Business context and reporting period
Matrix Service Company provides engineering, construction, maintenance and repair services across Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions. This unaudited Form 10-Q covers the fiscal quarter and six months ended December 31, 2021; comparisons are to the corresponding prior-year periods.
Financial and operating performance
| Metric | Quarter ended Dec. 31, 2021 | Prior-year quarter | Six months ended Dec. 31, 2021 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $162.0 million | $167.5 million | $330.1 million | $350.2 million |
| Gross profit (loss); margin | $3.2 million; 2.0% | $15.3 million; 9.1% | ($0.3) million; (0.1)% | $29.7 million; 8.5% |
| Operating loss | ($13.4) million | ($6.5) million | ($34.2) million | ($9.9) million |
| Net loss; diluted loss per share | ($24.9) million; ($0.93) | ($4.6) million; ($0.17) | ($42.5) million; ($1.59) | ($7.6) million; ($0.29) |
| Adjusted EBITDA (non-GAAP) | ($7.1) million | $6.2 million | ($21.4) million | $10.4 million |
Quarterly revenue declined about 3%; six-month revenue declined about 6%. Lower revenue and substantial margin compression drove the larger losses. The six-month gross loss included under-recovered construction overhead and unfavorable project items. Reported tax expense was $11.0 million for the quarter and $5.7 million for six months, despite pretax losses, principally reflecting a $14.2 million valuation allowance against U.S. deferred tax assets.
By segment, quarterly revenue was $54.8 million in Utility and Power Infrastructure, $50.3 million in Process and Industrial Facilities, and $56.9 million in Storage and Terminal Solutions. Six-month operating losses were concentrated in Utility and Power Infrastructure ($12.8 million) and Storage and Terminal Solutions ($8.6 million); Process and Industrial Facilities reported $1.6 million of operating income.
Operating cash flow was $11.4 million for six months, versus $5.8 million a year earlier. It included a $35.5 million cash benefit from changes in operating assets and liabilities, including increased contract billings in excess of costs. Investing activities used $0.5 million and financing activities used $1.8 million. Capital expenditures were $0.6 million.
At December 31, cash and cash equivalents were $65.0 million; an additional $27.6 million was restricted. Total liquidity, as management defines it, was $101.7 million, comprising unrestricted cash and $36.7 million available under the ABL facility. The facility had a $70.1 million borrowing base, $33.4 million of Bank of Montreal letters of credit, and no reported borrowings. Total liabilities were $195.0 million and stockholders’ equity was $245.6 million. The filing does not report a conventional total-debt balance beyond the credit facility and lease liabilities.
Material changes and business developments
- Quarterly gross margin fell to 2.0% from 9.1%; six-month gross margin moved to a 0.1% loss from an 8.5% profit. Lower volumes left fixed construction overhead under-recovered.
- A thermal energy storage tank repair project reduced gross profit by $2.8 million in the quarter and $5.5 million for six months, due to expanded repair scope, additional client weld testing and schedule delays. Completion was expected in the second half of fiscal 2022.
- A Utility and Power Infrastructure capital project generated a $5.9 million gross-profit reduction in the first quarter due to unexpected equipment repairs and commissioning delays. Management said a second-quarter milestone significantly reduced exposure and did not change the project’s expected outcome.
- The company recorded $1.3 million of restructuring costs for six months and $22.1 million since the improvement plan began. Management estimates the plan has reduced its cost structure by approximately $80 million, or 29%; a second phase centralizes support functions.
- Backlog increased 27.9% from June 30 to $591.6 million. Six-month awards were $459.1 million and book-to-bill was 1.4. Process and Industrial Facilities backlog rose to $251.0 million; Utility and Power Infrastructure backlog was $150.4 million; Storage and Terminal Solutions backlog was $190.2 million. Remaining performance obligations were $396.8 million, with $326.6 million expected to be recognized within twelve months.
- On September 9, 2021, the company replaced its prior revolver with a $100 million asset-backed facility maturing September 2026. The facility requires at least $25 million of restricted cash. The company reported covenant compliance at quarter-end.
Outlook, commentary and risks
Management expects cost savings and improving revenue volumes to support earnings in the second half of fiscal 2022, and expects strong second-half revenue growth in Process and Industrial Facilities following $210.4 million of first-half awards. No specific full-year revenue, earnings or margin guidance is provided. The company says market conditions and the timing of project awards remain uncertain.
Management cited improving award activity and described demand opportunities in power infrastructure, refinery maintenance, midstream gas, mining and minerals, chemicals, LNG and renewable-energy-related storage. It also noted that oil and gas producers remain cautious on capital spending, limiting some crude-oil tank and terminal opportunities.
Key risks include COVID-19 effects, labor availability and material-price inflation, project delays and cost overruns, fixed-price contract exposure, customer credit and collections, and cyclical or seasonal project awards. The company is litigating to collect a $17.0 million unpaid receivable from an iron and steel customer; management believes it is entitled to the amount, but litigation outcomes are uncertain. Recorded revenue includes $10.1 million of unpriced change orders and claims that may ultimately be realized at materially different amounts. Management reported no goodwill impairment indicators at December 31, 2021, while noting future performance and market factors could prompt an interim test. The company received a $2.4 million refund of prior estimated tax overpayments in January 2022 and expected a separate $12.6 million CARES Act carryback refund.
Important facts for investors to verify
- Whether backlog converts into scheduled, profitable revenue, particularly the large Process and Industrial Facilities awards still in early project stages.
- Progress, final costs and margin recovery on the tank-repair project and the Utility and Power Infrastructure capital project.
- Whether operating cash generation persists as contract liabilities, billings, collections and working capital fluctuate.
- Availability under the ABL facility, restricted-cash requirements, letters of credit and covenant headroom.
- Collection prospects for the $17.0 million disputed receivable and realization of unpriced claims and change orders.
- Potential future tax benefits from deferred tax assets currently covered by the valuation allowance, and the timing of expected tax refunds.