MTRX 10-Q
Matrix Service Co (MTRX)
10-Q
2021-11-09
For: 2021-09-30
View Original
Added on
April 10, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-Q
_______________________________________
(Mark One)
| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||
For the quarterly period ended September 30, 2021
or
| Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 | |||||
For the transition period from to
Commission File No. 1-15461
__________________________________________
(Exact name of registrant as specified in its charter)
__________________________________________
| (State of incorporation) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (918 ) 838-8822
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
___________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☐ | ☒ | |||||||||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting Company | |||||||||||||||
| Emerging Growth Company | |||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 8, 2021 there were 27,888,217 shares of the Company’s common stock, $0.01 par value per share, issued and 26,765,025 shares outstanding.
TABLE OF CONTENTS
| PAGE | ||||||||
| FINANCIAL INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Matrix Service Company
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
| Three Months Ended | |||||||||||
2021 | September 30, 2020 | ||||||||||
| Revenue | $ | $ | |||||||||
| Cost of revenue | |||||||||||
| Gross profit (loss) | ( | ||||||||||
| Selling, general and administrative expenses | |||||||||||
| Restructuring costs | ( | ||||||||||
| Operating loss | ( | ( | |||||||||
| Other income (expense): | |||||||||||
| Interest expense (Note 5) | ( | ( | |||||||||
| Interest income | |||||||||||
| Other | ( | ||||||||||
| Loss before income tax benefit | ( | ( | |||||||||
| Provision (benefit) from federal, state and foreign income taxes | ( | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Basic loss per common share | $ | ( | $ | ( | |||||||
| Diluted loss per common share | $ | ( | $ | ( | |||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See accompanying notes.
-1-
Matrix Service Company
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(unaudited)
| Three Months Ended | |||||||||||
| September 30, 2021 | September 30, 2020 | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation gain (loss) (net of tax expense of $54 and $12 for the three months ended September 30, 2021 and 2020, respectively | ( | ||||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||
See accompanying notes.
-2-
Matrix Service Company
Condensed Consolidated Balance Sheets
(In thousands)
(unaudited)
2021 | June 30, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents (Note 1) | $ | $ | |||||||||
| Restricted cash (Note 1) | |||||||||||
| Accounts receivable, less allowances (September 30, 2021—$586 and June 30, 2021—$898) | |||||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | |||||||||||
| Inventories | |||||||||||
| Income taxes receivable | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment at cost: | |||||||||||
| Land and buildings | |||||||||||
| Construction equipment | |||||||||||
| Transportation equipment | |||||||||||
| Office equipment and software | |||||||||||
| Construction in progress | |||||||||||
| Total property, plant and equipment - at cost | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment - net | |||||||||||
| Restricted cash, non-current (Note 1) | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net of accumulated amortization | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets, non-current | |||||||||||
| Total assets | $ | $ | |||||||||
See accompanying notes.
-3-
Matrix Service Company
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
2021 | June 30, 2021 | ||||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Billings on uncompleted contracts in excess of costs and estimated earnings | |||||||||||
| Accrued wages and benefits | |||||||||||
| Accrued insurance | |||||||||||
| Operating lease liabilities | |||||||||||
| Other accrued expenses | |||||||||||
| Total current liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Operating lease liabilities | |||||||||||
| Other liabilities, non-current | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
| Common stock—$.01 par value; 60,000,000 shares authorized; 27,888,217 shares issued as of September 30, 2021 and June 30, 2021; 26,697,028 and 26,549,438 shares outstanding as of September 30, 2021 and June 30, 2021 | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Less: Treasury stock, at cost — 1,191,189 shares as of September 30, 2021, and 1,338,779 shares as of June 30, 2021 | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes.
-4-
Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
| Three Months Ended | |||||||||||
2021 | September 30, 2020 | ||||||||||
| Operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Operating lease impairment due to restructuring | |||||||||||
| Deferred income tax | ( | ||||||||||
| Gain on sale of property, plant and equipment | ( | ( | |||||||||
| Provision for uncollectible accounts | ( | ||||||||||
| Accelerated amortization of deferred debt amendment fees (Note 5) | |||||||||||
| Other | |||||||||||
| Changes in operating assets and liabilities increasing (decreasing) cash: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | ( | ||||||||||
| Inventories | ( | ||||||||||
| Other assets and liabilities | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Billings on uncompleted contracts in excess of costs and estimated earnings | ( | ( | |||||||||
| Accrued expenses | ( | ||||||||||
| Net cash used by operating activities | ( | ( | |||||||||
| Investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from asset sales | |||||||||||
| Net cash used by investing activities | $ | ( | $ | ( | |||||||
See accompanying notes.
-5-
Matrix Service Company
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
| Three Months Ended | |||||||||||
2021 | September 30, 2020 | ||||||||||
| Financing activities: | |||||||||||
| Payment of debt amendment fees | $ | ( | $ | ||||||||
| Proceeds from issuance of common stock under employee stock purchase plan | |||||||||||
| Repurchase of common stock for payment of statutory taxes due on equity-based compensation | ( | ( | |||||||||
| Other | ( | ||||||||||
| Net cash used by financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ||||||||||
| Decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period (Note 1) | |||||||||||
| Cash, cash equivalents and restricted cash, end of period (Note 1) | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Income taxes | $ | $ | |||||||||
| Interest, including payment of debt amendment fees | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Purchases of property, plant and equipment on account | $ | $ | |||||||||
See accompanying notes.
-6-
Matrix Service Company
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share data)
(unaudited)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||
| Balances, July 1, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
| Issuance of deferred shares (217,084 shares) | ( | ||||||||||||||||||||||||||||||||||
| Treasury shares sold to Employee Stock Purchase Plan (7,209 shares) | ( | ||||||||||||||||||||||||||||||||||
| Treasury shares purchased to satisfy tax withholding obligations (76,703 shares) | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||
| Balances, September 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Balances, July 1, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||
| Issuance of deferred shares (478,703 shares) | ( | ||||||||||||||||||||||||||||||||||
| Treasury shares sold to Employee Stock Purchase Plan (8,730 shares) | ( | ||||||||||||||||||||||||||||||||||
| Treasury shares purchased to satisfy tax withholding obligations (168,765 shares) | ( | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||||||||||||||
| Balances, September 30, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
-7-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1 – Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of Matrix Service Company and its subsidiaries (“Matrix”, “we”, “our”, “us”, “its” or the “Company”), unless otherwise indicated. Intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. The information furnished reflects all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations, cash flows and financial position for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2021, included in our Annual Report on Form 10-K for the year then ended. The results of operations for the three month period ended September 30, 2021 may not necessarily be indicative of the results of operations for the full year ending June 30, 2022.
Significant Accounting Policies
We updated our significant accounting policies as a result of entering into an asset-backed credit agreement (the "ABL Facility"), which requires us to maintain a restricted cash balance (See Note 5 - Debt for more information about the ABL Facility). Our other significant accounting policies are detailed in “Note 1 - Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended June 30, 2021.
Cash, Cash Equivalents and Restricted Cash
The ABL Facility requires us to maintain a minimum of $25.0 million of restricted cash at all times. Since this cash must be restricted through the maturity date of the ABL Facility, which is beyond one year, we have classified this restricted cash as non-current in our Condensed Consolidated Balance Sheets. In addition, we must maintain a restricted cash balance of $2.6 million in support of the purchase card program that is associated with our prior card administrator. We have included this restricted cash in current assets in our Condensed Consolidated Balance Sheets since we expect to dissolve the prior purchase card program during fiscal 2022.
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):
2021 | June 30, 2021 | |||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash, current | ||||||||||||||
| Restricted cash, non-current | ||||||||||||||
| Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | $ | ||||||||||||
Note 2 – Revenue
Remaining Performance Obligations
We had $365.4 million of remaining performance obligations yet to be satisfied as of September 30, 2021 . We expect to recognize $302.2 million of our remaining performance obligations as revenue within the next twelve months.
-8-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Contract Balances
Contract terms with customers include the timing of billing and payment, which usually differs from the timing of revenue recognition. As a result, we carry contract assets and liabilities in our balance sheet. These contract assets and liabilities are calculated on a contract-by-contract basis and reported on a net basis at the end of each period and are classified as current. We present our contract assets in the balance sheet as Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts ("CIE"). CIE consists of revenue recognized in excess of billings. We present our contract liabilities in the balance sheet as Billings on Uncompleted Contracts in Excess of Costs and Estimated Earnings ("BIE"). BIE consists of billings in excess of revenue recognized. The following table provides information about CIE and BIE:
2021 | June 30, 2021 | Change | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | $ | $ | $ | ||||||||||||||
| Billings on uncompleted contracts in excess of costs and estimated earnings | ( | ( | |||||||||||||||
| Net contract liabilities | $ | ( | $ | ( | $ | ||||||||||||
The difference between the beginning and ending balances of our CIE and BIE primarily results from the timing of revenue recognized relative to its billings. The amount of revenue recognized during the three months ended September 30, 2021 that was included in the June 30, 2021 BIE balance was $44.3 million. This revenue consists primarily of work performed during the period on contracts with customers that had advance billings.
Progress billings in accounts receivable at September 30, 2021 and June 30, 2021 included retentions to be collected within one year of $12.8 million and $19.9 million, respectively. Contract retentions collectible beyond one year are included in other assets, non-current in the Condensed Consolidated Balance Sheet and totaled $2.6 million as of September 30, 2021 and $3.1 million as of June 30, 2021.
Disaggregated Revenue
Revenue disaggregated by reportable segment is presented in Note 9 - Segment Information. The following series of tables presents revenue disaggregated by geographic area where the work was performed and by contract type:
Geographic Disaggregation:
| Three Months Ended | ||||||||||||||
2021 | September 30, 2020 | |||||||||||||
| (In thousands) | ||||||||||||||
| United States | $ | $ | ||||||||||||
| Canada | ||||||||||||||
| Other international | ||||||||||||||
| Total Revenue | $ | $ | ||||||||||||
Contract Type Disaggregation:
| Three Months Ended | ||||||||||||||
| September 30, 2021 | September 30, 2020 | |||||||||||||
| (In thousands) | ||||||||||||||
| Fixed-price contracts | $ | $ | ||||||||||||
| Time and materials and other cost reimbursable contracts | ||||||||||||||
| Total Revenue | $ | $ | ||||||||||||
-9-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Typically, we assume more risk with fixed-price contracts since increases in costs to perform the work may not be recoverable. However, these types of contracts typically offer higher profits than time and materials and other cost reimbursable contracts when completed at or below the costs originally estimated. The profitability of time and materials and other cost reimbursable contracts is typically lower than fixed-price contracts and is usually less volatile than fixed-price contracts since the profit component is factored into the rates charged for labor, equipment and materials, or is expressed in the contract as a percentage of the reimbursable costs incurred.
Other
Our results of operations were materially impacted by an increase in the forecasted costs to complete a large capital project in the Utility and Power Infrastructure segment, which resulted in a decrease in gross profit of $5.9 million in the three months ended September 30, 2021. 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. We achieved a critical performance milestone in the second quarter of fiscal 2022, which significantly reduced our financial exposure.
Note 3 – Leases
We enter into lease arrangements for real estate, construction equipment and information technology equipment in the normal course of business. Real estate leases accounted for approximately 93 % of all right-of-use assets as of September 30, 2021 . Most real estate and information technology equipment leases generally have fixed payments that follow an agreed upon payment schedule and have remaining lease terms ranging from less than a year to 14 years. Construction equipment leases generally have "month-to-month" lease terms that automatically renew as long as the equipment remains in use.
The components of lease expense in the Condensed Consolidated Statements of Income are as follows:
| Three Months Ended | |||||||||||||||||
| September 30, 2020 | |||||||||||||||||
| Lease expense | Location of Expense | (in thousands) | |||||||||||||||
| Operating lease expense | Cost of revenue and Selling, general and administrative expenses | $ | $ | ||||||||||||||
Short-term lease expense(1) | Cost of revenue | ||||||||||||||||
| Total lease expense | $ | $ | |||||||||||||||
(1)Primarily represents the lease expense of construction equipment that is subject to month-to-month rental agreements with expected rental durations of less than one year.
The future undiscounted lease payments, as reconciled to the discounted operating lease liabilities presented in our Condensed Consolidated Balance Sheets, were as follows:
| Maturity Analysis: | (in thousands) | |||||||
| Remainder of Fiscal 2022 | $ | |||||||
| Fiscal 2023 | ||||||||
| Fiscal 2024 | ||||||||
| Fiscal 2025 | ||||||||
| Fiscal 2026 | ||||||||
| Thereafter | ||||||||
| Total future operating lease payments | ||||||||
| Imputed interest | ( | |||||||
| Net present value of future lease payments | ||||||||
| Less: current portion of operating lease liabilities | ||||||||
| Non-current operating lease liabilities | $ | |||||||
-10-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following is a summary of the weighted average remaining operating lease term and weighted average discount rate as of September 30, 2021 :
| Weighted-average remaining lease term (in years) | ||||||||
| Weighted-average discount rate | % | |||||||
Supplemental cash flow information related to leases is as follows:
| Three Months Ended | ||||||||
| (in thousands) | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating lease payments | $ | |||||||
| Right-of-use assets obtained in exchange for lease liabilities: | ||||||||
| Operating leases | $ | |||||||
Note 4 – Intangible Assets Including Goodwill
Goodwill
The changes in the carrying value of goodwill by segment are as follows:
| Utility and Power Infrastructure | Process and Industrial Facilities | Storage and Terminal Solutions | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net balance at June 30, 2021 | $ | $ | $ | $ | |||||||||||||||||||
Translation adjustment(1) | ( | ( | ( | ( | |||||||||||||||||||
| Net balance at September 30, 2021 | $ | $ | $ | $ | |||||||||||||||||||
(1)The translation adjustments relate to the periodic translation of Canadian Dollar and South Korean Won denominated goodwill recorded as a part of prior acquisitions in Canada and South Korea, in which the local currency was determined to be the functional currency.
We test our goodwill for impairment annually as of May 31st. While there continues to be uncertainty around the near-term level of spending by some of our customers due to the impacts of the COVID-19 pandemic and the timing of the economic recovery in certain energy markets, we concluded, that based on the totality of both positive and negative factors, no impairment indicators existed at September 30, 2021. However, if customer spending levels do not improve or if the outlook in certain key markets deteriorates, we may need to perform an interim goodwill impairment test, which could result in an impairment.
Other Intangible Assets
Information on the carrying value of other intangible assets is as follows:
| At September 30, 2021 | |||||||||||||||||||||||
| Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| (Years) | (In thousands) | ||||||||||||||||||||||
| Intellectual property | 10 to 15 | $ | $ | ( | $ | ||||||||||||||||||
| Customer-based | 6 to 15 | ( | |||||||||||||||||||||
| Total amortizing intangible assets | $ | $ | ( | $ | |||||||||||||||||||
-11-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
| At June 30, 2021 | |||||||||||||||||||||||
| Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| (Years) | (In thousands) | ||||||||||||||||||||||
| Intellectual property | 10 to 15 | $ | $ | ( | $ | ||||||||||||||||||
| Customer-based | 6 to 15 | ( | |||||||||||||||||||||
| Total amortizing intangible assets | $ | $ | ( | $ | |||||||||||||||||||
Amortization expense totaled $0.5 million and $0.6 million during the three months ended September 30, 2021 and September 30, 2020, respectively.
We estimate that the remaining amortization expense related to September 30, 2021 amortizing intangible assets will be as follows (in thousands):
| Period ending: | |||||
| Remainder of Fiscal 2022 | $ | ||||
| Fiscal 2023 | |||||
| Fiscal 2024 | |||||
| Fiscal 2025 | |||||
| Fiscal 2026 | |||||
| Total estimated remaining amortization expense at September 30, 2021 | $ | ||||
Note 5 – Debt
ABL Credit Facility
On September 9, 2021 , we and our primary U.S. and Canada operating subsidiaries entered into an asset-backed credit agreement (the "ABL Facility") as borrowers with Bank of Montreal, as Administrative Agent, Swing-Line Lender, a Letter of Credit Issuer and a Lender. The ABL Facility is guaranteed by substantially all of our remaining U.S. and Canadian subsidiaries. The ABL Facility provides for available borrowings of up to $100.0 million, which may be increased further by an amount not to exceed $15.0 million, subject to certain conditions, including obtaining additional commitments. The ABL Facility is intended to be used for working capital, capital expenditures, issuances of letters of credit and other lawful purposes. Our obligations under the ABL Facility are secured by a first lien on all our assets and the assets of our co-borrowers and guarantors under the ABL Facility.
The maximum amount that we may borrow under the ABL Facility is subject to a borrowing base, which is based on restricted cash plus a percentage of the value of certain accounts receivable, inventory and equipment, reduced for certain reserves. We are required to maintain a minimum of $25.0 million of restricted cash at all times, but such amounts are also included in the borrowing base. At September 30, 2021, availability under the ABL Facility was $32.1 million and there were $43.1 million in letters of credit outstanding. The ABL Facility matures and any outstanding amounts become due and payable on September 9, 2026 .
Borrowings under the ABL Facility bear interest through maturity at a variable rate based upon, at our option, an annual rate equal to any of a base rate (“Base Rate”), Canadian prime rate, CDOR rate or a LIBOR rate, plus an applicable margin. The Base Rate is defined as a fluctuating interest rate equal to the greatest of (i) rate of interest announced by Bank of Montreal from time to time as its prime rate; (ii) the U.S. federal funds rate plus 0.50 %; (iii) LIBOR rate for one month period plus 1.00 %; and (iv) 1.00 %. Depending on the amount of average availability, the applicable margin is between 1.00 % to 1.50 % for either U.S. Base Rate Loans or Canadian prime rate, and between 2.00 % and 2.50 % for CDOR and LIBOR rate borrowings. Interest is payable either (i) monthly for Base Rate borrowings or (ii) the last day of the interest period for LIBOR or CDOR rate borrowings, as set forth in the Credit Agreement. The fee for undrawn amounts is 0.25 % per annum and is due quarterly.
-12-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
The ABL Facility contains customary conditions to borrowings, events of default and covenants, including, but not limited to, covenants that restrict our ability to sell assets, engage in mergers and acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay cash dividends, issue equity instruments, make distribution or redeem or repurchase capital stock. In the event that our availability is less than the greater of (i) $15.0 million and (ii) 15.00 % of the lesser of (1) the current borrowing base and (2) the commitments under the ABL Facility then in effect, a consolidated Fixed Charge Coverage Ratio of at least 1.00 to 1.00 must be maintained.
Senior Secured Revolving Credit Facility
The ABL Facility replaced the Fifth Amended and Restated Credit Agreement (the "Prior Credit Agreement"), that was entered into on November 2, 2020, and subsequently amended on May 4, 2021, by and among us and certain foreign subsidiaries, as Borrowers, various subsidiaries of ours, as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole Book Runner, and the other Lenders party thereto. The Prior Credit Agreement provided for a three-year senior secured revolving credit facility of $200.0 million that expired November 2, 2023 .
We had no borrowings and $41.3 million of letters of credit outstanding under the Prior Credit Agreement as of the date we commenced the ABL Facility. Interest expense during the three months ended September 30, 2021 included $1.5 million of accelerated amortization of deferred debt amendment fees associated with the Prior Credit Agreement.
Note 6 – Income Taxes
Effective Tax Rate
Our effective tax rates were 23.1 % and (9.8 )% for the three months ended September 30, 2021 and September 30, 2020, respectively. The effective tax rate for the three months ended September 30, 2020 was negatively impacted by a $1.0 million deferred tax asset adjustment.
Net Operating Loss Carryback and Refund of Prior Years Overpayment
Through provisions in the CARES Act, we had income tax benefits of $5.2 million during fiscal 2021 and $0.3 million during the three months ended September 30, 2021 from the ability to carryback the fiscal 2021 federal net operating loss to a period with a higher statutory federal income tax rate. We estimate that we will receive a $13.6 million tax refund in connection with this carryback, which is included in income taxes receivable in the Condensed Consolidated Balance Sheets.
In addition, we expect to receive a $2.4 million tax refund in connection with overpayments from prior years, which is included in income taxes receivable in the Condensed Consolidated Balance Sheets.
Deferred Payroll Taxes
We have deferred $11.1 million of U.S. payroll tax as of September 30, 2021 through provisions of CARES Act. We must repay half of the deferred payroll tax by December 31, 2021 and the remainder by December 31, 2022. The current portion of deferred payroll taxes is included within accrued wages and benefits and the non-current portion is included within other liabilities, non-current in the Condensed Consolidated Balance Sheets.
Note 7 – Commitments and Contingencies
Insurance Reserves
We maintain insurance coverage for various aspects of its operations. However, exposure to potential losses is retained through the use of deductibles, self-insured retentions and coverage limits.
-13-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Typically, our contracts require us to indemnify our customers for injury, damage or loss arising from the performance of our services and provide warranties for materials and workmanship. We may also be required to name the customer as an additional insured up to the limits of insurance available, or we may be required to purchase special insurance policies or surety bonds for specific customers or provide letters of credit in lieu of bonds to satisfy performance and financial guarantees on some projects. We maintain a performance and payment bonding line sufficient to support the business. We generally require our subcontractors to indemnify us and our customer and name us as an additional insured for activities arising out of the subcontractors’ work. We also require certain subcontractors to provide additional insurance policies, including surety bonds in favor of us, to secure the subcontractors’ work or as required by the subcontract.
There can be no assurance that our insurance and the additional insurance coverage provided by our subcontractors will fully protect us against a valid claim or loss under the contracts with our customers.
Unpriced Change Orders and Claims
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $15.3 million at September 30, 2021 and $14.6 million at June 30, 2021. Generally, collection of amounts related to unpriced change orders and claims is expected within twelve months. However, since customers may not pay these amounts until final resolution of related claims, collection of these amounts may extend beyond one year.
Other
During the third quarter of fiscal 2020, we commenced litigation in an effort to collect accounts receivable from an iron and steel customer following the deterioration of the relationship in the second quarter of fiscal 2020. The unpaid receivable balance at September 30, 2021 was $17.0 million. Litigation is unpredictable, however, based on the terms of the contract with this customer, we believe we are entitled to collect the full amount owed under the contract.
We and our subsidiaries are participants in various legal actions. It is the opinion of management that none of the other known legal actions, including a contract dispute with a customer involving the construction of a crude terminal, will have a material impact on our financial position, results of operations or liquidity.
Note 8 – Earnings per Common Share
Basic earnings per share (“Basic EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share (“Diluted EPS”) includes the dilutive effect of stock options and nonvested deferred shares. In the event we report a loss, stock options and nonvested deferred shares are not included since they are anti-dilutive.
The computation of basic and diluted earnings per share is as follows:
| Three Months Ended | |||||||||||
2021 | September 30, 2020 | ||||||||||
| (In thousands, except per share data) | |||||||||||
| Basic EPS: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Weighted average shares outstanding | |||||||||||
| Basic loss per share | $ | ( | $ | ( | |||||||
| Diluted EPS: | |||||||||||
| Diluted weighted average shares | |||||||||||
| Diluted loss per share | $ | ( | $ | ( | |||||||
-14-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 9 – Segment Information
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 construction and maintenance services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configuration, and provide engineering, fabrication, and construction services for LNG utility peak shaving facilities.
•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 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.
We evaluate performance and allocate resources based on operating income. We record intersegment sales and transfers at cost; therefore, no intercompany profit or loss is recognized. In addition, corporate selling, general and administrative expenses are reported separately from the three reportable segments.
Segment assets consist primarily of accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, property, plant and equipment, right-of-use lease assets, goodwill and other intangible assets.
-15-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Results of Operations
(In thousands)
| Three Months Ended | |||||||||||
2021 | September 30, 2020 | ||||||||||
| Gross revenue | |||||||||||
| Utility and Power Infrastructure | $ | $ | |||||||||
| Process and Industrial Facilities | |||||||||||
| Storage and Terminal Solutions | |||||||||||
| Total gross revenue | $ | $ | |||||||||
| Less: Inter-segment revenue | |||||||||||
| Process and Industrial Facilities | $ | $ | |||||||||
| Storage and Terminal Solutions | |||||||||||
| Total inter-segment revenue | $ | $ | |||||||||
| Consolidated revenue | |||||||||||
| Utility and Power Infrastructure | $ | $ | |||||||||
| Process and Industrial Facilities | |||||||||||
| Storage and Terminal Solutions | |||||||||||
| Total consolidated revenue | $ | $ | |||||||||
| Gross profit (loss) | |||||||||||
| Utility and Power Infrastructure | $ | ( | $ | ||||||||
| Process and Industrial Facilities | |||||||||||
| Storage and Terminal Solutions | |||||||||||
| Corporate | ( | ||||||||||
| Total gross profit (loss) | $ | ( | $ | ||||||||
| Selling, general and administrative expenses | |||||||||||
| Utility and Power Infrastructure | $ | $ | |||||||||
| Process and Industrial Facilities | |||||||||||
| Storage and Terminal Solutions | |||||||||||
| Corporate | |||||||||||
| Total selling, general and administrative expenses | $ | $ | |||||||||
| Restructuring costs | |||||||||||
| Utility and Power Infrastructure | $ | $ | |||||||||
| Process and Industrial Facilities | ( | ||||||||||
| Storage and Terminal Solutions | ( | ||||||||||
| Corporate | |||||||||||
| Total restructuring costs | $ | $ | ( | ||||||||
| Operating income (loss) | |||||||||||
| Utility and Power Infrastructure | $ | ( | $ | ||||||||
| Process and Industrial Facilities | |||||||||||
| Storage and Terminal Solutions | ( | ( | |||||||||
| Corporate | ( | ( | |||||||||
| Total operating loss | $ | ( | $ | ( | |||||||
-16-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Total assets by segment were as follows:
2021 | June 30, 2021 | |||||||||||||
| Utility and Power Infrastructure | $ | $ | ||||||||||||
| Process and Industrial Facilities | ||||||||||||||
| Storage and Terminal Solutions | ||||||||||||||
| Corporate | ||||||||||||||
| Total segment assets | $ | $ | ||||||||||||
Note 10 – Restructuring Costs
In fiscal 2020, we initiated a business improvement plan to increase profitability and reduce our cost structure due to our strategic initiative to exit the domestic iron and steel industry and the decline in revenue caused by the ongoing effects of the COVID-19 pandemic and related market disruptions.
The business improvement plan consists of discretionary cost reductions, workforce reductions, reduction of capital expenditures and the reduction in size or closure of certain offices in order to increase the utilization of our staff and bring the cost structure of the business in line with revenue volumes. We incurred $0.6 million of restructuring costs during the three months ended September 30, 2021 and $21.4 million of restructuring costs since inception of the plan. The restructuring costs consist primarily of severance costs, facility closure costs, and other liabilities as a result of exiting certain operations. We expect to substantially complete this initiative in fiscal 2022.
-17-
Matrix Service Company
Notes to Condensed Consolidated Financial Statements
(unaudited)
Restructuring costs under our business improvement plan are classified as follows:
| Three Months Ended | Since Inception of Business Improvement Plan | |||||||||||||||||||
| September 30, 2020 | ||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Utility and Power Infrastructure | ||||||||||||||||||||
| Severance and other personnel-related costs | $ | $ | $ | |||||||||||||||||
| Facility costs | ||||||||||||||||||||
| Other intangible asset impairments | ||||||||||||||||||||
| Total Utility and Power Infrastructure | $ | $ | $ | |||||||||||||||||
| Process and Industrial Facilities | ||||||||||||||||||||
| Severance and other personnel-related costs | $ | $ | ( | $ | ||||||||||||||||
| Facility costs | ( | |||||||||||||||||||
| Other intangible asset impairments | ||||||||||||||||||||
| Other costs | ||||||||||||||||||||
| Total Process and Industrial Facilities | $ | $ | ( | $ | ||||||||||||||||
| Storage and Terminal Solutions | ||||||||||||||||||||
| Severance and other personnel-related costs | $ | ( | $ | $ | ||||||||||||||||
| Facility costs | ||||||||||||||||||||
| Total Storage and Terminal Solutions | $ | ( | $ | $ | ||||||||||||||||
| Corporate | ||||||||||||||||||||
| Severance and other personnel-related costs | $ | $ | $ | |||||||||||||||||
| Facility costs | ||||||||||||||||||||
| Other costs | ||||||||||||||||||||
| Total Corporate | $ | $ | $ | |||||||||||||||||
| Restructuring Costs by Type: | ||||||||||||||||||||
| Severance and other personnel-related costs | $ | $ | ( | $ | ||||||||||||||||
| Facility costs | ||||||||||||||||||||
| Other intangible asset impairments | ||||||||||||||||||||
| Other costs | ||||||||||||||||||||
| Total restructuring costs | $ | $ | ( | $ | ||||||||||||||||
The restructuring reserve is included in other accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets. The table below is a reconciliation of the beginning and ending restructuring reserve balance under the business improvement plan (in thousands):
| Balance as of June 30, 2021 | $ | |||||||
| Cash payments | ( | |||||||
| Other | ||||||||
| Balance as of September 30, 2021 | $ | |||||||
-18-
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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:
•the impact to our business of the COVID-19 pandemic;
•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 of changes in crude oil, natural gas and other commodity prices;
•the likely impact of new or existing regulations or market forces on the demand for our services;
•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:
•the risk factors discussed in our Form 10-K for the fiscal year ended June 30, 2021 and listed from time to time in our filings with the Securities and Exchange Commission;
•economic, market or business conditions in general (including the length and severity of the COVID-19 pandemic) 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 COVID-19 concerns, permitting issues or other factors;
•reduced creditworthiness of our customer base and the higher risk of non-payment of receivables due to volatility of crude oil, natural gas, and other commodity prices which affect our customers' businesses;
•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.
-19-
RESULTS OF OPERATIONS
Operational Update
Throughout the course of the COVID-19 pandemic, our top priority has been to maintain a safe working environment for all employees, customers and business partners. Our project teams, in coordination with our clients, are monitoring the impact of new variants of COVID-19 and continue to operate under enhanced work processes to protect the health and safety of everyone on our job sites.
Since the beginning of the pandemic we have reduced our cost structure by more than $70 million, or approximately 27%, with one-third of those reductions related to SG&A and the rest related to construction overhead, which is included in cost of revenue in the Consolidated Statements of Income. These cost savings were primarily the result of the business improvement plan that began in fiscal 2020 and continues to evolve based on our markets, organizational structure and outlook. We expect to complete the plan in fiscal 2022. See Item 1. Financial Statements, Note 10 - Restructuring Costs, for more information. Despite these significant reductions in construction overhead, our low revenue volume still has not allowed for the complete recovery of construction overhead or leveraging of SG&A costs. As we move through fiscal 2022, we expect the business improvement plan along with improving revenue volumes to positively impact earnings.
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 construction and maintenance services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configuration and provide engineering, fabrication, and construction services for LNG utility peak shaving facilities.
•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 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 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.
We evaluate performance and allocate resources based on operating income. We record intersegment sales and transfers at cost; therefore, no intercompany profit or loss is recognized. In addition, corporate selling, general and administrative expenses are reported separately from the three reportable segments.
-20-
Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020
Consolidated
Consolidated revenue was $168.1 million for the three months ended September 30, 2021, compared to $182.8 million in the same period last year. On a segment basis, revenue decreased in the Storage and Terminal Solutions, Utility and Power Infrastructure, and Process and Industrial Facilities segments by $9.2 million, $3.5 million and $2.0 million, respectively.
Consolidated gross profit (loss) decreased to $(3.5) million in the three months ended September 30, 2021 compared to $14.4 million in the same period last year. Gross margin (loss) decreased to (2.1)% in the three months ended September 30, 2021 compared to 7.9% in the same period last year. Gross margins in 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 were also negatively impacted by lower than forecasted volumes, which led to under recovery of construction overhead costs.
Consolidated SG&A expenses were $16.6 million in the three months ended September 30, 2021 compared to $18.1 million in the same period a year earlier. The decrease is primarily attributable to implemented cost reductions.
As a result of restructuring activities, we recorded $0.6 million of restructuring costs in the three months ended September 30, 2021. See Item 1. Financial Statements, Note 10 - Restructuring Costs, for more information.
Interest expense was $2.0 million in the three months ended September 30, 2021 compared to $0.4 million in the three months ended September 30, 2020. Interest expense in fiscal 2022 included $1.5 million of accelerated amortization of deferred debt amendment fees associated with the Prior Credit Agreement (see Item 1. Financial Statements, Note 5 - Debt, for more information).
Our effective tax rates for the three months ended September 30, 2021 and September 30, 2020 were 23.1% and (9.8)%, respectively. The effective tax rate for the three months ended September 30, 2020 was negatively impacted by a $1.0 million deferred tax asset adjustment.
For the three months ended September 30, 2021, we had a net loss of $17.5 million, or $0.66 per fully diluted share, compared to a net loss of $3.0 million, or $0.12 per fully diluted share, in the three months ended September 30, 2020.
Utility and Power Infrastructure
Revenue for the Utility and Power Infrastructure segment was $57.2 million in the three months ended September 30, 2021 compared to $60.7 million in the same period last year. The decrease is primarily due to lower volumes of power delivery and natural gas utility peak shaving work, partially offset by higher volumes of storm response service work.
The segment gross margin (loss) was (10.7)% in fiscal 2022 compared to 11.4% in fiscal 2021. 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. We achieved a critical performance milestone in the second quarter of fiscal 2022, which significantly reduced our financial exposure. 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 $43.9 million in the three months ended September 30, 2021 compared to $45.9 million in the same period last year. The decrease is primarily due to lower volumes of thermal vacuum chamber and capital work, largely offset by an increase in refinery turnaround and maintenance work.
The segment gross margin was 6.5% for the three months ended September 30, 2021 compared to 8.0% in the same period last year. Project execution in fiscal 2021 was strong, but gross margin was negatively impacted by lower volumes, which led to the under recovery of construction overhead costs. The lower segment gross margin in fiscal 2022 was the result of lower direct margins largely offset by improved recovery of construction overhead costs.
-21-
Storage and Terminal Solutions
Revenue for the Storage and Terminal Solutions segment was $67.0 million in the three months ended September 30, 2021 compared to $76.2 million in the same period last year. The decrease in segment revenue is primarily a result of lower volumes of crude oil tank and terminal capital work, partially offset by an increase in tank repair and maintenance work.
The segment gross margin was 0.6% for the three months ended September 30, 2021 compared to 5.0% in the same period last year. 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. While recovery of construction overhead costs improved in fiscal 2022, revenue volumes were still not sufficient to allow full recovery. The fiscal 2021 segment gross margin was negatively impacted by the under recovery of construction overhead costs and a lower than previously forecasted margin on a crude oil storage terminal capital project that reached substantial completion in fiscal 2021.
Corporate
Unallocated corporate expenses were $7.6 million during the three months ended September 30, 2021 compared to $6.9 million in the same period last year. The increase is primarily attributable to an increase in legal costs for outstanding litigation (see Item 1. Financial Statements, Note 7 - Commitment and Contingencies, for more information) and third party consulting services related to restructuring activities (see "Operational Update" in this Results of Operations section), partially offset by cost reductions we implemented.
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, 2021:
| Utility and Power Infrastructure | Process and Industrial Facilities | Storage and Terminal Solutions | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Backlog as of June 30, 2021 | $ | 170,043 | $ | 134,777 | $ | 157,741 | $ | 462,561 | |||||||||||||||
| Project awards | 64,037 | 94,562 | 108,288 | 266,887 | |||||||||||||||||||
| Revenue recognized | (57,204) | (43,905) | (66,984) | (168,093) | |||||||||||||||||||
| Backlog as of September 30, 2021 | $ | 176,876 | $ | 185,434 | $ | 199,045 | $ | 561,355 | |||||||||||||||
Book-to-bill ratio(1) | 1.1 | 2.2 | 1.6 | 1.6 | |||||||||||||||||||
(1)Calculated by dividing project awards by revenue recognized during the period.
-22-
In the Utility and Power Infrastructure segment, bidding activity is strong in the power delivery portion of the business. During the first quarter of fiscal 2022, we received several key contracts for electrical infrastructure services including substation rebuilds, relay upgrades, and fiber installation. Similarly, our opportunity pipeline for LNG peak shaving projects is building, however those awards, while significant, can be less frequent. In addition, we expect the new $1.2 trillion Infrastructure Investment and Jobs Act recently passed by congress will lead to increased opportunities in this segment.
In the Process and Industrial Facilities segment, client spending related to refinery maintenance operations has returned to near-normal levels. During the first quarter of fiscal 2022, we received a key award for the construction of a thermal vacuum chamber. 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, oil and natural gas producers have remained cautious with capital spending, which has limited new production volumes and opportunities in crude oil tanks and terminals. However, we received key capital construction contracts for an LNG tank and a storage tank package consisting of seven biodiesel tanks, in the first quarter of fiscal 2022. This segment also includes significant opportunities for storage infrastructure projects related to natural gas, LNG, ammonia, hydrogen, NGLs and other forms of renewable energy.
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 operations are also impacted by the COVID-19 pandemic, which has led to the loss of productivity, among other issues. Our business can also be affected, both positively and negatively, by seasonal factors such as energy demand or weather conditions including hurricanes, snowstorms, 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.
-23-
Non-GAAP Financial Measures
Adjusted Net Loss
In order to more clearly depict our core profitability, the following tables present our operating results after certain adjustments:
Reconciliation of Adjusted Net Loss and Diluted Loss per Common Share(1)
(In thousands, except per share data)
| Three Months Ended | ||||||||||||||
| September 30, 2021 | September 30, 2020 | |||||||||||||
| Net loss, as reported | $ | (17,538) | $ | (3,037) | ||||||||||
| Restructuring costs incurred | 605 | (320) | ||||||||||||
| Accelerated amortization of deferred debt amendment fees | 1,518 | — | ||||||||||||
| Tax impact of adjustments | (546) | 82 | ||||||||||||
| Adjusted net loss | $ | (15,961) | $ | (3,275) | ||||||||||
| Loss per fully diluted share, as reported | $ | (0.66) | $ | (0.12) | ||||||||||
| Adjusted loss per fully diluted share | $ | (0.60) | $ | (0.12) | ||||||||||
(1)This table presents non-GAAP financial measures of our adjusted net loss and adjusted diluted loss per common share for the three months ended September 30, 2021 and 2020. The most directly comparable financial measures are net loss and net loss per diluted 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 diluted loss per common 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.
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, 2021 | September 30, 2020 | ||||||||||
| (In thousands) | |||||||||||
| Net loss | $ | (17,538) | $ | (3,037) | |||||||
| Restructuring costs | 605 | (320) | |||||||||
| Stock-based compensation | 1,869 | 2,218 | |||||||||
| Interest expense | 1,999 | 375 | |||||||||
| Provision (benefit) from income taxes | (5,265) | 270 | |||||||||
| Depreciation and amortization | 4,052 | 4,639 | |||||||||
| Adjusted EBITDA | $ | (14,278) | $ | 4,145 | |||||||
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, 2021 were unrestricted cash and cash equivalents on hand, capacity under our credit agreement, and cash generated from operations. Unrestricted cash and cash equivalents at September 30, 2021 totaled $34.7 million and availability under the ABL Facility totaled $32.1 million, resulting in total liquidity of $66.8 million. We expect letters of credit outstanding to decrease by approximately $20.0 million in the second quarter of fiscal 2022, which will increase availability under the ABL Facility by the same amount.
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):
| September 30, 2021 | June 30, 2021 | |||||||||||||
| Cash and cash equivalents | $ | 34,678 | $ | 83,878 | ||||||||||
| Restricted cash, current | 2,600 | — | ||||||||||||
| Restricted cash, non-current | 25,000 | — | ||||||||||||
| Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 62,278 | $ | 83,878 | ||||||||||
While we saw improvement in our project awards and business environment during the first quarter of fiscal 2022, the near- and intermediate-term business impacts from the COVID-19 pandemic and its disruption of our markets are still uncertain. Therefore we continue to maintain a strong balance sheet, which we believe is sufficient to support our near- to intermediate-term needs. We are continuing to take the following actions:
•strategically reviewing business processes and organizational structure;
•proactively managing our the cost structure and working capital; and
•eliminating all non-critical capital expenditures.
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Factors that routinely impact our short-term liquidity and may impact our long-term liquidity include, but are not limited to:
•changes in costs and estimated earnings in excess of billings on uncompleted contracts and billings on uncompleted contracts in excess of costs due to contract terms that determine the timing of billings to customers and the collection of those billings:
◦some cost-plus and fixed-price customer contracts are billed based on milestones which may require us to incur significant expenditures prior to collections from our customers;
◦some fixed-price customer contracts allow for significant upfront billings at the beginning of a project, which temporarily increases liquidity near term;
◦time and material contracts are normally billed in arrears. Therefore, we are routinely required to carry these costs until they can be billed and collected; and
◦some of our large construction projects may require security in the form of letters of credit or significant retentions. The timing of collection of retentions is often uncertain;
•other changes in working capital; and
•capital expenditures.
Other factors that may impact both short and long-term liquidity include:
•contract disputes, which can be significant;
•collection issues, including those caused by weak commodity prices, economic slowdowns or other factors which can lead to credit deterioration of our customers;
•issuances of letters of credit; and
•strategic investments in new operations.
Other factors that may impact long-term liquidity include:
•borrowing constraints under our ABL Facility and maintaining compliance with all covenants contained in the ABL Facility;
•acquisitions and disposals of businesses; and
•purchases of shares under our stock buyback program.
ABL Credit Facility and Senior Secured Revolving Credit Facility
ABL Credit Facility
On September 9, 2021, we and our primary U.S. and Canada operating subsidiaries entered into an asset-backed credit agreement (the "ABL Facility") as borrowers with Bank of Montreal, as Administrative Agent, Swing-Line Lender, a Letter of Credit Issuer and a Lender. The ABL Facility is guaranteed by substantially all of our remaining U.S. and Canadian subsidiaries. The ABL Facility provides for available borrowings of up to $100.0 million, which may be increased further by an amount not to exceed $15.0 million, subject to certain conditions, including obtaining additional commitments. The ABL Facility is intended to be used for working capital, capital expenditures, issuances of letters of credit and other lawful purposes. Our obligations under the ABL Facility are secured by a first lien on all our assets and the assets of our co-borrowers and guarantors under the ABL Facility.
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The maximum amount that we may borrow under the ABL Facility is subject to a borrowing base, which is based on restricted cash plus a percentage of the value of certain accounts receivable, inventory and equipment, reduced for certain reserves. We are required to maintain a minimum of $25.0 million of restricted cash at all times, but such amounts are also included in the borrowing base. At September 30, 2021, availability under the ABL Facility was $32.1 million and there were $43.1 million in letters of credit outstanding. The ABL Facility matures and any outstanding amounts become due and payable on September 9, 2026.
Borrowings under the ABL Facility bear interest through maturity at a variable rate based upon, at our option, an annual rate equal to any of a base rate (“Base Rate”), Canadian prime rate, CDOR rate or a LIBOR rate, plus an applicable margin. The Base Rate is defined as a fluctuating interest rate equal to the greatest of (i) rate of interest announced by Bank of Montreal from time to time as its prime rate; (ii) the U.S. federal funds rate plus 0.50%; (iii) LIBOR rate for one month period plus 1.00%; and (iv) 1.00%. Depending on the amount of average availability, the applicable margin is between 1.00% to 1.50% for either U.S. Base Rate Loans or Canadian prime rate, and between 2.00% and 2.50% for CDOR and LIBOR rate borrowings. Interest is payable either (i) monthly for Base Rate borrowings or (ii) the last day of the interest period for LIBOR or CDOR rate borrowings, as set forth in the Credit Agreement. The fee for undrawn amounts is 0.25% per annum and is due quarterly.
The ABL Facility contains customary conditions to borrowings, events of default and covenants, including, but not limited to, covenants that restrict our ability to sell assets, engage in mergers and acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay cash dividends, issue equity instruments, make distribution or redeem or repurchase capital stock. In the event that our availability is less than the greater of (i) $15.0 million and (ii) 15.00% of the lesser of (1) the current borrowing base and (2) the commitments under the ABL Facility then in effect, a consolidated Fixed Charge Coverage Ratio of at least 1.00 to 1.00 must be maintained.
Senior Secured Revolving Credit Facility
The ABL Facility replaced the Fifth Amended and Restated Credit Agreement (the "Prior Credit Agreement"), that was entered into on November 2, 2020, and subsequently amended on May 4, 2021, by and among us and certain foreign subsidiaries, as Borrowers, various subsidiaries of ours, as Guarantors, JPMorgan Chase Bank, N.A., as Administrative Agent, Sole Lead Arranger and Sole Book Runner, and the other Lenders party thereto. The Prior Credit Agreement provided for a three-year senior secured revolving credit facility of $200.0 million that expired November 2, 2023.
We had no borrowings and $41.3 million of letters of credit outstanding under the Prior Credit Agreement as of the date we commenced the ABL Facility. Interest expense during the three months ended September 30, 2021 included $1.5 million of accelerated amortization of deferred debt amendment fees associated with the Prior Credit Agreement.
Cash Flow for the Three Months Ended September 30, 2021
Cash Flows Used by Operating Activities
Cash used by operating activities for the three months ended September 30, 2021 totaled $19.2 million. The various components are as follows:
Net Cash Used by Operating Activities
(In thousands)
| Net loss | $ | (17,538) | |||
| Non-cash expenses | 7,342 | ||||
| Deferred income tax | (5,343) | ||||
| Cash effect of changes in operating assets and liabilities | (3,614) | ||||
| Net cash used by operating activities | $ | (19,153) | |||
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Cash effect of changes in operating assets and liabilities at September 30, 2021 in comparison to June 30, 2021 include the following:
•Accounts receivable, net of credit losses recognized during the period and other adjustments, decreased $3.1 million during the three months ended September 30, 2021, which increased cash flows from operating activities. The variance is primarily attributable to the timing of billing and collections.
•Costs and estimated earnings in excess of billings on uncompleted contracts ("CIE") increased $3.0 million, which decreased cash flows from operating activities. Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") decreased $2.9 million, which decreased cash flows from operating activities. CIE and BIE balances can experience significant fluctuations based on business volumes and the timing of when job costs are incurred and the timing of customer billings and payments.
•Inventories, income taxes receivable, other current assets, operating right-of-use lease assets and other assets, non-current, increased $3.3 million during the three months ended September 30, 2021, which decreased cash flows from operating activities. These operating assets can fluctuate based on the timing of inventory builds and draw-downs, accrual and receipt of income taxes receivable; prepayments of certain expenses; lease commencement, passage of time, expiration, or termination of operating leases; business volumes; and other timing differences.
•Accounts payable, accrued wages and benefits, accrued insurance, operating lease liabilities, other accrued expenses, and other liabilities, non-current increased by $2.8 million during the three months ended September 30, 2021, which increased cash flows from operating activities. These operating liabilities can fluctuate based on the timing of vendor payments; accruals; lease commencement, lease payments, expiration, or termination of operating leases; business volumes; and other timing differences.
Cash Flows Used by Investing Activities
Investing activities used $0.1 million of cash in the three months ended September 30, 2021 primarily due to $0.2 million of capital expenditures, partially offset by $0.1 million of proceeds from other asset sales.
Cash Flows Used by Financing Activities
Financing activities used $1.8 million of cash in the three months ended September 30, 2021 primarily due to $0.9 million paid to repurchase our stock for payment of withholding taxes due on equity-based compensation and $0.9 million paid in fees to enter into our ABL Facility.
Dividend Policy
We have never paid cash dividends on our common stock and the terms of our ABL Facility limit dividends to stock dividends only. Any future dividend payments will depend on the terms of our ABL Facility, our financial condition, capital requirements and earnings as well as other relevant factors.
Stock Repurchase Program and Treasury Shares
Treasury Shares
The terms of our Credit Agreement limit share repurchases to $2.5 million per fiscal year provided that we meet certain availability thresholds and do not violate our Fixed Charge Coverage Ratio financial covenant. We may repurchase common stock pursuant to the Stock Buyback Program, which was approved by the board of directors in November 2018. Under the program, the aggregate number of shares repurchased may not exceed 2,707,175 shares. We may repurchase our stock from time to time in the open market at prevailing market prices or in privately negotiated transactions and are not obligated to purchase any shares. The program will continue unless and until it is modified or revoked by the Board of Directors. We made no repurchases under the program in the first quarter of fiscal 2022 and have no current plans to repurchase stock in the near-term.
As of September 30, 2021, there were 1,349,037 shares available for repurchase under the Stock Buyback Program. We had 1,191,189 treasury shares as of September 30, 2021 and intend to utilize these treasury shares in connection with equity awards under the our stock incentive plans and for sales to the Employee Stock Purchase Plan.
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CRITICAL ACCOUNTING POLICIES
There have been no material changes in our critical accounting policies from those reported in our fiscal 2021 Annual Report on Form 10-K filed with the SEC. For more information on our critical accounting policies, see Part II, Item 7 of our fiscal 2021 Annual Report on Form 10-K. The following section provides certain information with respect to our critical accounting policies as of the close of our most recent quarterly period.
Revenue Recognition
General Information about our Contracts with Customers
Our revenue comes from contracts to provide engineering, procurement, fabrication and construction, repair and maintenance and other services. Our engineering, procurement and fabrication and construction services are usually provided in association with capital projects, which are commonly fixed-price contracts that are billed based on project milestones. Our repair and maintenance services typically are cost reimbursable or time and material based contracts and are billed monthly or, for projects of short duration, at the conclusion of the project. The elapsed time from award to completion of performance may exceed one year for capital projects.
Step 1: Contract Identification
We do not recognize revenue unless we have identified a contract with a customer. A contract with a customer exists when it has approval and commitment from both parties, the rights and obligations of the parties are identified, payment terms are identified, the contract has commercial substance, and collectibility is probable. We also evaluate whether a contract should be combined with other contracts and accounted for as a single contract. This evaluation requires judgment and could change the timing of the amount of revenue and profit recorded for a given period.
Step 2: Identify Performance Obligations
Next, we identify each performance obligation in the contract. A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services to the customer. Revenue is recognized separately for each performance obligation in the contract. Many of our contracts have one clearly identifiable performance obligation. However, many of our contracts provide the customer an integrated service that includes two or more of the following services: engineering, procurement, fabrication, construction, repair and maintenance services. For these contracts, we do not consider the integrated services to be distinct within the context of the contract when the separate scopes of work combine into a single commercial objective or capability for the customer. Accordingly, we generally identify one performance obligation in our contracts. The determination of the number of performance obligations in a contract requires significant judgment and could change the timing of the amount of revenue recorded for a given period.
Step 3: Determine Contract Price
After determining the performance obligations in the contract, we determine the contract price. The contract price is the amount of consideration we expect to receive from the customer for completing the performance obligation(s). In a fixed-price contract, the contract price is a single lump-sum amount. In reimbursable and time and materials based contracts, the contract price is determined by the agreed upon rates or reimbursements for time and materials expended in completing the performance obligation(s) in the contract.
A number of our contracts contain various cost and performance incentives and penalties that can either increase or decrease the contract price. These variable consideration amounts are generally earned or incurred based on certain performance metrics, most commonly related to project schedule or cost targets. We estimate variable consideration at the most likely amount of additional consideration to be received (or paid in the case of penalties), provided that meeting the variable condition is probable. We include estimated amounts of variable consideration in the contract price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the contract price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We reassess the amount of variable consideration each accounting period until the uncertainty associated with the variable consideration is resolved. Changes in the assessed amount of variable consideration are accounted for prospectively as a cumulative adjustment to revenue recognized in the current period.
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Step 4: Assign Contract Price to Performance Obligations
After determining the contract price, we assign such price to the performance obligation(s) in the contract. If a contract has multiple performance obligations, we assign the contract price to each performance obligation based on the stand-alone selling prices of the distinct services that comprise each performance obligation.
Step 5: Recognize Revenue as Performance Obligations are Satisfied
We record revenue for contracts with our customers as we satisfy the contracts' performance obligations. We recognize revenue on performance obligations associated with fixed-price contracts for engineering, procurement, fabrication and construction services over time since these services create or enhance assets the customer controls as they are being created or enhanced. We measure progress of satisfying these performance obligations by using the percentage-of-completion method, which is based on costs incurred to date compared to the total estimated costs at completion, since it best depicts the transfer of control of assets being created or enhanced to the customer.
We recognize revenue over time for reimbursable and time and material based repair and maintenance contracts since the customer simultaneously receives and consumes the benefit of those services as we perform work under the contract. As a practical expedient allowed under the revenue accounting standards, we record revenue for these contracts in the amount to which we have a right to invoice for the services performed provided that we have a right to consideration from the customer in an amount that corresponds directly with the value of the performance completed to date.
Costs incurred may include direct labor, direct materials, subcontractor costs and indirect costs, such as salaries and benefits, supplies and tools, equipment costs and insurance costs. Indirect costs are charged to projects based upon direct costs and overhead allocation rates per dollar of direct costs incurred or direct labor hours worked. Typically, customer contracts will include standard warranties that provide assurance that products and services will function as expected. We do not sell separate warranties.
We have numerous contracts that are in various stages of completion which require estimates to determine the forecasted costs at completion. Due to the nature of the work left to be performed on many of our contracts, the estimation of total cost at completion for fixed-price contracts is complex, subject to many variables and requires significant judgment. Estimates of total cost at completion are made each period and changes in these estimates are accounted for prospectively as cumulative adjustments to revenue recognized in the current period. If estimates of costs to complete fixed-price contracts indicate a loss, a provision is made through a contract write-down for the total loss anticipated.
Change Orders
Contracts are often modified through change orders, which are changes to the agreed upon scope of work. Most of our change orders, which may be priced or unpriced, are for goods or services that are not distinct from the existing contract due to the significant integration of services provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a change order on the contract price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. For unpriced change orders, we estimate the increase or decrease to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Unpriced change orders are more fully discussed in Note 7 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.
Claims
Sometimes we seek claims for amounts in excess of the contract price for delays, errors in specifications and designs, contract terminations, change orders in dispute or other causes of additional costs incurred by us. Recognition of amounts as additional contract price related to claims is appropriate only if there is a legal basis for the claim. The determination of our legal basis for a claim requires significant judgment. We estimate the change to the contract price using the variable consideration method described in the Step 3: Determine Contract Price paragraph above. Claims are more fully discussed in Note 7 - Commitments and Contingencies of the Notes to Financial Statements.
Costs and estimated earnings in excess of billings on uncompleted contracts included revenues for unpriced change orders and claims of $15.3 million at September 30, 2021 and $14.6 million at June 30, 2021. The amounts ultimately realized may be significantly different than the recorded amounts resulting in a material adjustment to future earnings.
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Goodwill
Goodwill represents the excess of the purchase price of acquisitions over the acquisition date fair value of the net identifiable tangible and intangible assets acquired. In accordance with current accounting guidance, goodwill is not amortized, but is tested at least annually for impairment at the reporting unit level, which is a level below our reportable segments.
We perform our annual impairment test as of May 31st of each fiscal year to determine whether an impairment exists and to determine the amount of headroom. We define "headroom" as the percentage difference between the fair value of a reporting unit and its carrying value. The goodwill impairment test involves comparing management’s estimate of the fair value of a reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, then goodwill is not impaired. If the fair value of a reporting unit is less than its carrying value, then goodwill is impaired to the extent of the difference, but the impairment may not exceed the balance of goodwill assigned to that reporting unit.
We utilize a discounted cash flow analysis, referred to as an income approach, and market multiples, referred to as a market approach, to determine the estimated fair value of our reporting units. For the income approach, significant judgments and assumptions including forecasted project awards, discount rate, anticipated revenue growth rate, gross margins, operating expenses, working capital needs and capital expenditures are inherent in the fair value estimates, which are based on our operating and capital budgets and on our strategic plan. As a result, actual results may differ from the estimates utilized in our income approach. For the market approach, significant judgments and assumptions include the selection of guideline companies, forecasted guideline company EBITDA and our forecasted EBITDA. The use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate and could result in the recognition of additional impairment charges in the financial statements. As a test for reasonableness, we also consider the combined fair values of our reporting units compared to our market capitalization.
Income Taxes
We use the asset and liability approach for financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances based on our judgments and estimates are established when necessary to reduce deferred tax assets to the amount expected to be realized in future operating results. We believe that realization of deferred tax assets in excess of the valuation allowance is more likely than not. Our estimates are based on facts and circumstances in existence as well as interpretations of existing tax regulations and laws applied to the facts and circumstances, with the help of professional tax advisors. Therefore, we estimate and provide for amounts of additional income taxes that may be assessed by the various taxing authorities.
Loss Contingencies
Various legal actions, claims, and other contingencies arise in the normal course of our business. Contingencies are recorded in the condensed consolidated financial statements, or are otherwise disclosed, in accordance with Accounting Standard Codification ("ASC") Topic 450-20, “Loss Contingencies”. Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and estimable. We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes known. We believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results of operations or liquidity. However, the results of litigation are inherently unpredictable and the possibility exists that the ultimate resolution of one or more of these matters could result in a material effect on our financial position, results of operations or liquidity.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in market risk faced by us from those reported in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed with the Securities and Exchange Commission. For more information on market risk, see Part II, Item 7A in our fiscal 2021 Annual Report on Form 10-K.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e).
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We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2021. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level at September 30, 2021.
There have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting during the quarter ended September 30, 2021.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to a number of legal proceedings. We believe that the nature and number of these proceedings are typical for a company of our size engaged in our type of business and that none of these proceedings will result in a material effect on our business, results of operations, financial condition, cash flows or liquidity.
Item 1A. Risk Factors
We have amended the following Risk Factor that appeared in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. This amended Risk Factor should be considered along with the other Risk Factors that appeared in our Annual Report for the fiscal year ended June 30, 2021. Except as set forth below, there have been no material changes to the risk factors involving us from those previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
The COVID-19 pandemic has adversely affected our business and operations.
The COVID-19 pandemic has adversely affected our business and operations and the business and operations of our customers. We have experienced unpredictable reductions in demand for our services. In response to the COVID-19 pandemic, companies within the oil and natural gas and other industries (including our customers) have announced spending cuts and/or project delays which, in turn, have resulted in decreased awards of new contracts or adjustments, reductions, suspensions or cancellations of existing contracts. Such continued delays have impacted our business, results of operations and financial condition.
The ongoing pandemic has also resulted in disruptions to labor and global supply chains, which have led to labor shortages and higher prices for some of the materials we need to run our business, including, but not limited to, structural steel, steel piping, rebar, valves, copper, and delivery freight. We have been proactive with managing our workforce and procurement processes to help reduce the impacts of labor shortages and rising materials prices on our business and to help ensure we continue to have the labor and materials we need available. However, rising prices and the potential for labor and materials shortages have created additional risk into bidding and executing work profitably.
On September 9, 2021, President Biden announced a proposed new rule requiring all employers with at least 100 employees to require that their employees be fully vaccinated or tested weekly. On November 4, 2021, the U.S. Department of Labor’s Occupational Safety and Health Administration (“OSHA”) issued an emergency regulation to carry out this mandate, which is expected to take effect on January 4, 2022. As a company with more than 100 employees, we are subject to the OSHA regulation concerning COVID-19 vaccination. At this time, it is not possible to predict with certainty the exact impact that the new regulation will have on us or on our workforce. The proposed new regulation may result in employee attrition and difficulty securing future labor needs which could have an adverse effect on our business, results of operations and/or cash flows.
Because the duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the impact on our business, financial condition and results of operations remains uncertain. While we expect the COVID-19 pandemic to have an adverse effect on our business, financial condition, liquidity, cash flow and results of operations, we are unable to predict the extent, nature or duration of these impacts at this time.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The table below sets forth information with respect to purchases we made of our common stock during the first quarter of fiscal year 2022.
| Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (C) | ||||||||||||||||||||
| July 1 to July 31, 2021 | |||||||||||||||||||||||
| Stock Buyback Program (A) | — | $ | — | — | 1,349,037 | ||||||||||||||||||
| Employee Transactions (B) | — | — | |||||||||||||||||||||
| August 1 to August 31, 2021 | |||||||||||||||||||||||
| Stock Buyback Program (A) | — | $ | — | — | 1,349,037 | ||||||||||||||||||
| Employee Transactions (B) | 76,703 | $ | 11.11 | — | — | ||||||||||||||||||
| September 1 to September 30, 2021 | |||||||||||||||||||||||
| Stock Buyback Program (A) | — | $ | — | — | 1,349,037 | ||||||||||||||||||
| Employee Transactions (B) | — | $ | — | — | — | ||||||||||||||||||
(A)Represents shares purchased under our Stock Buyback Program.
(B)Represents shares withheld to satisfy the employee’s tax withholding obligation that is incurred upon the vesting of deferred shares granted under our stock incentive plans.
(C)We may repurchase common stock pursuant to the Stock Buyback Program, which was approved by the board of directors in November 2018. Under the program, the aggregate number of shares repurchased may not exceed 2,707,175 shares. We may repurchase our stock from time to time in the open market at prevailing market prices or in privately negotiated transactions and are not obligated to purchase any shares. The program will continue unless and until it is modified or revoked by the Board of Directors. The terms of our ABL Facility also limit share repurchases to $2.5 million per fiscal year provided that we meet certain availability thresholds and we do not violate our Fixed Charge Coverage Ratio financial covenant. We made no repurchases under the program in the first quarter of fiscal 2022 and have no current plans to repurchase stock in the near-term.
Dividend Policy
We have never paid cash dividends on our common stock and the terms of our ABL Facility limit dividends to stock dividends only. Any future dividend payments will depend on the terms of our ABL Facility, our financial condition, capital requirements and earnings as well as other relevant factors.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires domestic mine operators to disclose violations and orders issued under the Federal Mine Safety and Health Act of 1977 (the "Mine Act") by the Federal Mine Safety and Health Administration. We do not act as the owner of any mines, but as a result of our performing services or construction at mine sites as an independent contractor, we are considered an "operator" within the meaning of the Mine Act.
Information concerning mine safety violations or other regulatory matters required to be disclosed in this quarterly report under Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K is included in Exhibit 95.
Item 5. Other Information
None
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Item 6. Exhibits:
The following documents are included as exhibits to this Quarterly Report on Form 10-Q. Any exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical hereafter.
| Exhibit No. | Description | |||||||
| Exhibit 10.1 | ||||||||
| Exhibit 31.1: | ||||||||
| Exhibit 31.2: | ||||||||
| Exhibit 32.1: | ||||||||
| Exhibit 32.2: | ||||||||
| Exhibit 95: | ||||||||
| Exhibit 101.INS: | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| Exhibit 101.SCH: | XBRL Taxonomy Schema Document. | |||||||
| Exhibit 101.CAL: | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| Exhibit 101.DEF: | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| Exhibit 101.LAB: | XBRL Taxonomy Extension Labels Linkbase Document. | |||||||
| Exhibit 101.PRE: | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MATRIX SERVICE COMPANY | ||||||||
| Date: | November 9, 2021 | By: /s/ Kevin S. Cavanah | ||||||
| Kevin S. Cavanah Vice President and Chief Financial Officer signing on behalf of the registrant and as the registrant’s principal financial officer | ||||||||
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