Q2 2023 Matrix Service Co Earnings Call
However, our recent project performance and near term prospects and the gas processing portion of this segment required us to reevaluate the fair value of the related goodwill we determined an impairment of goodwill was required for one of the business units serving this market a record a noncash charge of $12 3 million or approximately.
<unk> 46 per share in the quarter.
Our second quarter revenue was $194 million compared to $208 million in the first quarter consolidated gross profit decreased to a loss of $1 3 million in the quarter, including the project adjustments.
Excluding the adjustment our gross profit was $8 3 million quarter and our gross margin was not was four 3%, which was somewhat lower than our expectations due to under recovered overhead costs at this revenue level, which impacted gross margins by 230 basis points.
We expect under recovery to improve as revenue levels increased in the fourth quarter.
Consolidated SG&A expenses were $17 5 million in the second quarter compared to $16 8 million in the first quarter.
The increase is primarily related to project pursuit costs as we continue our efforts to increase our backlog quality projects.
We also incurred $1 3 million of restructuring costs in the second quarter, primarily related to closing of underperforming office.
Our effective tax rate for the second quarter was zero as expected we will continue to place valuation allowances on newly generated deferred tax assets and will realize the benefit associated with the reserve deferred tax assets when the company returns to profitable performance later in this year.
For the three months ended December 31, 2022, we had a net loss of $32 8 million or.
$1 22 per fully diluted share.
On an adjusted basis, we had a net loss of $14 4 million.
Or an adjusted loss of <unk> 53 per fully diluted share.
<unk> 36 related to the previously mentioned project loss.
Now turning to our segments, starting with utility and power infrastructure.
Revenue for the utility and power infrastructure segment increased to $51 million in the second quarter compared to $45 million in the first quarter. The higher revenue volume related to increased power delivery work. The company is substantially complete with the previous DTA with projects and the newly awarded peak share of project will not begin to positively impact.
Revenue.
So at the end of the fiscal year.
The segment gross margin was four 8% in the second quarter of fiscal 2023 compared to three 8% in the first quarter.
The margin decrease was related to improved overhead recovery.
While margins are improving.
<unk> continued to be impacted by work on projects with previously six gross margins and projects that were bid in a highly competitive environment.
Our process and industrial facilities.
<unk> was 81 million in the second quarter.
<unk> compared to $87 million in the first quarter.
The decrease was primarily related to the project adjustment previously discussed.
The segment gross margin was a loss of six 4%.
Excluding the $9 $6 million adjustment on the gas processing project. The segment's gross margin was a positive five 6%, which improved modestly over the first quarter gross margin of 5%.
The segment continued to incur under recovered overhead costs in the second quarter, which impacted gross margins by 250 basis points at this revenue level.
And finally in storage and terminal solutions revenue decreased to $63 million in the second quarter.
As compared to $77 million in the first quarter.
The revenue volume was lower than expected.
The award of a large storage project was delayed and that project was previously expected to begin generating revenue in the second quarter.
Our Ultimate award of that project is not known.
The company has successfully captured other storage project awards as evidenced by a one eight book to Bill first six months of the year.
These awarded projects will generate additional revenue that have a later start dates and the aforementioned project as a result of a decline in quarterly revenue from our storage segment is temporary and we expect to see a substantial increase in booked in the fourth quarter.
Segment gross margin was two 6% from second quarter, which was impacted by two issues.
Lower revenue volume negatively impacted overhead recovery.
460 basis point impact in the quarter and an increase forecasted cost complete a smaller capsule storage project at 260 basis point impact in the quarter.
That project was awarded in a competitive environment is scheduled to be completed within the fiscal year.
Now turning to liquidity.
As of December 31, 2022, we had total liquidity of $80 5 million, an increase of $23 9 million during the quarter.
Liquidity improved primarily as a result of an expected decrease in working capital investment, resulting from the timing of cash flows from projects.
Liquidity is comprised of $31 5 million of unrestricted cash and $49 million of borrowing availability.
The company also has $25 million of restricted cash to support the credit facility and borrowings of $15 million.
We expect our liquidity position to continue to improve for several reasons, including expected improved operating results in our fourth quarter. The receipt of approximately $13 million of tax refunds in the third fiscal quarter and positive cash flow from newly awarded capital projects.
Overall, the operating results for the second quarter were disappointing.
However, the legacy projects that negatively impacted our results will be completed within the fiscal year and many of the head and the headwinds we've been facing RFA. In addition, a number of our businesses are generating improved operating performance with margins at or near targeted ranges.
Bind with the strong award activity and the strength of the project funnel. We are confident that our revenues will have increased gross margins and overhead recovery will improve resulting in significantly improved operating results in a return to profitability.
We will now open the follow up questions.
And thank you.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
<unk>. Your question. Please press star one again please.
Please standby will be compile the Q&A roster.
And one moment for our next question.
And our next question comes from Brent Thielman from D. A Davidson your line is now open.
Hey, great Good morning, John Kevin.
Good morning.
Okay.
I guess, just one question on the revenue volume.
Just kind of wanted to gauge your temperature.
Price by the time it Jacob.
It kind of get some of these new awards.
Moving forward kind of anything unusual behind that and then just kind of wanted to get your confidence what youre seeing.
Happen with some of these awards.
Again gets your confidence around the pickup in the fourth quarter as you heard Jay you've laid out.
Yeah. So.
If you look at the revenues for the quarter they were pretty much in line with our expectations I would say the only.
Exception to that.
Volume within storage and terminal solutions was a little bit lower than we originally expected.
And that's the result of a.
As I mentioned on my comments.
A large storage project that we have.
Expected to be awarded and we would've started during the second quarter that would have had a pretty decent amount of revenue in the quarter at that project still not awarded.
Timing of when it will be awarded don't know.
But the good news is.
That the that the second half had a bunch of other projects that we have awarded the last six months and so the process for the increased revenue segment are are still there. They just started a little later than the projects that didn't get awarded.
So that's the only variance from the revenue revenue standpoint at the timing on some of these projects.
Or whether we're pulling that into backlog.
Yes, the word Jerry on some of that base. Thanks.
Could take up to two quarters before we get any kind of heavy revenue there will be some upfront engineering and some of the projects.
We'll know more complex. So there's more time taken to negotiate contracts and are making.
As a final permits to get in place. So usually as we said in our comments. It takes it can take a quarter or two for those things to really start impacting our revenue.
And John just because these are kind of more of the larger capital projects is that.
Is that fair.
Yes.
Yes, I mean larger capital projects, but even projects that are in some types of it.
Say, 30% to 50 million kind of range.
Client as their processes work out today strikes a contractor in substance we can be selected we could be able to put in the backlog, but it could take it could take a couple of months before we really going to start putting money into it.
And just kind of sort of the nature of the business as we return our level our revenue levels, it's a little bit more on path for impactful to the business on a quarter over quarter basis until we get back up to a revenue run rate That's foundation of our company.
Okay. Okay. That's helpful.
And then just on the mid stream.
Processing project.
Yes.
Sort of curious why negotiations didn't translate to the outcome.
Debated and yes, I think the bigger question here is probably just.
Others of this magnitude youre in negotiate negotiations with customers, where maybe there is risk of a similar outcome or just sort of truly unusual to you.
Yeah, No I think this was sort of an unusual situation.
<unk>.
This is as we said.
Hora and other costs.
Finally, the last of our larger.
Recall, our COVID-19 contracts and.
So yes I.
I would say we're not complete.
And with our clients discussing and through some of the commercial issues, but we felt at the time of the filing here that we maybe you can take a position at this position that we've taken.
Yes.
Understood.
Yes, John or Kevin I mean, any context for what sort of revenues.
For that job as we worked through the fiscal second half.
Debt at $225 million to $30 million.
And a lot of that will be while that will be all.
In the third quarter.
Okay, and then John It sounds like you are pretty confident book to Bill is going to be pretty strong here over the next.
A couple of quarters, I mean, any kind of highlighted sectors, you would want to point to where you're really seeing.
A lot of activity.
Yes, I think.
I'll think storage, so theres, a lot of and as our CTO, where some of the bigger projects are but.
A lot of activity in storage around LNG ammonia.
Propane.
Hydro Chad we continue to.
To work in that sector those opportunities continue to come flowing in on feed and pre feed work and hydrogen hydrogen opportunities both domestically and internationally and so we're continuing to work at that market and so.
So I think.
What we see out in front of us the opportunities for LNG peak shaving facilities.
LNG plants related to ship Bunkering.
Bob.
And the export it's pretty big and so we feel very very comfortable where we are there we're going to continue to see good awards and bookings as we move out over the next several quarters.
Black is normal in our business the timing of all that when we can take it into backlog.
That can move month to month.
But as you know as we've said before the trend the trend in backlog growth for US was important award cycle and I think what we see.
Future is very positive trend.
At awards and built our backlog.
Yes.
Okay, Great I appreciate that I'll pass it on.
And thank you.
And.
If you would like to ask a question that is going to be star. One one again, if you would like to ask a question that is going to be star one one and one moment our next question.
And our next question comes from John <unk> from Sidoti. Your line is now open.
Hey, John and Kevin Thanks for taking my questions.
Just to circle back to the midstream processing project was there anything unique about this contract.
You didn't have to engage in before.
So I don't think it's going to take.
As far as the okay.
Process, the design and fabrication.
Direction of facility I would say, it's not we'd do more complex things.
So what was what's the unusual part the customer pushback on the changes in scope.
Well no not.
I really don't want to debate the public so we're trying to give you guys a perspective Chad.
Challenges on the project certainly they.
Supply chain issues that I think.
The planet is felt over the last 18 months.
We had an impact on <unk> from us from a delivery timeframe and inflationary pressure.
And as we noted in the as we noted in the release the job had a lot of.
Changes in scope.
From the client and when there is significant amount of changes that can also impact our ability to perform as we had planned.
These are things that we're working through with our clients.
We're continuing to do that.
So John do you feel there is any.
In hindsight I guess any operational changes that you should make in order to prevent this kind of <unk>.
Since it happened again.
I mean, we will do what we normally do we will do a lessons learned and we.
We'll do a lessons learned with with the client.
If that's afforded to us while we're done perhaps talk about how we interact that there continues.
<unk> continues to be possibility for future work with this client and certainly that would be an outcome that.
We would like we have a lot of clients, we built complex projects with.
Over and over and over again.
And so we are.
Obviously happy with our performance.
So I would say this.
A bit of a unique situation.
But we're we're always honest with ourselves and we will look at the areas, where we think we could have done something differently or better and we will make those adjustments.
Okay.
It sounds like during the quarter, we made some.
Minor struck a structural change closed down an office.
It makes me wonder if the breakeven point for the company has changed at all either positively or negatively in light of.
Now recent operating environment.
Yeah.
So.
I don't think it's changed significantly from what we talked about last quarter.
Year, and a half ago, we were talking about $200 billion was kind of a quarterly breakeven and thats gone up a bit so probably $2 15 to 20 based on inflation.
So but.
There is not a big change in what we need to either fully recover or breakeven.
Okay.
And.
The revenue that was pushed out of storage you said you expected it to.
To close and be working on it in the quarter.
<unk> hasn't closed is there any expectation will close by year end do you think it's firmly pushed out for now.
Yes.
We've sort of taken the position here that this project will not be in this fiscal year as we look at our forecasting going forward.
So it was a fairly sizable storage related project, but the owner has had issues getting into financial close.
Ed.
Permitting so.
So we've kind of taken the position that we're sort of we've been working with them for a while doing some feed work that we were working towards converting that into a full contract.
No.
We're kind of out of that process right now until they get their situations together straightened out and make a decision on how to proceed with projects. So.
So fundamentally taken it out so well.
Came out of dose in the middle of the second quarter, basically and so thats why <unk> had the setback in the second quarter.
Got it got it.
And John you said that the jobs in the backlog are closer to historic norms on the gross margin side.
How far away I dunno across the whole business profile do you think you often getting normalized gross margins and what kind of timing.
I mean do you see on realizing that.
So we're driving the average is up to the backlog a lot of the some of these newer projects that have that are in this.
300, plus million dollars of awards in a quarter or in that range.
So theyre driving those averages are averages for the organization back up into that range.
Plus the opportunity.
That average range.
From a historical perspective.
Might be on the low side, but we generally had good performance across our projects on a quarter to quarter basis were able to upsize. Our are a direct margins because were either underwrite our costs are able to convert other.
Contingencies and things that are built into the projects to the bottom line then so that's our historical our historical operating environment.
We've got more we have more opportunities to drive the margins up that drive the largest out and.
So that also contributes to keeping those margins with that range.
Okay, I guess, one last question and I'll jump back in there was once a time that you you talked about exiting fiscal 2023 with a $1 billion backlog is that number still on the table or has that been pushed to get to the left or the right either way.
That's still on the table from me.
Okay, alright, thanks, so much and good luck.
Thanks.
And thank you.
And I am showing no further questions I would now like to turn the call back over to John Hewitt, President and CEO for closing remarks.
So thank you everybody for joining us today, certainly in a challenging quarter for us, but we we are making progress.
With the organization and all the things that we've done and we've invested in and we feel very strongly about the direction of the organization and where we're going and we're going to continue to build backlog and we're going to continue to improve operating results here over the next couple of quarters. So we look forward to speaking with everybody.
Okay.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
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