Business context and reporting period
Matrix Service Company provides engineering, construction, maintenance, and specialty fabrication services through Storage and Terminal Solutions, Utility and Power Infrastructure, and Process and Industrial Facilities. This Form 10-Q covers the fiscal quarter and six months ended December 31, 2023 (the second quarter of fiscal 2024); comparisons are with the same periods a year earlier unless noted.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2023 | Six months ended Dec. 31, 2023 |
|---|---|---|
| Revenue | $175.0 million, down 9.7% | $372.7 million, down 7.4% |
| Gross profit and margin | $10.6 million; 6.0% (prior year: loss of $1.3 million; (0.7)%) | $22.4 million; 6.0% (prior year: $11.7 million; 2.9%) |
| Operating loss | $5.1 million (prior year: $32.4 million) | $10.4 million (prior year: $37.5 million) |
| Net loss and loss per diluted share | $2.9 million; $0.10 (prior year: $32.8 million; $1.22) | $6.0 million; $0.22 (prior year: $39.3 million; $1.46) |
| Adjusted EBITDA (non-GAAP) | $0.3 million (prior year: loss of $13.1 million) | Loss of $0.4 million (prior year: loss of $12.2 million) |
Quarterly SG&A was $15.7 million, down from $17.5 million; first-half SG&A was $32.8 million, down from $34.4 million. Improved execution and the absence of prior-year goodwill impairment and restructuring charges supported the year-over-year improvement. In the quarter, the Process and Industrial Facilities segment returned to positive gross profit after a prior-year loss; lower revenue in all segments except Storage and Terminal Solutions weighed on consolidated sales.
For the six months, operating cash flow was $0.7 million, compared with use of $17.6 million a year earlier. Investing activities provided $1.9 million, including asset-sale proceeds, while financing activities used $10.4 million, including net repayment of ABL borrowings. Cash, cash equivalents, and restricted cash totaled $72.2 million at December 31; unrestricted cash was $47.2 million and restricted cash was $25.0 million. Total liquidity, including $59.1 million available under the ABL facility, was $106.3 million.
The company had no ABL borrowings outstanding at December 31, $10.0 million of letters of credit, and a $69.1 million borrowing base. The facility matures September 9, 2026; the company reported compliance with its covenants. Total liabilities were $225.9 million and stockholders’ equity was $178.9 million at December 31.
Material changes and operating outlook
- Backlog reached a company record $1.447 billion at December 31, up from $1.090 billion at June 30. First-half awards were $728.2 million, with a total book-to-bill ratio of 2.0. Storage and Terminal Solutions accounted for $539.9 million of first-half awards; its backlog was $658.0 million.
- Remaining performance obligations were $749.4 million, of which $437.1 million was expected to be recognized as revenue within 12 months. Backlog and performance obligations are not guarantees of revenue or margin; timing depends on project progress and other factors.
- Management expected modest revenue growth in fiscal third quarter 2024 and a substantial revenue recovery in the fourth quarter and beyond, as recently awarded large projects move through contracting, planning, and mobilization. Management cited strong awards, improved execution, cost controls, and a cost structure positioned to benefit from higher volumes. Timing of project starts and conversion remains uncertain.
- Management said overhead under-recovery was pressuring margins at current revenue levels and expected it to ease as volumes return. For Storage and Terminal Solutions, full construction-overhead recovery was expected in fiscal fourth quarter 2024; for Utility and Power Infrastructure, large LNG peak-shaving awards were expected to support later revenue.
Guidance, risks, contingencies, and unusual items
- No specific full-year revenue, earnings, or margin guidance was provided. The outlook statements are expectations, not formal quantified guidance.
- Other income included gains on sales of the Burlington, Ontario facility and Catoosa, Oklahoma facility. The first-half statement of income included $4.7 million of other income; the company reported $4.5 million of asset-sale gains. Catoosa proceeds of $2.7 million were received in January 2024, after quarter-end.
- The company received $16.8 million in October 2023 following a jury verdict in its favor in a customer receivable dispute. Other material disputes include a $5.6 million receivable subject to customer litigation and a $32.7 million receivable in arbitration, with the hearing scheduled for October 2024. The company believes it is entitled to collect the amounts and says it has recorded appropriate reserves; outcomes remain uncertain.
- Unpriced change orders and claims included in contract assets totaled $11.8 million at December 31. Actual recovery may differ materially from recorded amounts. Contract assets and liabilities can fluctuate with billing and collection timing; net contract liabilities increased to $76.8 million from $40.5 million at June 30.
- Effective tax rates were zero in the reported periods, in part because of valuation allowances on deferred tax assets. The company expects to realize those tax benefits only to the extent it generates future taxable income.
- Other risks highlighted include customer credit and nonpayment, project delays and execution, workforce utilization, inflation and supply availability, industry and energy-market changes, seasonality, litigation, and possible under-recovery of fixed overhead. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether record backlog converts to revenue on management’s expected timetable, and whether project margins meet expectations.
- Whether operating cash generation improves as receivables are collected and billing patterns shift; monitor contract assets, advance billings, and customer credit.
- Progress and recoverability of the $5.6 million and $32.7 million disputed receivables, and the company’s exposure to related claims and counterclaims.
- The impact of asset-sale gains and other nonrecurring items when assessing underlying earnings; compare GAAP results with the company’s non-GAAP measures and their stated limitations.
- Liquidity and borrowing-base availability, covenant compliance, and whether tax valuation allowances continue to restrict recognition of deferred tax benefits.