Business context and reporting period
Matrix Service Company provides engineering, construction, maintenance, and related services across utility and power infrastructure, process and industrial facilities, and storage and terminal solutions. This Form 10-Q covers the three months ended September 30, 2020, the first quarter of fiscal 2021; comparisons are with the three months ended September 30, 2019. The filing is unaudited.
Financial performance and position
| Metric | Quarter ended September 30, 2020 | Prior-year quarter |
|---|---|---|
| Revenue | $182.8 million | $338.1 million |
| Gross profit / margin | $14.4 million / 7.9% | $32.5 million / 9.6% |
| Operating income (loss) | $(3.5) million | $8.8 million |
| Net income (loss) | $(3.0) million; $(0.12) per diluted share | $6.2 million; $0.22 per diluted share |
| Adjusted EBITDA (non-GAAP) | $1.9 million | $14.0 million |
| Operating cash flow | $(15.0) million | $56.1 million |
| Capital expenditures | $2.8 million | $8.7 million |
- Cash and cash equivalents were $82.2 million at September 30, down from $100.0 million at June 30. Total reported liquidity was $133.9 million, comprising cash and $51.7 million of revolver availability.
- Revolver borrowings were $9.4 million; letters of credit were $34.8 million. Total liabilities were $206.2 million and stockholders’ equity was $306.0 million. The balance sheet also included $25.4 million of operating lease liabilities.
- Operating cash use reflected a $18.4 million cash outflow from changes in working capital, including a $10.8 million increase in receivables. Cash declined by $17.9 million during the quarter.
Material changes versus the prior comparable period
- Revenue fell about 46%, led by declines in Process and Industrial Facilities (to $45.9 million from $154.9 million) and Storage and Terminal Solutions (to $76.2 million from $135.5 million). Utility and Power Infrastructure revenue increased to $60.7 million from $47.7 million.
- Gross margin declined to 7.9% from 9.6%. Management attributed the pressure mainly to lower volumes and under-recovered construction overhead; Storage and Terminal Solutions also had a lower-than-forecast margin on a crude-oil terminal project nearing completion.
- SG&A fell to $18.1 million from $23.7 million, reflecting restructuring-related cost reductions and lower incentive compensation. Despite these savings, the company reported an operating and net loss.
- Backlog was $678.4 million at quarter-end, down from $758.5 million at June 30. Quarterly awards were $102.7 million and the companywide book-to-bill ratio was 0.6.
Outlook, risks, and unusual items
- Management said it expects available liquidity to support near- to intermediate-term needs, while emphasizing significant uncertainty from COVID-19, commodity prices, and customer spending. It is managing costs and eliminating non-critical capital expenditures. No revenue or earnings guidance was provided; management expects a fiscal 2021 effective tax rate of approximately 27%.
- Management reported ongoing project delays, deferred awards, longer award cycles, and postponed refinery turnarounds and maintenance work. It said some delayed work may move out in time rather than be eliminated, but updated start dates remain uncertain.
- On November 2, 2020, after quarter-end, the company replaced its prior facility with a three-year, $200 million secured revolving credit agreement expiring November 2, 2023. Availability at September 30 would have been the same under the new facility because of leverage-based borrowing constraints. The company reported covenant compliance at September 30.
- The company recorded a $0.3 million gain related to trailing restructuring items; it had incurred $14.0 million of restructuring costs in fiscal 2020. A $1.0 million deferred tax asset adjustment negatively affected the quarter’s effective tax rate.
- The company is pursuing litigation to collect $17.8 million from an iron and steel customer. Management believes it is entitled to the full amount, but acknowledges litigation is unpredictable. Unpriced change orders and claims included in contract assets were $13.9 million; actual collections may differ materially from recorded estimates.
- The company deferred $7.4 million of U.S. payroll taxes under the CARES Act, with repayment due in installments by December 2021 and December 2022. Management also cited customer credit deterioration, project execution, contract claims, and goodwill impairment as risks to monitor.
Important facts for investors to verify
- Whether project awards, backlog, and revenue recover, particularly in Storage and Terminal Solutions and Process and Industrial Facilities.
- Whether lower volumes and under-recovered overhead continue to pressure gross margins and cash generation.
- Receivable collection, including the disputed $17.8 million balance, and realization of the $13.9 million in unpriced change orders and claims.
- Revolver availability and compliance with leverage and fixed-charge coverage covenants under the amended credit agreement.
- The ongoing effects of COVID-19, crude-oil and energy-market conditions, and customer delays on project timing and spending.