Matrix Service Company — Fiscal 2021 Second-Quarter 10-Q
Reporting period: Three and six months ended December 31, 2020; comparisons are with the corresponding periods ended December 31, 2019. Amounts below are in U.S. dollars.
Business context and results
Matrix provides engineering, fabrication, construction, maintenance and related services across Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions. Revenue fell sharply amid lower project volumes, COVID-19-related market disruption, the prior-year comparison with completed major work, and the company’s exit from domestic iron and steel work.
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $167.5 million, down 47.5% | $350.2 million, down 46.7% |
| Gross profit / margin | $15.3 million / 9.1%, versus $30.0 million / 9.4% | $29.7 million / 8.5%, versus $62.5 million / 9.5% |
| Operating loss | $6.5 million, versus $31.7 million | $9.9 million, versus $22.9 million |
| Net loss / diluted loss per share | $4.6 million / $0.17, versus $28.0 million / $1.04 | $7.6 million / $0.29, versus $21.9 million / $0.81 |
| Adjusted net result (non-GAAP) | $0.8 million loss / $0.03 loss per share, versus $5.2 million income / $0.19 per share | $4.1 million loss / $0.16 loss per share, versus $11.4 million income / $0.41 per share |
Quarterly gross margin eased despite generally strong execution, primarily because lower-than-expected volumes left construction overhead under-recovered. Adjusted EBITDA, a non-GAAP measure, was $4.2 million for the quarter and $6.2 million for the six months, versus $12.6 million and $26.6 million, respectively.
Segments and material changes
- Utility and Power Infrastructure: Quarterly revenue rose to $52.0 million from $49.2 million; six-month revenue rose to $112.7 million from $96.9 million. Gross margin improved to 10.8% for the quarter and 11.1% for the half-year, supported by stronger execution and LNG peak-shaving work.
- Process and Industrial Facilities: Quarterly revenue fell to $51.3 million from $142.9 million; six-month revenue fell to $97.2 million from $297.8 million. Segment gross margins improved to 15.3% and 11.9%, respectively, with strong execution; management cited reduced turnaround and maintenance work, lower midstream activity, a completed major project and the iron-and-steel exit as revenue drivers.
- Storage and Terminal Solutions: Quarterly revenue fell to $64.2 million from $126.6 million; six-month revenue fell to $140.4 million from $262.1 million. A large crude-oil terminal project cost estimate reduced operating income by $5.8 million in the quarter and $7.7 million for the half-year. Mechanical completion was achieved; closeout and outstanding change orders remained. Segment gross margin was 2.9% for the quarter and 4.0% for the half-year.
Backlog was $622.8 million at December 31, down from $758.5 million at June 30. Six-month book-to-bill was 0.6; quarterly book-to-bill was 0.7. Remaining performance obligations were $418.0 million, of which $315.3 million was expected to be recognized as revenue within 12 months.
Cash flow, debt and liquidity
- Six-month operating cash flow was $5.8 million, compared with $38.6 million a year earlier. Investing activities used $1.4 million, including $3.1 million of capital expenditures; financing activities used $11.8 million, principally for net revolver repayments.
- Cash was $93.5 million at December 31, versus $100.0 million at June 30. The company had no revolver borrowings outstanding, but $34.9 million of letters of credit and leverage-based capacity constraints left $33.4 million available under the facility. Total stated liquidity was $126.9 million, down from $193.4 million at June 30.
- A new $200 million senior secured revolver, entered into November 2, 2020, expires November 2, 2023. The company reported compliance with its covenants. The facility requires a maximum 3.00:1 leverage ratio and minimum 1.25:1 fixed-charge coverage ratio.
- Current assets were $304.8 million and current liabilities $150.1 million. Total assets were $479.9 million; total liabilities were $175.6 million; stockholders’ equity was $304.3 million.
Outlook, commentary and risks
Management expected business conditions to improve in the second half of fiscal 2021, while emphasizing significant uncertainty from the pandemic and disruption in energy and industrial markets. It cited strong bidding activity in power delivery, a strong LNG peak-shaving opportunity pipeline, possible improvement in spring refinery turnarounds, and opportunities in gas infrastructure, mining, chemicals and storage projects supporting clean-energy initiatives. Awards can shift between periods and backlog is not a guarantee of future revenue.
The restructuring plan, initiated in fiscal 2020 in response to market disruption, the domestic iron-and-steel exit and power-delivery improvements, had generated approximately $60 million in annual construction-overhead and SG&A cost reductions. The company recorded $5.0 million of restructuring costs in the quarter and $4.7 million in the first half; it expected another $1.0 million to $1.5 million in the third quarter and said the plan was essentially complete.
- COVID-19, commodity and market conditions, customer spending, project delays, workforce utilization, and cost overruns could affect results and liquidity.
- Unpriced change orders and claims included in contract assets totaled $13.0 million; collection timing and amounts ultimately realized are uncertain.
- A disputed iron-and-steel customer receivable under litigation was $16.9 million. Management said it believed the contract entitled the company to the full amount, but litigation outcomes are uncertain.
- The company had deferred $11.1 million of U.S. payroll taxes under the CARES Act, with half due by December 31, 2021 and the remainder by December 31, 2022.
- Management expected an effective tax rate of approximately 27% for the remainder of fiscal 2021. No specific revenue or earnings guidance was provided.
Important facts for investors to verify
- Whether the large terminal project closes out without further cost increases and whether outstanding change orders are recovered.
- Whether backlog stabilizes or converts to revenue, especially given six-month book-to-bill below 1.0 and lower reported volumes.
- Cash generation, revolver availability and covenant headroom as market conditions and project working capital change.
- Collection prospects for the $16.9 million disputed receivable and the $13.0 million of unpriced change orders and claims.
- Whether the stated $60 million annualized cost savings are sustained and offset lower activity without impairing execution capacity.