Matrix Service Company — Q2 FY2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended December 31, 2022. Matrix provides engineering, fabrication, construction, repair and maintenance services across Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions.
Financial performance and position
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $193.8 million | $162.0 million | $402.3 million | $330.1 million |
| Gross profit (loss) | $(1.3) million | $3.2 million | $11.7 million | $(0.3) million |
| Gross margin | (0.7)% | 2.0% | 2.9% | (0.1)% |
| Operating loss | $(32.4) million | $(13.4) million | $(37.5) million | $(34.2) million |
| Net loss | $(32.8) million | $(24.9) million | $(39.3) million | $(42.5) million |
| Diluted loss per share | $(1.22) | $(0.93) | $(1.46) | $(1.59) |
| Adjusted EBITDA (non-GAAP) | $(13.1) million | $(7.1) million | $(12.2) million | $(21.4) million |
Second-quarter revenue rose year over year, led by Process and Industrial Facilities and Storage and Terminal Solutions. However, the quarter’s gross loss and larger net loss reflected a $9.6 million loss on a midstream gas-processing project, lower overhead recovery, and a $12.3 million goodwill impairment. The six-month net loss improved year over year, while six-month gross profit turned positive.
- Segment performance, Q2: Utility and Power Infrastructure revenue was $50.5 million with $2.4 million gross profit; Process and Industrial Facilities revenue was $80.8 million with a $5.1 million gross loss; Storage and Terminal Solutions revenue was $62.5 million with $1.6 million gross profit.
- Cash flow: Operating activities used $17.6 million in the six months, versus $11.4 million provided in the prior-year period. Investing activities used $2.8 million, primarily for capital expenditures; financing activities used $0.2 million. Cash and cash equivalents were $31.5 million at December 31, plus $25.0 million restricted cash.
- Liquidity and debt: Management reported $80.5 million of total liquidity, comprising $31.5 million unrestricted cash and $49.0 million ABL availability. ABL borrowings were $15.0 million; $19.2 million of letters of credit were outstanding. The borrowing rate was 8.75%, and the facility matures September 2026. Matrix reported compliance with facility covenants.
- Balance sheet: Total assets were $438.1 million and stockholders’ equity $191.5 million at December 31, 2022. Current assets were $294.5 million against current liabilities of $208.6 million.
Material changes and operating developments
- Backlog increased to $740.5 million at December 31 from $589.5 million at June 30. Q2 awards were $318.7 million and the quarter’s book-to-bill ratio was 1.6.
- Remaining performance obligations were $574.6 million; the company expects $432.8 million to be recognized as revenue within 12 months.
- Goodwill fell to $29.7 million from $42.1 million after a full $12.3 million impairment of a Process and Industrial Facilities reporting unit. Management noted other higher-risk reporting units could require impairment testing if project opportunities or margins worsen.
- Net contract liabilities increased to $53.2 million from $20.4 million at June 30, mainly reflecting contract billing and revenue timing.
- Unrestricted cash declined to $31.5 million from $52.4 million at June 30. The six-month operating cash outflow included a $28.1 million increase in accounts receivable; higher advance billings on new capital projects supported the second-quarter liquidity recovery.
Outlook, commentary, and risks
- Management expects Q3 FY2023 revenue to be relatively unchanged from Q2 and anticipates a meaningful increase in Q4 as newly awarded projects begin contributing. It cited expected improved fourth-quarter operating results, approximately $13 million of tax refunds in Q3, and positive cash flow from new capital projects as factors supporting liquidity. These are expectations, not guarantees.
- A large LNG project expected to be awarded in the first half of FY2023 had not been awarded; timing was unknown. Management said other storage awards were strong and expected to support later-year revenue.
- The midstream gas-processing project was affected by scope changes, supply-chain issues, and inflation. The client notified the company after quarter-end that it would not approve adequate compensation for those impacts. Matrix accrued the full expected project loss and expects mechanical completion in Q4 FY2023.
- Unpriced change orders and claims included in contract assets totaled $18.2 million, up from $8.9 million at June 30; eventual recovery may differ materially from recorded amounts. A disputed customer receivable under litigation was $17.0 million.
- Deferred tax assets remain subject to a full valuation allowance due to cumulative losses; the six-month tax provision was zero. The company estimated a $12.6 million CARES Act tax refund receivable and repaid the remaining $5.6 million of deferred U.S. payroll taxes during Q2.
- Other risks highlighted include project cost-estimate changes, customer collection and credit risk, seasonality, workforce utilization, project delays, inflation and supply-chain availability, litigation outcomes, and possible further goodwill impairment. The company said risk factors were not materially changed from its FY2022 Form 10-K.
Key facts for investors to verify
- Progress, final cost, and any recovery on the gas-processing project, including whether the accrued expected loss proves sufficient.
- Conversion of the $740.5 million backlog and $574.6 million remaining performance obligations into revenue and cash, including the timing of the unawarded LNG project.
- Cash conversion, receivable collections, contract billing trends, and realization/timing of the expected tax refund.
- Collectability of the $17.0 million disputed receivable and recoverability of the $18.2 million in unpriced change orders and claims.
- Segment margins, especially Process and Industrial Facilities, and whether further goodwill impairment or tax valuation allowances become necessary.
- ABL availability, borrowing costs, and covenant compliance if liquidity or operating performance weakens.