Business context and reporting period
Matrix Service Company’s Form 10-Q covers the three months ended September 30, 2023, the first quarter of its fiscal year 2024. The company provides engineering, construction, maintenance and fabrication services through Storage and Terminal Solutions, Utility and Power Infrastructure, and Process and Industrial Facilities. The financial statements are unaudited.
Financial performance and position
| Metric | Quarter ended September 30, 2023 | Prior-year quarter |
|---|---|---|
| Revenue | $197.7 million | $208.4 million |
| Gross profit / margin | $11.9 million / 6.0% | $13.0 million / 6.2% |
| Operating loss | $5.3 million | $5.1 million |
| Net loss / diluted loss per share | $3.2 million / $0.12 | $6.5 million / $0.24 |
| Adjusted EBITDA | $(0.7) million | $0.8 million |
| Operating cash flow | $(28.9) million | $(35.2) million |
Cash and cash equivalents were $27.4 million at quarter-end, plus $25.0 million of restricted cash. Total reported liquidity was $80.3 million, including $52.9 million of availability under the asset-backed credit facility. The company had $10.0 million of borrowings and $10.0 million of letters of credit outstanding at September 30; it repaid the borrowings in November 2023. The facility matures September 2026, and the quarter-end borrowing rate was approximately 7.68%. The company reported covenant compliance.
Total assets were $382.3 million and stockholders’ equity was $179.1 million at September 30, 2023. Operating cash use reflected working-capital needs, including lower contract billings in excess of costs, higher receivables, and payments for annual insurance premiums and project inventory. Investing activities provided $2.1 million, including asset-sale proceeds, while capital expenditures were $0.5 million.
Material changes versus the prior comparable period
- Revenue declined $10.8 million, or about 5%, as lower Utility and Power Infrastructure and Process and Industrial Facilities activity more than offset growth in Storage and Terminal Solutions.
- Gross margin was nearly flat year over year. The company cited under-recovery of construction overhead costs in the current and prior-year quarters.
- Net loss improved by $3.3 million, but included a $2.5 million gain on the sale of a former Burlington, Ontario facility. Excluding the gain and prior-year restructuring costs, adjusted net loss was $5.7 million versus $5.2 million.
- Storage and Terminal Solutions revenue rose to $90.1 million from $76.9 million, but segment gross margin fell to 5.5% from 9.8%. Utility and Power revenue fell to $32.4 million from $44.9 million, while its gross margin improved to 11.4% from 3.8%. Process and Industrial revenue declined to $75.1 million from $86.6 million, while gross margin improved to 6.8% from 5.0%.
- Operating cash use improved by $6.4 million year over year but remained substantial. Unrestricted cash fell $27.5 million from June 30, 2023.
Outlook, risks and unusual items
- Quarterly project awards were $497.4 million, producing a 2.5 book-to-bill ratio. Backlog reached $1.39 billion, its highest level since fiscal 2015’s fourth quarter; Storage and Terminal Solutions backlog rose 119.9% during the quarter, including a significant LNG storage project.
- Remaining performance obligations were $376.5 million; the company expected to recognize $293.1 million within the next 12 months. Management said backlog growth should return revenue toward pre-pandemic levels, but did not expect a meaningful revenue uplift until fiscal 2024’s third quarter as large projects start. It expects improved overhead recovery, gross margins and operating income in the second half of fiscal 2024 and beyond.
- Management cited strong bidding activity, particularly for LNG and specialty storage projects. Awards are subject to timing shifts, permitting, financing and other conditions; results are also exposed to project execution, labor and material availability, customer credit and collection, seasonality, and fixed-overhead under-recovery.
- Unpriced change orders and claims included $10.1 million of recognized revenue at quarter-end; ultimate collection and realization could differ materially. The company also disclosed disputes involving a $5.4 million receivable claim and a separate $32.7 million arbitration claim, both with customer counterclaims. In another matter, a September 2023 jury verdict awarded the company an $16.8 million contract balance, which it collected in October.
- The effective tax rate was zero in both periods because valuation allowances were applied to deferred tax assets; future tax benefits depend on generating taxable income. Insurance deductibles, self-insured retentions, coverage limits, and contract indemnities also present potential exposure.
Important facts for investors to verify
- Whether large awards convert to project starts and revenue on management’s stated timetable, and whether the backlog is executed at anticipated margins.
- Whether overhead costs are fully recovered as volumes rise, particularly in Storage and Terminal Solutions.
- Cash conversion, working-capital requirements, facility availability and covenant headroom; note that the $25.0 million restricted-cash balance is not unrestricted liquidity.
- Collection and ultimate resolution of contract claims, unpriced change orders and litigation, including the $5.4 million and $32.7 million disputes.
- The effect of the Burlington asset-sale gain and other adjustments when assessing underlying profitability; non-GAAP adjusted measures are not substitutes for GAAP results.