Engineering & Capital Goods News

MATRIX SERVICE CO Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)


FORWARD-LOOKING STATEMENTS


This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included in this Form 10-Q which address
activities, events or developments which we expect, believe or anticipate will
or may occur in the future are forward-looking statements. The words "believes,"
"intends," "expects," "anticipates," "projects," "estimates," "predicts" and
similar expressions are also intended to identify forward-looking statements.

These forward-looking statements include, among others, such things as:

•amounts and nature of future project awards, revenue and margins from each of
our segments;

•our ability to generate sufficient cash from operations, access our credit
facility, or raise cash in order to meet our short and long-term capital
requirements;

•our ability to comply with the covenants in our credit agreement;

•the impact to our business from economic, market or business conditions in
general and in the oil, natural gas, power, petrochemical, agricultural and
mining industries in particular;

•the impact of inflation on our operating expenses and our business operations;

•the likely impact of new or existing regulations or market forces on the demand
for our services;

•the impact to our business from disruptions to supply chains, inflation and
availability of materials and labor;

•our expectations with respect to the likelihood of a future impairment; and

•expansion and other trends of the industries we serve.


These statements are based on certain assumptions and analyses we made in light
of our experience and our historical trends, current conditions and expected
future developments as well as other factors we believe are appropriate.
However, whether actual results and developments will conform to our
expectations and predictions is subject to a number of risks and uncertainties
which could cause actual results to differ materially from our expectations,
including:

•any risk factors discussed in this Form 10-Q, Form 10-K for the fiscal year
ended June 30, 2022, and in our other filings with the Securities and Exchange
Commission;

•economic, market or business conditions in general and in the oil, natural gas,
power, petrochemical, agricultural and mining industries in particular;

•the transition to renewable energy sources and its impact on our current
customer base;

•the under- or over-utilization of our work force;

•delays in the commencement or progression of major projects, whether due to
permitting issues or other factors;

•reduced creditworthiness of our customer base and the higher risk of
non-payment of receivables;

•the inherently uncertain outcome of current and future litigation;

•the adequacy of our reserves for claims and contingencies; and

•changes in laws or regulations, including the imposition, cancellation or delay
of tariffs on imported goods.


Consequently, all of the forward-looking statements made in this Form 10-Q are
qualified by these cautionary statements and there can be no assurance that the
actual results or developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected consequences or effects
on our business operations. We assume no obligation to update publicly, except
as required by law, any such forward-looking statements, whether as a result of
new information, future events or otherwise.
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RESULTS OF OPERATIONS

Overview

We report our results of operations through three reportable segments: Utility
and Power Infrastructure, Process and Industrial Facilities, and Storage and
Terminal Solutions.

•Utility and Power Infrastructure: consists of power delivery services provided
to investor-owned utilities, including construction of new substations, upgrades
of existing substations, transmission and distribution line installations,
upgrades and maintenance, as well as emergency and storm restoration services.
We also provide engineering, fabrication, and construction services for LNG
utility peak shaving facilities, and provide construction and maintenance
services to a variety of power generation facilities, including natural gas
fired facilities in simple or combined cycle configuration.

•Process and Industrial Facilities: primarily serves customers in the downstream
and midstream petroleum industries who are engaged in refining crude oil and
processing, fractionating, and marketing of natural gas and natural gas liquids.
We also serve customers in various other industries such as petrochemical,
sulfur, mining and minerals companies engaged primarily in the extraction of
non-ferrous metals, aerospace and defense, cement, agriculture, and other
industrial customers. Our services include plant maintenance, turnarounds,
industrial cleaning services, engineering, fabrication, and capital
construction.

•Storage and Terminal Solutions: consists of work related to aboveground crude
oil and refined product storage tanks and terminals. We also include work
related to cryogenic and other specialty storage tanks and terminals, including
LNG, liquid nitrogen/liquid oxygen, liquid petroleum, hydrogen and other
specialty vessels such as spheres in this segment, as well as work related to
marine structures and truck and rail loading/offloading facilities. Our services
include engineering, fabrication, construction, and maintenance and repair,
which includes planned and emergency services for both tanks and full terminals.
Finally, we offer tank products, including geodesic domes, aluminum internal
floating roofs, floating suction and skimmer systems, roof drain systems and
floating roof seals.

Operational Update

Bidding activity, project award volumes, and revenue volumes all continued to
improve from the two year period impacted by the pandemic and we are now
beginning to see these trends positively affect our operating results. Repair
and maintenance activities have increased significantly and returned to near
pre-pandemic levels. In addition, capital project award opportunities have
strengthened during the past year, which has resulted in more project awards and
is beginning to drive higher revenue volumes. We expect these trends to continue
and expect significant project awards in the second quarter of fiscal 2023.
Gross margins are also improving as lower margin projects bid competitively
during the pandemic continue to be completed and are being replaced by projects
with an improved margin profile. Higher revenue volumes have also resulted in
improved overhead cost recovery, which is critical to improved gross margin and
operating income performance. We have still not reached the level of revenue
that allows us to fully recover construction overhead costs and to adequately
leverage SG&A costs, but we expect to see significant progress towards those
objectives as we progress through fiscal 2023.


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Adjusted Net Loss

In order to more clearly depict our core profitability, the following tables
present our operating results after certain adjustments:

               Reconciliation of Net Loss to Adjusted Net Loss(1)
                     (In thousands, except per share data)

                                                                                Three Months Ended
                                                                       

September 30, September 30,

                                                                             2022                2021
Net loss, as reported                                                   $    (6,512)         $  (17,538)
Restructuring costs                                                           1,287                 605

Accelerated amortization of deferred debt amendment fees(2)                       -               1,518
Tax impact of above adjustments                                                (331)               (546)
Deferred tax asset valuation allowance(3)                                     1,394                   -

Adjusted net loss                                                       $    (4,162)         $  (15,961)

Loss per share, as reported                                             $     (0.24)         $    (0.66)
Adjusted loss per share                                                 $     (0.15)         $    (0.60)




(1)This table presents non-GAAP financial measures of our adjusted net loss and
adjusted loss per share for the three months ended September 30, 2022 and 2021.
The most directly comparable financial measures are net loss and loss per share,
respectively, presented in the Condensed Consolidated Statements of Income. We
have presented these non-GAAP financial measures because we believe they more
clearly depict our core operating results during the periods presented and
provide a more comparable measure of our operating results to other companies
considered to be in similar businesses. Since adjusted net loss and adjusted
loss per share are not measures of performance calculated in accordance with
GAAP, they should be considered in addition to, rather than as a substitute for,
the most directly comparable GAAP financial measures.
(2)Interest expense in fiscal 2022 included $1.5 million of accelerated
amortization of deferred debt amendment fees.
(3)See Item 1. Financial Statements, Note 7 - Income Taxes, for more information
about the deferred tax asset valuation allowance.


Adjusted EBITDA


We have presented Adjusted EBITDA, which we define as net loss before
restructuring costs, stock-based compensation, interest expense, income taxes,
and depreciation and amortization, because it is used by the financial community
as a method of measuring our performance and of evaluating the market value of
companies considered to be in similar businesses. We believe that the line item
on our Condensed Consolidated Statements of Income entitled "Net loss" is the
most directly comparable GAAP measure to Adjusted EBITDA. Since Adjusted EBITDA
is not a measure of performance calculated in accordance with GAAP, it should
not be considered in isolation of, or as a substitute for, net earnings as an
indicator of operating performance. Adjusted EBITDA, as we calculate it, may not
be comparable to similarly titled measures employed by other companies. In
addition, this measure is not a measure of our ability to fund our cash needs.
As Adjusted EBITDA excludes certain financial information compared with net
loss, the most directly comparable GAAP financial measure, users of this
financial information should consider the type of events and transactions that
are excluded. Our non-GAAP performance measure, Adjusted EBITDA, has certain
material limitations as follows:

•It does not include restructuring costs. Restructuring costs represent material
costs that were incurred and are oftentimes cash expenses. Therefore, any
measure that excludes restructuring costs has material limitations.


•It does not include stock-based compensation. Stock-based compensation
represents material amounts of equity that are awarded to our employees and
directors for services rendered. While the expense is non-cash, we release
vested shares out of our treasury stock, which has historically been replenished
by using cash to periodically repurchase our stock. Therefore, any measure that
excludes stock-based compensation has material limitations.

•It does not include interest expense. Because we have borrowed money to finance
our operations and acquisitions, pay commitment fees to maintain our credit
facility, and incur fees to issue letters of credit under the credit facility,
interest expense is a necessary and ongoing part of our costs and has assisted
us in generating revenue. Therefore, any measure that excludes interest expense
has material limitations.

•It does not include income taxes. Because the payment of income taxes is a
necessary and ongoing part of our operations, any measure that excludes income
taxes has material limitations.
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•It does not include depreciation or amortization expense. Because we use
capital and intangible assets to generate revenue, depreciation and amortization
expense is a necessary element of our cost structure. Therefore, any measure
that excludes depreciation or amortization expense has material limitations.

A reconciliation of Adjusted EBITDA to net loss follows:

                                                               Three Months Ended
                                                       September 30,       September 30,
                                                            2022                2021
                                                                 (In thousands)
Net loss                                              $       (6,512)     $      (17,538)

Restructuring costs                                            1,287                 605
Stock-based compensation                                       2,055               1,869
Interest expense                                                 372               1,999
Benefit for federal, state and foreign income taxes                -        

(5,265)

Depreciation and amortization                                  3,642               4,052
Adjusted EBITDA                                       $          844      $      (14,278)


Three Months Ended September 30, 2022 Compared to the Three Months Ended
September 30, 2021

Consolidated


Consolidated revenue was $208.4 million for the three months ended September 30,
2022, compared to $168.1 million in the same period last year. On a segment
basis, revenue increased in the Process and Industrial Facilities and Storage
and Terminal Solutions segments by $42.7 million and $9.9 million, respectively.
The increases were partially offset by a decrease in revenue of $12.3 million in
the Utility and Power Infrastructure segment.

Consolidated gross profit increased to $13.0 million in the three months ended
September 30, 2022 compared to a gross loss of $3.5 million in the same period
last year. Gross margin (loss) increased to 6.2% in the three months ended
September 30, 2022 compared to (2.1%) in the same period last year. Gross
margins in the first quarter of fiscal 2023 improved significantly from recent
quarters, but were still negatively impacted by the under recovery of
construction overhead costs. Gross margins in the first quarter of fiscal 2022
were negatively impacted by a lower than previously forecasted margin on a large
capital project and an unfavorable settlement of a claim with a customer, both
in the Utility and Power Infrastructure segment, and by lower than previously
forecasted margins on a limited number of projects in the Storage and Terminal
Solutions segment. In addition, gross margins in the first quarter of fiscal
2022 were also negatively impacted by lower than forecasted volumes, which led
to under recovery of construction overhead costs.

Consolidated SG&A expenses were $16.8 million in the three months ended
September 30, 2022 compared to $16.6 million in the same period last year.

We recorded restructuring costs of $1.3 million in the three months ended
September 30, 2022 compared to $0.6 million in the same period last year. See
Item 1. Financial Statements, Note 11 – Restructuring Costs, for more
information about our business improvement plan.


Interest expense was $0.4 million in the three months ended September 30, 2022
compared to $2.0 million in the three months ended September 30, 2021. Interest
expense in the three months ended September 30, 2022 consisted primarily of
interest on debt outstanding, unused capacity fees, amortization of deferred
debt issuance costs, and letter of credit fees. Interest expense in fiscal 2022
included $1.5 million of accelerated amortization of deferred debt amendment
fees associated with terminating our prior credit facility.

Our effective tax rates for the three months ended September 30, 2022 and
September 30, 2021 were 0.0% and 23.1%, respectively. The effective tax rate
during the first quarter of fiscal 2023 was impacted by a $1.4 million valuation
allowance placed on deferred tax assets generated during the quarter. We placed
a full valuation allowance on our deferred tax assets in the second quarter of
fiscal 2022 due to the existence of a cumulative loss over a three-year period.
We will continue to place valuation allowances on newly generated deferred tax
assets and will realize the benefit associated with the deferred tax assets for
which the valuation allowance has been provided to the extent we generate
taxable income in the future, or cumulative losses are no longer present and our
future projections for growth or tax planning strategies are demonstrated.
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For the three months ended September 30, 2022, we had a net loss of $6.5
million
, or $0.24 per fully diluted share, compared to a net loss of $17.5
million
, or $0.66 per fully diluted share, in the three months ended
September 30, 2021.

Utility and Power Infrastructure


Revenue for the Utility and Power Infrastructure segment was $44.9 million in
the three months ended September 30, 2022 compared to $57.2 million in the same
period last year. The decrease is primarily due to lower volumes of LNG peak
shaving work, partially offset by higher volumes of power delivery and power
generation work.

The segment gross margin (loss) was 3.8% in fiscal 2023 compared to (10.7%) in
fiscal 2022. The segment gross margin for the first quarter of fiscal 2023 was
negatively impacted by low revenue volume, which led to the under recovery of
construction overhead costs, and work on a large capital project with a
previously reduced gross margin.

The fiscal 2022 segment gross margin was negatively impacted by an increase in
the forecasted costs to complete a large capital project, which resulted in a
decrease in gross profit of $5.9 million. The change in estimate was principally
due to unexpected equipment repairs during commissioning that delayed the
scheduled completion and increased the estimated costs to complete. In addition,
segment gross margin was negatively impacted by an unfavorable settlement of a
claim with a customer, and low volumes, which led to the under recovery of
construction overhead costs.

Process and Industrial Facilities


Revenue for the Process and Industrial Facilities segment was $86.6 million in
the three months ended September 30, 2022 compared to $43.9 million in the same
period last year. This 97.3% increase reflects the improved market environment
and was primarily due to higher volumes of refinery maintenance and turnaround
work, work on a capital project at a biodiesel facility, and higher volumes of
midstream gas processing capital work.

The segment gross margin was 5.0% for the three months ended September 30, 2022
compared to 6.5% in the same period last year. The segment gross margin in the
first quarter of fiscal 2023 was negatively impacted by work on a midstream gas
processing project that experienced increases in forecasted costs to complete in
the prior year, which reduced the remaining margin realized on the project. In
addition, revenue volumes were still too low to fully recover construction
overhead costs, which negatively impacted segment gross margin.

The segment gross margin in fiscal 2022 was negatively impacted by low revenue
volume, which led to the under recovery of construction overhead costs.

Storage and Terminal Solutions

Revenue for the Storage and Terminal Solutions segment was $76.9 million in the
three months ended September 30, 2022 compared to $67.0 million in the same
period last year. The increase in segment revenue is primarily a result of
higher volumes of LNG and specialty vessel tank and terminal capital work.


The segment gross margin was 9.8% for the three months ended September 30, 2022
compared to 0.6% in the same period last year. The fiscal 2023 segment gross
margin was positively impacted by strong project execution, partially offset by
low revenue volume, which led to under recovery of construction overhead costs.

The fiscal 2022 segment gross margin was negatively impacted by lower than
previously forecasted margins on a limited number of projects and a higher
percentage of lower margin maintenance work. Segment gross margin in fiscal 2022
was also negatively impacted by low revenue volume, which led to under recovery
of construction overhead costs.

Corporate

Unallocated corporate expenses were $7.9 million during the three months ended
September 30, 2022 compared to $7.6 million in the same period last year.

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Backlog


We define backlog as the total dollar amount of revenue that we expect to
recognize as a result of performing work that has been awarded to us through a
signed contract, limited notice to proceed or other type of assurance that we
consider firm. The following arrangements are considered firm:

•fixed-price awards;

•minimum customer commitments on cost plus arrangements; and

•certain time and material arrangements in which the estimated value is firm or
can be estimated with a reasonable amount of certainty in both timing and
amounts.


For long-term maintenance contracts with no minimum commitments and other
established customer agreements, we include only the amounts that we expect to
recognize as revenue over the next 12 months. For arrangements in which we have
received a limited notice to proceed ("LNTP"), we include the entire scope of
work in our backlog if we conclude that the likelihood of the full project
proceeding as high. For all other arrangements, we calculate backlog as the
estimated contract amount less revenue recognized as of the reporting date.

The following table provides a summary of changes in our backlog for the three
months ended September 30, 2022:


                                                                                 Process and           Storage and
                                                     Utility and Power           Industrial             Terminal
                                                       Infrastructure            Facilities             Solutions             Total
                                                                                      (In thousands)
Backlog as of June 30, 2022                         $         102,059          $    292,287          $    195,114          $ 589,460
Project awards                                                 42,618                59,982               132,028            234,628

Revenue recognized                                            (44,870)              (86,628)              (76,933)          (208,431)
Backlog as of September 30, 2022                    $          99,807          $    265,641          $    250,209          $ 615,657
Book-to-bill ratio(1)                                             0.9                   0.7                   1.7                1.1



(1)Calculated by dividing project awards by revenue recognized during the
period.

Backlog increased $26.2 million or 4.4% in the first quarter of fiscal 2023 on
project awards of $234.6 million and a book-to-bill ratio of 1.1.


In the Utility and Power Infrastructure segment, backlog decreased by 2.2% as we
booked $42.6 million of project awards during the first quarter of fiscal 2023,
primarily related to power delivery work. Our opportunity pipeline for LNG peak
shaving projects continues to be promising, however those awards, while
significant, can be less frequent. While we did not book any LNG peak shaver
projects in the first quarter of fiscal 2023, early in the second quarter, the
Company was awarded the engineering, procurement, and construction of upgrades
being made to an existing LNG peak shaving facility that include a new gas
liquefaction system and vaporization system. Project opportunities and bidding
activity are strong for both the power delivery portion of the business and LNG
peak shaving.

In the Process and Industrial Facilities segment, backlog decreased by 9.1% as
we booked $60.0 million of project awards during the first quarter of fiscal
2023. Client spending related to refinery maintenance and turnaround operations
has returned to near-normal pre-pandemic levels. We continue to see strong
demand for thermal vacuum chambers in the coming quarters, as well as increasing
opportunities in mining and minerals, and chemicals. In addition, we are seeing
more opportunities for midstream gas work, including some larger scale projects.

In the Storage and Terminal Solutions segment, backlog increased by 28.2% as we
booked $132.0 million of project awards during the first quarter of fiscal 2023.
We received an LNTP on a significant ethane/ethylene tank EPC project during the
quarter and booked several other storage projects related to a variety of other
refined products. We were also awarded a large-scale specialty vessel project
early in the second quarter of fiscal 2023. This segment includes significant
opportunities for storage infrastructure projects related to natural gas, LNG,
ammonia, hydrogen, NGLs and other forms of renewable energy. We believe LNG and
hydrogen projects in particular will be key growth drivers for this segment.
Bidding activity on LNG projects has been strong and we have been positioning
ourselves for growth in hydrogen by entering into key relationships, such as the
signing of a memorandum of understanding ("MOU") with Korea Gas Corporation in
August 2022 to support South
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Korea's development of a hydrogen economy as it transforms itself from natural
gas and the signing of a MOU with Chart Industries, Inc. in January of 2021 to
support the development of hydrogen solutions. Oil and natural gas producers
have remained cautious with capital spending, which has limited opportunities in
crude oil tanks and terminals. However, the price of crude oil and natural gas
increased significantly since the world emerged from the COVID-19 pandemic,
which, if sustained, may lead to higher production volumes and more
opportunities for crude oil tanks, terminals and export facilities in the coming
quarters.

Project awards in all segments are cyclical and are typically the result of a
sales process that can take several months or years to complete. It is common
for awards to shift from one period to another as the timing of awards is
dependent upon a number of factors including changes in market conditions,
permitting, off take agreements, project financing and other factors. Backlog
volatility may increase for some segments from time to time when individual
project awards are less frequent, but more significant. The level of awards
presented above only represents an interim period and may not be indicative of
full year awards.

Seasonality and Other Factors

Our operating results can exhibit seasonal fluctuations, especially in our
Process and Industrial Facilities segment, for a variety of reasons. Turnarounds
and planned outages at customer facilities are typically scheduled in the spring
and the fall when the demand for energy is lower. Within the Utility and Power
Infrastructure segment, transmission and distribution work is generally
scheduled by the public utilities when the demand for electricity is at its
lowest. Therefore, revenue volume in the summer months is typically lower than
in other periods throughout the year.

Our business can also be affected, both positively and negatively, by seasonal
factors such as energy demand or weather conditions including hurricanes,
snowstorms, wildfires and abnormally low or high temperatures. Some of these
seasonal factors may cause some of our offices and projects to close or reduce
activities temporarily. In addition to the above noted factors, the general
timing of project starts and completions could exhibit significant fluctuations.
Accordingly, results for any interim period may not necessarily be indicative of
operating results for the full year.

Other factors impacting operating results in all segments come from decreased
work volume during holidays, work site permitting delays or customers
accelerating or postponing work. The differing types, sizes, and durations of
our contracts, combined with their geographic diversity and stages of
completion, often results in fluctuations in our operating results.

Our overhead cost structure is generally fixed. Significant fluctuations in
revenue usually leads to over or under recovery of fixed overhead costs, which
can have a material impact on our gross margin and profitability.
























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LIQUIDITY AND CAPITAL RESOURCES

Overview


We define liquidity as the ongoing ability to pay our liabilities as they become
due, fund business operations and meet all monetary contractual obligations. Our
primary sources of liquidity at September 30, 2022 were unrestricted cash and
cash equivalents on hand, capacity under our ABL Facility, and cash generated
from operations. Unrestricted cash and cash equivalents at September 30, 2022
totaled $14.3 million and availability under the ABL Facility totaled $42.3
million, resulting in total liquidity of $56.6 million.

The following table provides a reconciliation of cash, cash equivalents and
restricted cash in the Condensed Consolidated Balance Sheets to the total cash,
cash equivalents and restricted cash shown in the Condensed Consolidated
Statements of Cash Flows (in thousands):

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