Business context and reporting period
Matrix Service Company filed this Form 10-Q for the quarter ended March 31, 2022, its fiscal 2022 third quarter—not 2021 Q3. The company provides engineering, construction, maintenance and related services across Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions.
Unless otherwise noted, amounts below are in millions of dollars. Comparisons are with the three or nine months ended March 31, 2021, as applicable.
Financial performance and position
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $177.0, up from $148.3 | $507.1, up from $498.5 |
| Gross profit (loss) and margin | $(1.8); (1.0%), versus $1.6 and 1.1% | $(2.1); (0.4%), versus $31.2 and 6.3% |
| Operating loss | $(35.5), versus $(17.5) | $(69.7), versus $(27.4) |
| Net loss / diluted loss per share | $(34.9) / $(1.30), versus $(12.9) / $(0.49) | $(77.4) / $(2.90), versus $(20.5) / $(0.78) |
| Adjusted EBITDA (non-GAAP) | $(12.3), versus $(9.2) | $(33.7), versus $1.2 |
| Cash used by operating activities | Not separately presented in the supplied filing text | $(22.5), versus $(13.2) |
For the nine months, interest expense was $2.7 million, including $1.5 million of accelerated amortization of fees on the replaced credit facility. The effective tax rate was (7.8%); a $21.9 million valuation allowance against deferred tax assets materially affected tax accounting. The reported results include an $18.3 million goodwill impairment in the third quarter.
At March 31, 2022, cash and cash equivalents were $34.1 million, plus $25.0 million of restricted cash. Total liquidity was $86.8 million, comprising unrestricted cash and $52.7 million available under the ABL facility. The facility had a $76.4 million borrowing base and $23.7 million of letters of credit outstanding; the filing reports covenant compliance. Total assets were $413.1 million, total liabilities $200.2 million, and stockholders’ equity $212.8 million. Cash and cash equivalents were $83.9 million at June 30, 2021. The filing does not provide a clear period-end ABL borrowing balance.
Remaining performance obligations were $433.6 million, of which $368.9 million was expected to be recognized as revenue within 12 months. Backlog was $594.2 million at quarter-end, up 28.5% since June 30, 2021; nine-month book-to-bill was 1.3.
Material changes versus the prior comparable period
- Quarterly revenue rose 19.4%, and nine-month revenue rose 1.7%, but profitability deteriorated sharply: nine-month gross profit of $31.2 million became a $2.1 million gross loss.
- For the nine months, Utility and Power Infrastructure revenue increased to $171.3 million, but the segment recorded a $7.1 million gross loss. Process and Industrial Facilities revenue grew to $163.2 million, with gross profit falling to $6.7 million. Storage and Terminal Solutions revenue declined to $172.6 million and the segment recorded a $0.2 million gross loss.
- Goodwill fell from $60.6 million at June 30, 2021 to $42.2 million after the $18.3 million impairment. Management cited the share-price decline and operating results below forecast.
- Unrestricted cash declined by $49.8 million from June 30, 2021. Operating cash use increased year over year.
- Backlog increased across the nine-month period, particularly in Process and Industrial Facilities; quarter-end backlog was broadly unchanged from December 31, 2021.
Outlook, commentary, risks and unusual items
Management said bidding activity and awards had improved as the economy emerged from the pandemic, but revenue remained insufficient to recover construction overhead and SG&A fully. It expects awards to increase in the fourth quarter and momentum to continue into fiscal 2023, potentially supporting higher revenue, better cost leverage and improved earnings. This is an outlook, not quantified earnings or revenue guidance.
Project estimate revisions weighed on results: a midstream gas-processing project reduced gross profit by $4.8 million after a subcontractor’s performance required rework; a Utility and Power Infrastructure capital project reduced nine-month gross profit by $5.1 million, though execution improved in Q3 and management expected completion in Q4 FY2022; and thermal energy storage tank repairs reduced Storage and Terminal Solutions gross profit by $5.5 million, with completion also expected in Q4 FY2022. Unpriced change orders and claims included in contract assets were $9.3 million; actual recoveries may differ materially.
Management reported approximately $82 million of cost-structure reductions since fiscal 2020 and continued a restructuring plan focused on centralizing support functions. A $1.6 million favorable settlement related to the company’s exit from the domestic iron and steel industry resulted in a restructuring credit in the quarter.
Risks highlighted include project execution and cost-estimate uncertainty, low volumes and under-recovered fixed overhead, inflation, supply-chain and labor constraints, customer spending and collection risk, commodity-market volatility, COVID-19 effects, and the timing of awards. The company is pursuing litigation over a $17.0 million unpaid customer receivable and believes it is entitled to collect the full amount; litigation outcomes remain uncertain. Deferred U.S. payroll taxes of $5.6 million were due by December 31, 2022. The ABL facility requires at least $25.0 million of restricted cash and limits certain actions, including dividends and share repurchases.
Most important facts for investors to verify
- Whether project execution, rework and repair costs stabilize, and whether the cited projects reach expected completion in Q4 FY2022.
- Whether backlog converts to revenue and margin, particularly in Utility and Power Infrastructure and Storage and Terminal Solutions.
- Cash burn, working-capital needs, ABL availability and covenant headroom, including the continuing restricted-cash requirement.
- Recoverability and timing of the $17.0 million disputed receivable and the $9.3 million of unpriced change orders and claims.
- Future tax-asset realizability and any additional goodwill impairment or valuation allowance.