Matrix Service Company — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2021; comparisons are with the three months ended September 30, 2020, unless otherwise noted. Amounts are in U.S. dollars.
Business context and financial performance
Matrix provides engineering, construction, maintenance and related services across Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions. Results were affected by reduced revenue volumes, under-recovered overhead and project execution issues.
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $168.1 million | $182.8 million |
| Gross profit (loss) | ($3.5) million | $14.4 million |
| Gross margin | (2.1)% | 7.9% |
| Operating loss | ($20.7) million | ($3.5) million |
| Net loss | ($17.5) million | ($3.0) million |
| Diluted loss per share | ($0.66) | ($0.12) |
| Adjusted EBITDA, non-GAAP | ($14.3) million | $4.1 million |
| Cash used by operating activities | $19.2 million | $15.0 million |
| Capital expenditures | $0.2 million | $2.8 million |
SG&A declined to $16.6 million from $18.1 million. Interest expense rose to $2.0 million from $0.4 million, including $1.5 million of accelerated amortization of fees on the replaced credit agreement. The tax provision was a $5.3 million benefit in Q1 FY2022. Adjusted net loss was $16.0 million, or $0.60 per diluted share; these are non-GAAP measures.
Revenue declined about 8%. Fixed-price contract revenue fell to $102.1 million from $133.4 million, while time-and-materials and other cost-reimbursable revenue increased to $66.0 million from $49.4 million.
Segments and material changes
| Segment | Revenue | Gross profit (loss) | Key comparison |
|---|---|---|---|
| Utility and Power Infrastructure | $57.2 million, down from $60.7 million | ($6.1) million | Gross margin was (10.7)% versus 11.4%; a large project cost estimate change reduced gross profit by $5.9 million. |
| Process and Industrial Facilities | $43.9 million, down from $45.9 million | $2.9 million | Gross margin was 6.5% versus 8.0%. |
| Storage and Terminal Solutions | $67.0 million, down from $76.2 million | $0.4 million | Gross margin was 0.6% versus 5.0%. |
The Utility and Power project estimate increase reflected unexpected equipment repairs during commissioning, delaying completion and raising estimated costs. Management said a critical performance milestone in fiscal Q2 significantly reduced the company’s financial exposure. Utility results were also hurt by an unfavorable customer claim settlement and low volumes. Storage results reflected lower-margin maintenance mix and lower-than-forecast margins on certain projects.
Backlog increased to $561.4 million from $462.6 million at June 30, 2021. First-quarter awards were $266.9 million and the consolidated book-to-bill ratio was 1.6. Remaining performance obligations were $365.4 million at September 30, with $302.2 million expected to be recognized within 12 months.
Liquidity, debt and balance sheet
At September 30, 2021, cash and cash equivalents were $34.7 million; an additional $27.6 million was restricted, including $25.0 million required under the new ABL facility. Total cash, cash equivalents and restricted cash was $62.3 million. Total current assets were $250.3 million and current liabilities were $154.3 million.
Management reported total liquidity of $66.8 million, comprising $34.7 million of unrestricted cash and $32.1 million of ABL availability. The $100 million ABL facility, entered into September 9, 2021, replaced the prior $200 million revolving facility and matures September 9, 2026. The facility is secured by a first lien on specified company and subsidiary assets, requires at least $25 million of restricted cash, and had $43.1 million of letters of credit outstanding. The filing does not provide a clear September 30 balance of drawn borrowings. Management expected letters of credit to decrease by approximately $20 million in fiscal Q2, which would increase facility availability by the same amount.
Operating cash outflow was $19.2 million, compared with $15.0 million a year earlier. Cash and cash equivalents fell from $83.9 million at June 30 to $34.7 million at September 30, in part reflecting the new restricted-cash requirement. Stockholders’ equity was $268.3 million, down from $285.5 million at June 30.
Outlook, risks and contingencies
- No quantified full-year earnings or revenue guidance is provided. Management said it expects the ongoing cost-reduction plan and improving revenue volumes to support earnings as fiscal 2022 progresses, while noting that low volumes still prevent full overhead recovery.
- Management cited strong bidding activity in power delivery, refinery maintenance returning near normal, and opportunities in thermal vacuum chambers, mining, chemicals, midstream gas, LNG and other energy-storage infrastructure. Awards are cyclical and timing is uncertain.
- The company had reduced its cost structure by more than $70 million, or approximately 27%, since the pandemic began; it expected to substantially complete its business improvement plan in fiscal 2022. Restructuring expense was $0.6 million in the quarter and $21.4 million since the plan began.
- COVID-19, labor availability, supply-chain disruption, material price increases, project delays, customer spending and creditworthiness, commodity markets, and fixed-price contract cost overruns pose risks. The filing discusses potential workforce effects from the OSHA vaccination-or-testing rule.
- Unpriced change orders and claims included in contract assets totaled $15.3 million. Amounts ultimately collected may differ materially from recorded estimates.
- A disputed iron and steel customer receivable under litigation was $17.0 million. Management believes the contract supports collection of the full amount, but litigation outcomes are uncertain. The company also disclosed other legal matters, including a crude-terminal contract dispute.
- The company estimated tax refunds of $13.6 million from a net operating loss carryback and $2.4 million from prior-year overpayments, both included in income taxes receivable. It had deferred $11.1 million of payroll taxes, with half due by December 31, 2021 and the remainder by December 31, 2022.
- Management reported no goodwill impairment indicators at September 30, 2021, but said deteriorating customer spending or market outlook could require an interim test.
Important facts for investors to verify
- Whether the Utility and Power project milestone achieved in fiscal Q2 limits remaining cost and schedule exposure as expected.
- Whether backlog converts to revenue and profitable work, especially given the quarter’s negative consolidated gross margin and lower fixed-price revenue.
- Actual ABL borrowings, borrowing-base availability, letter-of-credit reductions, and compliance with facility covenants and restricted-cash requirements.
- Collection outcomes for the $17.0 million litigated receivable and the $15.3 million of unpriced change orders and claims.
- Timing and receipt of expected tax refunds, and repayment of deferred payroll taxes.
- Whether labor, materials, COVID-19 impacts and customer spending trends affect project execution, awards and margins.