquisition. Fiscal 2016 gross margins were negatively impacted by an unfavorable customer settlement and lower margins on iron and steel work due to lower volume.
Nine Months Ended March 31, 2017 Compared to the Nine Months Ended March 31, 2016
Consolidated
Consolidated revenue was $905.7 million for the nine months ended March 31, 2017 , compared to $952.3 million in the same period in the prior fiscal year. On a segment basis, consolidated revenue decreased in the Industrial and Oil Gas & Chemical segments by $43.2 million and $28.5 million, respectively. These decreases were partially offset by increases in revenue in the Electrical Infrastructure and Storage Solutions segments by $21.8 million and $3.3 million, respectively.
Consolidated gross profit decreased from $91.9 million in the nine months ended March 31, 2016 to $57.9 million in the nine months ended March 31, 2017 . Gross margin decreased to 6.4% in the nine months ended March 31, 2017 compared to 9.6% in the same period in the prior fiscal year. The reduction in gross margin in fiscal 2017 is primarily attributable to the financial impact of an Electrical Infrastructure project, which decreased gross profit by $13.7 million (more fully discussed in Item 1. Financial Statements, Note 3 - Uncompleted Contracts) and lower volumes, which led to increased under recovery of construction overhead costs.
Consolidated SG&A expenses were $56.5 million in the nine months ended March 31, 2017 compared to $65.5 million in the same period a year earlier. The decrease in SG&A expense in fiscal 2017 was primarily attributable to a bad debt charge of $5.2 million from a client bankruptcy in fiscal 2016 and to the reversal of incentive compensation expense. Fiscal 2017 SG&A expense included $1.2 million of acquisition and integration costs from the Houston Interests acquisition (See Item 1. Financial Statements, Note 2 - Acquisitions) and fiscal 2016 SG&A expense included $0.9 million of acquisition and integration costs from the Baillie Tank Equipment acquisition (See Item 1. Financial Statements, Note 2 - Acquisitions).
Net interest expense was $1.5 million and $0.6 million in the nine months ended March 31, 2017 and 2016, respectively. The higher interest expense in fiscal 2017 is primarily attributable to the higher average debt balance in the current year, which is largely attributable to the borrowings used to fund the Houston Interests acquisition.
Our effective tax rate for the nine months ended March 31, 2017 was 933.6% and 35.6% in the same period a year earlier. The fiscal 2017 tax rate was positively impacted by discrete benefits of $0.9 million primarily related to the application of ASU 2016-09 (See Item 1. Financial Statements, Note 1 - Basis of Presentation and Accounting Policies), adjustments to state net operating loss carryforwards, a reduction in the blended state income tax rate and an increase in actual tax credits over estimated tax credits for fiscal 2016.  These benefits were offset by a valuation allowance on deferred tax assets related to foreign tax credit carryforwards and stock compensation expense.  The fiscal 2016 tax rate was positively impacted by discrete benefits of $1.3 million related to the retroactive application of the R&D tax credit and a foreign currency item related to our Canadian operations.
For the nine months ended March 31, 2017 , net income attributable to Matrix Service Company and the related fully diluted earnings per share were $0.8 million and $0.03 compared to $19.7 million and $0.73 in the same period a year earlier.
Electrical Infrastructure
Revenue for the Electrical Infrastructure segment increased $21.8 million to $273.2 million in the nine months ended March 31, 2017 compared to $251.4 million in the same period a year earlier primarily as a result of higher volumes on a significant power generation project, partially offset by lower volumes in transmission and distribution work. The fiscal 2017 gross margin was (0.3)% compared to 7.6% in the same period last year. The lower fiscal 2017 gross margin was primarily attributable to the financial impact of the project mentioned in the consolidated discussion above, which decreased gross profit by $13.7 million (more fully discussed in Item 1. Financial Statements, Note 3 - Uncompleted Contracts). Fiscal 2016 gross margin was negatively impacted by $7.1 million of charges in connection with an acquired EPC joint venture project.

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Oil Gas & Chemical
Revenue for the Oil Gas & Chemical segment was $157.1 million in the nine months ended March 31, 2017 compared to $185.6 million in the same period a year earlier. The decrease of $28.5 million is related to lower volume across the business as refiners continue to limit spending as the result of continued volatility in commodity prices and market uncertainty, partially offset by incremental revenues associated with the Houston Interests acquisition in December 2016 (See Item 1. Financial Statements, Note 2 - Acquisitions). The gross margin was 4.3% for the nine months ended March 31, 2017 compared to 7.7% in the same period last year. The gross margin for fiscal 2017 was affected by lower volume, which led to increased under recovery of overhead costs, and project execution.
Storage Solutions
Revenue for the Storage Solutions segment was $402.3 million in the nine months ended March 31, 2017 compared to $399.0 million in the same period a year earlier, an increase of $3.3 million. The increase is primarily attributable to increased activity during the first half of Fiscal 2017 on a previously announced project for the construction of crude gathering terminals that support the Dakota Access pipeline and higher Canadian volumes. These increases were partially offset by lower volumes in our remaining domestic storage business. The gross margin was 12.2% in the nine months ended March 31, 2017 and 12.5% in the nine months ended March 31, 2016 as a result of effective project execution in both periods. Work on the terminals that support the Dakota Access Pipeline is expected to be completed in fiscal 2017 and revenue will continue to decline on this project as it nears completion.
Industrial
Revenue for the Industrial segment decreased $43.2 million to $73.0 million in the nine months ended March 31, 2017 compared to $116.2 million in the same period a year earlier. The decline in revenue is primarily attributable to lower business volumes in the iron and steel and mining markets, and lower revenue recognized on a large fertilizer project. The gross margin was 4.1% in the nine months ended March 31, 2017 compared to 7.5% in the same period a year earlier. The fiscal 2017 gross margin was negatively impacted by the under recovery of construction overhead costs due to reduced volume and a higher percentage of lower margin iron and steel work. The fiscal 2016 gross margin was positively impacted by the mix of work and strong project execution.
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.
For long-term maintenance contracts and other established customer arrangements, 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 revenue recognized as of the reporting date.
The following table provides a summary of changes in our backlog for the three months ended March 31, 2017 :  
 
Electrical
Infrastructure
 
Oil Gas &
Chemical
 
Storage
Solutions
 
Industrial
 
Total
 
(In thousands)
Backlog as of December 31, 2016
$
338,413

 
$
209,505

 
$
185,491

 
$
80,581

 
$
813,990

Project awards
57,630

 
100,459

 
52,981

 
16,592

 
227,662

Revenue recognized
(82,032
)
 
(68,888
)
 
(74,052
)
 
(26,265
)
 
(251,237
)
Backlog as of March 31, 2017
$
314,011

 
$
241,076

 
$
164,420

 
$
70,908

 
$
790,415


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The following table provides a summary of changes in our backlog for the nine months ended March 31, 2017 :  
 
Electrical
Infrastructure
 
Oil Gas &
Chemical
 
Storage
Solutions
 
Industrial
 
Total
 
(In thousands)
Backlog as of June 30, 2016
$
369,791

 
$
91,478

 
$
359,013

 
$
48,390

 
$
868,672

Project awards
217,435

 
280,240

 
207,738

 
92,306

 
797,719

Acquired backlog from Houston Interests (Note 2)

 
26,502

 

 
3,195

 
29,697

Revenue recognized
(273,215
)
 
(157,144
)
 
(402,331
)
 
(72,983
)
 
(905,673
)
Backlog as of March 31, 2017
$
314,011

 
$
241,076

 
$
164,420

 
$
70,908

 
$
790,415

Project awards in all segments are cyclical and are typically the result of a sales process that can take several months to complete. Backlog in the Storage Solutions and Electrical Infrastructure segments generally have the greatest volatility because individual project awards can be less frequent and more significant.
The change in backlog in the Electrical Infrastructure segment during the nine months ended March 31, 2017 is mainly attributable to the work related to the previously announced Napanee Power Generating Station project partially offset by transmission and distribution awards, which continue to meet the Company's expectations and the award for the electrical balance of plant work for PSEG Power's new 540-megawatt combined cycle power facility in New Jersey.
The increase in backlog in the Oil, Gas & Chemical segment during the nine months ended March 31, 2017 is mainly attributable to backlog acquire d from Houston Interests and increased project awards such as the previously announced Ultra-Low Gasoline Project awarded by KBR, Inc., and the previously announced award for the engineering, project management, procurement and commissioning of a 200 million cubic foot per day cryogenic gas recovery plant located in the SCOOP play of Southern Oklahoma's Woodford Shale and Springer Shale formations.
The decline in backlog in the Storage Solutions segment during the nine months ended March 31, 2017 is attributable to the work related to the previously announced project for the construction of terminals supporting the Dakota Access Pipeline partially offset by storage solutions awards, including the previously announced EPC award to construct 10 new tanks at the Vopak Americas Brownfield Expansion Project at the Deer Park, TX terminal. In addition, we continue to see a more cautious approach to decision-making on the part of clients and prolonged market uncertainty, which is delaying the timing of awards.
The increase in backlog in the Industrial segment during the nine months ended March 31, 2017 is primarily attributable to increased project awards, including an award for a thermal vacuum chamber project during the second quarter.
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 come from 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.
Impact of Commodity Price Volatility and Market Uncertainty
The prolonged decline in crude prices continues to impact our income from operations and project awards, particularly in the Oil Gas & Chemical and Storage Solutions segments. The Industrial segment continues to be negatively impacted by the low prices of other commodities, principally steel and copper. The decline in commodity prices has not had, and we do not expect a significant impact on the Electrical Infrastructure segment.

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Our Oil Gas & Chemical segment continues to see lower volumes of routine maintenance and turnaround work as well as award delays caused by slower than expected improvements in commodity pricing and regulatory uncertainties. If commodity prices remain at current levels or the current uncertainty continues, spending levels may continue to be reduced.
In our Storage Solutions segment, our customers continue to take a long-term view of the market, but continue to be cautious short-term. Based on current market conditions, we are seeing a continued reduction in customer spending and project award delays. Although we are seeing signs of market improvement, we cannot predict the direction of commodity prices or our customers’ ultimate reaction to the market and therefore cannot predict the magnitude of the impact to our future earnings.
In the Industrial segment, our iron and steel customers are facing challenges related to the import of cheaper foreign steel, global steel production over-capacity and the strong United States Dollar, which continues to be a headwind for steel exports. These conditions have reduced steel mill utilization in the U.S., which has reduced the capital, expansion and elective maintenance spending of our customers. Although we are seeing some encouraging political developments with respect to U.S. trade, we do not expect higher levels of spending until the factors that led to lower steel mill utilization are relieved. In the mining and minerals markets, we continue to see lower spending due to the softness of other commodity prices. However, copper prices, to which our clients are particularly exposed, have increased in recent months.
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 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.
A reconciliation of EBITDA to net income follows:
 
 
Three Months Ended
 
Nine Months Ended
 
March 31,
2017
 
March 31,
2016
 
March 31,
2017
 
March 31,
2016
 
(In thousands)
Net income (loss) attributable to Matrix Service Company
$
(13,821
)
 
$
4,357

 
$
771

 
$
19,729

Interest expense
833

 
241

 
1,573

 
756

Provision (benefit) for income taxes
(8,521
)
 
2,507

 
(1,223
)
 
9,060

Depreciation and amortization
5,851

 
5,419

 
15,839

 
16,139

EBITDA
$
(15,658
)
 
$
12,524

 
$
16,960

 
$
45,684



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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 nine months ended March 31, 2017 were cash on hand, capacity under our senior revolving credit facility and cash generated from operations before consideration of changes in working capital. Cash on hand at March 31, 2017 totaled $39.7 million and availability under the senior revolving credit facility totaled $106.8 million resulting in available liquidity of $ 146.5 million .
Our availability under the senior revolving credit facility was significantly impacted by the Electrical Infrastructure project recorded in the third fiscal quarter as discussed in Note 3 - Uncompleted Contracts. Our fourth quarter projected cash flow, which includes the collection of significant retention on a Storage Solutions project, is strong. Going into fiscal 2018, we do not expect significant increases to senior revolving credit facility availability until the second half of the year. However, with the cash balance, we believe that sufficient liquidity exists to fund the business. A complete discussion of our credit agreement is provided under the captain "Senior Revolving Credit Facility" included in this Financial Condition and Liquidity 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 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 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 credit facility and remaining in compliance with all covenants contained in the credit agreement

A default by one of the major financial institutions for which our deposits exceed insured deposit limits

Cash on hand outside of the United States that cannot be repatriated without incremental taxation.

As discussed under the caption "Senior Revolving Credit Facility" included in this Financial Condition and Liquidity section of the Form 10-Q, our Credit Agreement includes a Senior Leverage Ratio covenant, which provides that Consolidated Funded

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Indebtedness, as of the end of any fiscal quarter, may not exceed 3.0 times Consolidated EBITDA, as defined in the Credit Agreement, over the previous four quarters.
Cash Flow for the Nine Months Ended March 31, 2017
Cash Flows Used by Operating Activities
Cash used by operating activities for the nine months ended March 31, 2017 totaled $25.6 million . The various components are as follows:

Net Cash Used by Operating Activities
(In thousands)
 
Net income
$
1,092

Non-cash expenses
21,840

Deferred income tax
(4,665
)
Cash effect of changes in working capital
(44,087
)
Other
211

Net cash used by operating activities
$
(25,609
)
Working capital changes, net of effects from acquisitions, at March 31, 2017 in comparison to June 30, 2016 include the following:

Accounts receivable, net of bad debt expense recognized during the period, increased by $23.5 million during the nine months ended March 31, 2017 . The variance is primarily attributable to the timing of billing and collections on our previously announced projects for the construction of terminals supporting the Dakota Access Pipeline and the large Electrical Infrastructure project.

Accounts payable decreased by $45.7 million during the nine months ended March 31, 2017 . The variance is primarily attributable to lower volumes during the quarter preceding March 31, 2017 compared to the quarter preceding June 30, 2016 and the timing of vendor payments.

Costs and estimated earnings in excess of billings on uncompleted contracts ("CIE") decreased $34.8 million while billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") increased $5.4 million. The net change in CIE and BIE increased cash $40.2 million for the nine months ended March 31, 2017. CIE and BIE balances can experience significant fluctuations based on the timing of when job costs are incurred, the invoicing of those job costs to the customer, and other working capital management factors.

Cash Flows Used for Investing Activities
Investing activities used $48.1 million of cash in the nine months ended March 31, 2017 primarily due to the Houston Interests acquisition, which used $40.8 million, and $8.5 million of capital expenditures. Capital expenditures consisted of: $4.0 million for office equipment, $2.4 million for construction equipment, $1.7 million for transportation and fabrication equipment, and $0.4 million for land and buildings. Proceeds from asset sales provided $1.1 million of cash.
Cash Flows Provided by Financing Activities
Financing activities provided $42.4 million of cash in the nine months ended March 31, 2017 primarily due to net borrowings of $44.1 million under our credit facility and a contribution from a non-controlling interest of $0.9 million that were partially offset by the repurchase of $2.3 million of Company stock for payment of withholding taxes due on equity-based compensation and the payment of $0.8 million for debt amendment fees. The net borrowings under our credit facility were primarily used to fund the $46.0 million cash purchase price for the Houston Interests acquisition and working capital needs of our Canadian business.

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Senior 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