Matrix Service Company — Form 10-Q Summary
Period clarification: The filing covers the quarter and nine months ended March 31, 2021 (fiscal 2021 third quarter), not 2020 Q3 as stated in the request metadata. Amounts below are in U.S. dollars; financial statement figures have been converted from thousands to millions where applicable.
Business context and reporting period
Matrix provides engineering, fabrication, construction, maintenance and repair services through Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions. The company reported results amid COVID-19-related market disruption and reduced customer spending. It changed its reportable segments effective July 1, 2020 and restated prior-period segment data.
Financial performance and position
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $148.3m | $248.3m | $498.5m | $905.1m |
| Gross profit | $1.6m | $20.5m | $31.2m | $82.9m |
| Gross margin | 1.1% | 8.2% | 6.3% | 9.2% |
| Operating loss | $(17.5)m | $(5.8)m | $(27.4)m | $(28.7)m |
| Net loss | $(12.9)m | $(5.5)m | $(20.5)m | $(27.4)m |
| Diluted loss per share | $(0.49) | $(0.21) | $(0.78) | $(1.02) |
| Adjusted EBITDA (non-GAAP) | $(11.4)m | $5.0m | $(5.2)m | $31.6m |
For the nine months, operating cash flow was $(13.2)m, versus $31.5m provided in the prior-year period. Investing used $2.1m and financing used $12.2m. Cash declined to $73.8m at March 31, 2021 from $100.0m at June 30, 2020. Capital expenditures were $3.9m.
At March 31, 2021, total assets were $471.7m, total liabilities $177.8m and stockholders’ equity $293.9m. The company had no revolver borrowings and $41.4m of letters of credit outstanding. It had a $200m revolving facility scheduled to mature in November 2023, subsequently amended on May 4, 2021.
Remaining performance obligations were $444.5m, with $340.8m expected to be recognized as revenue within 12 months. Backlog was $538.3m at March 31, down from $758.5m at June 30, 2020; nine-month book-to-bill was 0.7.
Material changes versus prior comparable periods
- Quarterly revenue fell 40% year over year; nine-month revenue fell 45%. Lower volumes in Storage and Terminal Solutions and Process and Industrial Facilities were major contributors to the nine-month decline.
- Quarterly gross margin fell to 1.1%, reflecting low volumes and under-recovered construction overhead, as well as lower expected profitability on a large Utility and Power Infrastructure project.
- SG&A declined to $17.2m for the quarter and $52.0m for nine months, primarily due to cost reductions. Restructuring costs were $1.9m and $6.6m, respectively.
- The prior-year nine-month period included $38.5m of goodwill and intangible impairment charges. This helps explain why the reported nine-month net loss improved year over year, even as adjusted results deteriorated from $11.0m adjusted net income to a $15.6m adjusted net loss.
Outlook, commentary, risks and unusual items
- Management said it had reduced its cost structure by more than $60m, about 25%, and considered current adjusted overhead appropriate. It was focused on rebuilding backlog and restoring revenue to more normal levels. No specific consolidated revenue or earnings guidance was provided.
- Management described strong bidding activity in power delivery, a building LNG peak-shaving opportunity pipeline, moderated pandemic impacts on some refinery maintenance work, and opportunities in natural gas, LNG, ammonia, hydrogen and other storage infrastructure. Award timing remains uncertain and project cycles can be lengthy.
- A Utility and Power Infrastructure project cost forecast reduced gross profit by $8.9m in the quarter and nine-month period; causes included excessive rain, COVID-19 impacts, rework and schedule compression. Future revenue on the project is expected at a reduced margin.
- A crude oil terminal project was mechanically completed and demobilized in Q3. The company reported a $3.8m gross-profit reduction for the nine-month period from the project, while its Q3 assessment of additional unpriced change-order recoveries increased quarterly gross profit by $3.9m.
- On May 4, 2021, after quarter-end, the company amended its credit agreement for temporary covenant relief through the quarter ending December 31, 2021. During the relief period it cannot draw revolving loans; must maintain unrestricted cash of at least $50m through June 30, 2021 and $60m thereafter; faces restrictions on new letters of credit, acquisitions, buybacks and dividends; and is limited to $2m of quarterly capital expenditures. It must also meet specified minimum Covenant EBITDA levels: $2.5m for Q4 FY2021, $8.0m cumulatively for six months through September 2021, and $16.5m cumulatively for nine months through December 2021.
- Other risks include uncertainty in customer spending and COVID-19 effects, project execution and fixed-price cost estimates, customer credit and collections, litigation, and potential goodwill impairment if market outlook or spending worsens. A disputed $17.0m receivable from an iron and steel customer remained subject to litigation. Unpriced change orders and claims included $16.6m in contract assets; realized amounts may differ materially.
- The company estimated a $7.8m tax refund from carrying back a projected fiscal 2021 federal net operating loss. It had deferred $11.1m of U.S. payroll taxes, repayable in installments by December 2021 and December 2022.
Most important facts for investors to verify
- Whether the company maintains required unrestricted cash and meets the amended agreement’s Covenant EBITDA targets, and whether it can comply with financial covenants after relief ends.
- Whether operating cash flow stabilizes as revenue and project volumes recover, given the decline in cash and negative nine-month operating cash flow.
- Progress on backlog conversion and new awards, particularly the 0.7 nine-month book-to-bill ratio and the $74.2m Storage and Terminal Solutions backlog adjustment after a customer did not renew a limited notice to proceed.
- Final costs, margins and customer recoveries on the large Utility project and completed crude terminal project, including collection of unpriced change orders and claims.
- Collection of the $17.0m disputed receivable and realization of the estimated tax refund and deferred tax assets.