Matrix Service Company — Form 10-Q
Reporting period: Fiscal 2023 first quarter, three months ended September 30, 2022. The filing was submitted November 9, 2022. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial results and position
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $208.4 million | $168.1 million |
| Gross profit (loss) | $13.0 million | ($3.5 million) |
| Gross margin | 6.2% | (2.1%) |
| Operating loss | ($5.1 million) | ($20.7 million) |
| Net loss | ($6.5 million); $0.24 loss per diluted share | ($17.5 million); $0.66 loss per diluted share |
| Adjusted EBITDA (non-GAAP) | $0.8 million | ($14.3 million) |
| Cash used by operating activities | ($35.2 million) | ($19.2 million) |
Revenue rose approximately 24%. Segment revenue was $44.9 million in Utility and Power Infrastructure, $86.6 million in Process and Industrial Facilities, and $76.9 million in Storage and Terminal Solutions. Gross profit improved substantially, but the company remained loss-making; SG&A was $16.8 million and restructuring costs were $1.3 million.
At September 30, 2022, cash and cash equivalents were $14.3 million, with a further $25.0 million classified as restricted cash. Total current assets were $260.6 million and current liabilities were $154.6 million. The company reported $15.0 million of ABL borrowings, $21.7 million of letters of credit, and $42.3 million of remaining ABL availability. Total liquidity, as defined by the company, was $56.6 million, down from $94.8 million at June 30, 2022. Cash, cash equivalents and restricted cash together declined $38.0 million during the quarter. Capital expenditures were $1.6 million.
Changes versus prior period
- Revenue increased by $40.3 million. Process and Industrial Facilities revenue nearly doubled, and Storage and Terminal Solutions revenue rose; Utility and Power Infrastructure revenue declined by $12.3 million.
- Gross margin recovered to 6.2% from (2.1%). Management attributed the improvement to better project execution, stronger volumes, and the completion of lower-margin pandemic-era work. Under-recovered construction overhead continued to weigh on margins.
- Net loss narrowed by $11.0 million. Interest expense fell to $0.4 million from $2.0 million, partly because the prior-year period included $1.5 million of accelerated amortization of deferred debt amendment fees.
- Operating cash use increased, principally reflecting working-capital investment: contract assets rose $14.9 million and contract liabilities fell $11.8 million.
- Backlog increased 4.4% sequentially to $615.7 million, on $234.6 million in project awards and a 1.1 book-to-bill ratio.
Outlook, risks and unusual items
- Management reported improving bidding, awards, repair and maintenance activity, and capital-project opportunities. It expected significant project awards in Q2 FY2023 and anticipated further margin progress as revenue volumes improved, while noting revenue remained insufficient to fully recover construction overhead and leverage SG&A. No quantified earnings or revenue guidance was provided.
- Remaining performance obligations were $438.6 million; $367.2 million was expected to be recognized as revenue within the next 12 months.
- On October 5, 2022, after quarter-end, the company amended its ABL facility. The amendment waived a default related to late delivery of FY2022 audited financial statements, reduced maximum facility loans from $100 million to $90 million, and transitioned the interest benchmark from LIBOR to SOFR. The audited statements were delivered October 11. The outstanding loan rate at September 30 was 7.50%.
- The company recorded a $1.4 million valuation allowance on deferred tax assets generated in the quarter and reported a 0% effective tax rate. It had a full valuation allowance on deferred tax assets following cumulative losses over a three-year period. A $12.6 million CARES Act tax refund was included in income taxes receivable; $5.6 million of deferred payroll taxes was due for repayment by December 31, 2022.
- Unpriced change orders and claims included in contract assets totaled $13.7 million, up from $8.9 million at June 30; final realization could differ materially. A disputed customer receivable under litigation was $17.0 million; management believes it is entitled to collect the full amount, but litigation outcomes are uncertain.
- Management cited exposure to project delays, cost inflation, supply-chain and labor constraints, customer credit and collections, contract estimates and claims, seasonal fluctuations, and variable project awards. Four reporting units with $33.8 million of goodwill had been identified as at higher impairment risk in the prior fiscal-year test; management reported no impairment indicators at September 30, but deterioration in opportunities or margins could prompt an interim test.
Important facts for investors to verify
- Whether operating cash use and working-capital demands moderate as revenue grows, and whether the company can sustain adequate liquidity and ABL availability.
- Whether improved awards convert into profitable revenue and whether margins recover enough to absorb fixed construction overhead and SG&A.
- Progress on the $615.7 million backlog and the timing and execution risk of large projects, including awards received after quarter-end.
- Collection and resolution of the $17.0 million litigated receivable and realization of the $13.7 million in unpriced change orders and claims.
- Compliance with ABL covenants and the effects of reduced facility capacity, variable interest rates, and restricted-cash requirements.
- Potential consequences of the deferred-tax valuation allowance, the payroll-tax repayment, and future goodwill impairment testing.