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, 2024
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 6, 2024 there were 27,554,879 shares of the Company's common stock, $0.01 par value per share, 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 | |||||||||||
| September 30, 2024 | September 30, 2023 | ||||||||||
| Revenue | $ | $ | |||||||||
| Cost of revenue | |||||||||||
| Gross profit | |||||||||||
| Selling, general and administrative expenses | |||||||||||
| Operating loss | ( | ( | |||||||||
| Other income (expense): | |||||||||||
| Interest expense | ( | ( | |||||||||
| Interest income | |||||||||||
| Other (Note 3) | |||||||||||
| Loss before income tax expense | ( | ( | |||||||||
| Provision for 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, 2024 | September 30, 2023 | ||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation gain (loss) | ( | ||||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||
See accompanying notes.
-2-
Matrix Service Company
Condensed Consolidated Balance Sheets
(In thousands)
(unaudited)
| September 30, 2024 | June 30, 2024 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net of allowance for credit losses | |||||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | |||||||||||
| Inventories | |||||||||||
| Income taxes receivable | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Restricted cash | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net of accumulated amortization | |||||||||||
| Other assets, non-current (Note 2) | |||||||||||
| Total assets | $ | $ | |||||||||
See accompanying notes.
-3-
Matrix Service Company
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
| September 30, 2024 | June 30, 2024 | ||||||||||
| 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 (Note 6) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock — $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Treasury stock, at cost — | ( | ( | |||||||||
| 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 | |||||||||||
| September 30, 2024 | September 30, 2023 | ||||||||||
| Operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash provided (used) by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
Loss (gain) on disposal of property, plant and equipment (Note 3) | ( | ||||||||||
| Other | |||||||||||
| Changes in operating assets and liabilities increasing (decreasing) cash: | |||||||||||
| Accounts receivable, net of allowance for credit losses | ( | ( | |||||||||
| 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 provided (used) by operating activities | ( | ||||||||||
| Investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
Proceeds from sale of property, plant and equipment (Note 3) | |||||||||||
| Net cash provided (used) by investing activities | ( | ||||||||||
| Financing activities: | |||||||||||
| 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 | ( | ( | |||||||||
| Net cash used by financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid (received) during the period for: | |||||||||||
| Income taxes | $ | $ | ( | ||||||||
| Interest | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Purchases of property, plant and equipment on account | $ | $ | |||||||||
See accompanying notes.
-5-
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 | Accumulated Other Comprehensive Loss | Treasury Stock | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||
| Balances, June 30, 2024 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Issuance of restricted stock | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||
| Treasury shares sold to Employee Stock Purchase Plan | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||
| Treasury shares purchased to satisfy tax withholding obligations | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Balances, September 30, 2024 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Balances, June 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Issuance of restricted stock | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||
| Treasury shares sold to Employee Stock Purchase Plan | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||
| Treasury shares purchased to satisfy tax withholding obligations | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Balances, September 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||
-6-
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, 2024, included in our Annual Report on Form 10-K. The results of operations for the three month period ended September 30, 2024 may not necessarily be indicative of the results of operations for the full year ending June 30, 2025.
Significant Accounting Policies
Our significant accounting policies are detailed in “Note 1 - Basis of Presentation and Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended June 30, 2024.
Accounting Standards Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which expands disclosures about a public entity’s reportable segments and requires enhanced information about a reportable segment’s expenses, interim segment profit or loss, and how a public entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources. The update will be effective for annual periods beginning after December 15, 2023 (fiscal 2025). Adoption of this ASU will result in additional disclosure, but will not impact the Company's consolidated financial position, results of operations or cash flows.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which expands disclosures in an entity’s income tax rate reconciliation table and regarding cash taxes paid both in the U.S. and foreign jurisdictions. The update will be effective for annual periods beginning after December 15, 2024 (fiscal 2026). Adoption of this ASU will result in additional disclosure, but will not impact the Company's consolidated financial position, results of operations or cash flows.
In November 2024, the FASB issued ASU 2024-03, Income Statement Reporting Comprehensive Income Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, requiring companies to provide more detailed and organized disclosures of their expenses. Disclosures will include disaggregation of expense captions presented on the face of the income statement into specific categories, such as purchases of inventory, employee compensation, and costs related to depreciation and amortization. The new requirements will take effect for annual reporting periods beginning after December 15, 2026 (fiscal 2028). Adoption of this ASU will result in additional disclosure, but will not impact the Company's consolidated financial position, results of operations or cash flows.
Other accounting pronouncements issued but not effective until after September 30, 2024 are not expected to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
Note 2 – Revenue
Remaining Performance Obligations
-7-
We had $1.1 billion of remaining performance obligations yet to be satisfied as of September 30, 2024. We expect to recognize $591.2 million of our remaining performance obligations as revenue within the next twelve months.
Contract Balances
Contract terms with customers include the timing of billing and payments, 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 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:
| September 30, 2024 | June 30, 2024 | 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 the billings on the associated contract. The amount of revenue recognized during the three months ended September 30, 2024 that was included in the June 30, 2024 BIE balance was $81.0 million.
Progress billings in accounts receivable at September 30, 2024 and June 30, 2024 included retentions to be collected within one year of $11.9 million and $11.6 million, respectively. Contract retentions collectible beyond one year are included in Other assets, non-current in the Condensed Consolidated Balance Sheets and totaled $40.3 million as of September 30, 2024 and $28.6 million as of June 30, 2024, respectively.
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 $9.3 million at September 30, 2024 and $9.9 million at June 30, 2024. The amounts ultimately realized may be different than the recorded amounts resulting in adjustments to future earnings. Generally, we expect collection of amounts related to unpriced change orders and claims within twelve months. However, customers may not pay these amounts until final resolution of related claims, and therefore collection of these amounts may extend beyond one year.
Disaggregated Revenue
Revenue disaggregated by reportable segment is presented in Note 8 - 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 | |||||||||||
| September 30, 2024 | September 30, 2023 | ||||||||||
| (In thousands) | |||||||||||
| United States | $ | $ | |||||||||
| Canada | |||||||||||
| Other international | |||||||||||
| Total Revenue | $ | $ | |||||||||
-8-
Contract Type Disaggregation:
| Three Months Ended | |||||||||||
| September 30, 2024 | September 30, 2023 | ||||||||||
| (In thousands) | |||||||||||
| Fixed-price contracts | $ | $ | |||||||||
| Time and materials and other cost reimbursable contracts | |||||||||||
| Total Revenue | $ | $ | |||||||||
Note 3 – Property, Plant and Equipment
During the first quarter of fiscal 2024, we sold a previously utilized facility in Burlington, Ontario for $2.7 million in net proceeds, which resulted in a gain of $2.5 million. We closed this previously utilized facility because it was no longer strategic to the future of the business. There were no significant sales of property, plant and equipment in the first quarter of fiscal 2025.
Note 4 – Debt
On September 9, 2021 , the Company and our primary U.S. and Canada operating subsidiaries entered into an asset-based credit agreement, which was most recently amended on May 3, 2024 (as amended, the "ABL Facility"), with Bank of Montreal, as Administrative Agent, Swing Line Lender and a Letter of Credit Issuer. The maximum amount of loans under the ABL Facility is limited to $90.0 million. 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 guaranteed by substantially all of our U.S. and Canadian subsidiaries and are secured by a first lien on all our assets under the ABL Facility. The ABL Facility matures, and any outstanding amounts become due and payable, on September 9, 2026.
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. The borrowing base is recalculated on a monthly basis and at September 30, 2024, our borrowing base was $61.4 million. The Company had $4.8 million in letters of credit outstanding as of September 30, 2024, which resulted in availability of $56.6 million under the ABL Facility.
Borrowings under the ABL Facility bear interest through maturity at a variable rate based upon, at our option, an annual rate of either a base rate (“Base Rate”), an Adjusted Term Secured Overnight Financing Rate ("Adjusted Term SOFR"), or at the Canadian Prime Rate, plus an applicable margin. The Adjusted Term SOFR is defined as (i) the SOFR plus (ii) 11.448 basis points for a one-month tenor and 26.161 basis points for a three-month tenor; provided that the Adjusted Term SOFR cannot be below zero. The Base Rate is defined as a fluctuating interest rate equal to the greater 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) Adjusted Term SOFR for one month period plus 1.00 %; or (iv) 1.00 %. Depending on the amount of average availability, the applicable margin is between 1.00 % to 1.50 % for Base Rate and Canadian Prime Rate borrowings, which includes either U.S. or Canadian prime rate, and between 2.00 % and 2.50 % for Adjusted Term SOFR borrowings. Interest is payable either (i) monthly for Base Rate or Canadian Prime Rate borrowings or (ii) the last day of the interest period for Adjusted Term SOFR borrowings, as set forth in the ABL Facility. 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 limit 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 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. We were in compliance with all covenants of the ABL Facility as of September 30, 2024.
Note 5 – Income Taxes
Effective Tax Rate
-9-
During the three months ended September 30, 2024 and 2023, our effective tax rates were zero . The effective tax rates during both periods were impacted by valuation allowances of $1.3 million and $0.2 million, respectively, placed on deferred tax assets generated during the quarters.
Valuation Allowance
We placed a valuation allowance on our deferred tax assets in fiscal 2022 due to the existence of a cumulative loss over a three-year period. We will continue to place valuation allowances on newly generated deferred tax assets and will realize the benefit associated with the deferred tax assets for which the valuation allowance has been provided to the extent we generate taxable income in the future.
Note 6 – Commitments and Contingencies
Insurance Reserves
We maintain insurance coverage for various aspects of our operations. However, we retain exposure to potential losses through the use of deductibles, self-insured retentions and coverage limits.
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.
Litigation
In January 2021, we achieved mechanical completion on a crude oil storage project. On April 1, 2022, we filed an arbitration demand against Keyera Energy, Inc. in an effort to collect outstanding balances of $32.7 million related to the project. In response, on June 2, 2022, the customer filed counterclaims seeking $20.0 million , which included liquidated damages and damages with respect to miscellaneous warranty items. On October 31, 2022, the customer amended its counterclaim claiming damages in a range of $18.8 million to $36.0 million, which included estimated amounts for “potential future costs.” In July 2024, the customer filed a second amended counterclaim which significantly increased the amount of alleged damages to a range of $69.6 million to $97.9 million, including a new claim for unspecified “other damages” of $46.9 million . A portion of the total alleged damages, if we are held liable, may be subject to certain insurance coverages. We are actively pursuing our claims and believe we have substantial legal and contractual defenses to the customer's counterclaims.
During fiscal 2023, we completed construction services on a time and materials basis for a customer at a mining and minerals facility. In late fiscal 2023, after numerous attempts to collect outstanding receivables, we filed a notice of default for lack of payment of outstanding balances, and in early fiscal 2024, we filed a lien on the facility. The customer, 5E Boron Americas, LLC, responded by commencing litigation against us on July 17, 2023 in the United States District Court for the Central District of California, Eastern Division (5E Boron Americas, LLC v. Matrix Service Inc., Case No. 5:23-cv-01396-AB(DTBx)), alleging breach of contract and breach of express warranty. We denied all claims and filed a countersuit against the customer for failure to pay amounts due of $5.6 million.
We believe we have set appropriate reserves based on our evaluation of the possible outcomes for the matters described above. 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. We and our subsidiaries are participants in various other legal actions; however, assessing the eventual outcome of litigation involves forward-looking speculation as to judgement being made by arbitrators, judges, juries and appellate courts in the future. Based upon information presently available, and in light of legal and other factual defenses available to the Company, management does not believe that such other known legal actions will have a material adverse effect on our financial position, results of operations or liquidity.
-10-
Note 7 – Earnings per Common Share
Basic earnings per share (“EPS”) is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share includes the dilutive effect of employee and director nonvested restricted stock units. Nonvested restricted stock units are considered dilutive (antidilutive) to our EPS whenever the average market value of the shares during the period exceeds (is less than) the sum of the related average unamortized compensation expense during the period plus the related hypothetical estimated excess tax benefit that will be realized when the shares vest. Nonvested restricted stock units are considered antidilutive to our EPS in the event we report a net loss.
The computation of basic and diluted earnings per share is as follows:
| Three Months Ended | |||||||||||
| September 30, 2024 | September 30, 2023 | ||||||||||
| (In thousands, except per share data) | |||||||||||
| Basic EPS: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Weighted average shares outstanding | |||||||||||
| Basic loss per share | $ | ( | $ | ( | |||||||
| Diluted EPS: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Diluted weighted average shares outstanding | |||||||||||
| Diluted loss per share | $ | ( | $ | ( | |||||||
The following securities are considered antidilutive and have been excluded from the calculation of Diluted EPS:
| Three Months Ended | |||||||||||
| September 30, 2024 | September 30, 2023 | ||||||||||
| (In thousands) | |||||||||||
Nonvested restricted stock units | |||||||||||
-11-
Note 8 – Segment Information
We operate our business through three reportable segments:
•Storage and Terminal Solutions: primarily consists of engineering, procurement, fabrication, and construction services related to cryogenic and other specialty tanks and terminals for LNG, NGLs, hydrogen, ammonia, propane, butane, liquid nitrogen/liquid oxygen, and liquid petroleum. We also perform work related to traditional aboveground crude oil and refined product storage tanks and terminals. This segment also includes terminal balance of plant work, truck and rail loading/offloading facilities, and marine structures as well as storage tank and terminal maintenance and repair. Finally, we manufacture and sell precision engineered specialty tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.
•Utility and Power Infrastructure: primarily consists of engineering, procurement, fabrication, and construction services to support growing demand for LNG utility peak shaving facilities. We also perform traditional electrical work for public and private utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, and upgrades and maintenance including live wire work. Work may also include emergency and storm restoration services. We also provide construction services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configurations.
•Process and Industrial Facilities: primarily consists of plant maintenance, repair, and turnarounds in the downstream and midstream markets for energy clients including refining and processing of crude oil, fractionating, and marketing of natural gas and natural gas liquids. We also perform engineering, procurement, fabrication, and construction for refinery upgrades and retrofits for renewable fuels, including hydrogen processing, production, loading and distribution facilities. We also construct thermal vacuum test chambers for aerospace and defense industries and other infrastructure for industries including petrochemical, sulfur, mining and minerals primarily in the extraction of non-ferrous metals, cement, agriculture, wastewater treatment facilities and other industrial customers.
We evaluate performance and allocate resources based on operating income. We eliminate intersegment sales; therefore, no intercompany profit or loss is recognized. Corporate selling, general and administrative expenses, including corporate salaries and facilities costs, are excluded from our three reportable segments in order to align controllable costs with the responsibility of segment management, and to be consistent with how our chief operating decision-maker assesses segment performance and allocates resources. 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.
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Operating Segment Information - The following tables set forth certain selected financial information for our operating segments for the periods indicated:
(In thousands)
| Storage and Terminal Solutions | Utility and Power Infrastructure | Process and Industrial Facilities | Corporate | Total | |||||||||||||||||||||||||
| Three Months Ended September 30, 2024 | |||||||||||||||||||||||||||||
Total revenue (1) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Cost of revenue | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
| Gross profit (loss) | ( | ||||||||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||
(1) Total revenues are net of inter-segment revenues which are primarily Process and Industrial Facilities and Storage and Terminal Solutions and were $0.9 million for the three months ended September 30, 2024. | |||||||||||||||||||||||||||||
| Storage and Terminal Solutions | Utility and Power Infrastructure | Process and Industrial Facilities | Corporate | Total | |||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||
Total revenue (1) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Cost of revenue | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
| Gross profit (loss) | ( | ||||||||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||
| Total assets by segment | |||||||||||
| September 30, 2024 | June 30, 2024 | ||||||||||
| Storage and Terminal Solutions | $ | $ | |||||||||
| Utility and Power Infrastructure | |||||||||||
| Process and Industrial Facilities | |||||||||||
| Corporate | |||||||||||
| Total Segment Assets | $ | $ | |||||||||
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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. Although we believe that our expectations regarding future events are based on reasonable assumptions, we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2024.
These forward-looking statements include, among others, such things as:
•amounts and nature of future project awards, revenue and margins from each of our segments;
•our ability to generate sufficient cash from operations, access our credit facility, or raise cash in order to meet our short and long-term capital requirements;
•our ability to comply with the covenants in our credit agreement;
•the impact to our business from economic, market or business conditions in general and in the natural gas, oil, petrochemical, industrial and power industries in particular;
•the impact of interest rates and inflation on our operating expenses and our business operations;
•the likely impact of new or existing regulations or market forces on the demand for our services;
•the impact to our business from disruptions to supply chains, inflation and availability of materials and labor;
•our expectations with respect to the likelihood of a future impairment;
•our expectations regarding pending litigation; and
•expansion and other trends of the industries we serve.
These statements are based on certain assumptions and analyses we made in light of our experience and our historical trends, current conditions and expected future developments as well as other factors we believe are appropriate. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including:
•any risk factors discussed in this Form 10-Q, Form 10-K for the fiscal year ended June 30, 2024, and in our other filings with the Securities and Exchange Commission;
•economic, market or business conditions in general and in the natural gas, power, oil, petrochemical, industrial and power industries in particular;
•the transition to renewable energy sources and its impact on our current customer base;
•the under- or over-utilization of our work force;
•delays in the commencement or progression of major projects, whether due to permitting issues or other factors;
•reduced creditworthiness of our customer base and the higher risk of non-payment of receivables;
•the inherently uncertain outcome of current and future litigation;
•the adequacy of our reserves for claims and contingencies; and
•changes in laws or regulations, including the imposition, cancellation or delay of tariffs on imported goods.
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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, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise.
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RESULTS OF OPERATIONS
Overview
We operate our business through three reportable segments:
•Storage and Terminal Solutions: primarily consists of engineering, procurement, fabrication, and construction services related to cryogenic and other specialty tanks and terminals for LNG, NGLs, hydrogen, ammonia, propane, butane, liquid nitrogen/liquid oxygen, and liquid petroleum. We also perform work related to traditional aboveground crude oil and refined product storage tanks and terminals. This segment also includes terminal balance of plant work, truck and rail loading/offloading facilities, and marine structures as well as storage tank and terminal maintenance and repair. Finally, we manufacture and sell precision engineered specialty tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals.
•Utility and Power Infrastructure: primarily consists of engineering, procurement, fabrication, and construction services to support growing demand for LNG utility peak shaving facilities. We also perform traditional electrical work for public and private utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, and upgrades and maintenance including live wire work. Work may also include emergency and storm restoration services. We also provide construction services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configurations.
•Process and Industrial Facilities: primarily consists of plant maintenance, repair, and turnarounds in the downstream and midstream markets for energy clients including refining and processing of crude oil, fractionating, and marketing of natural gas and natural gas liquids. We also perform engineering, procurement, fabrication, and construction for refinery upgrades and retrofits for renewable fuels, including hydrogen processing, production, loading and distribution facilities. We also construct thermal vacuum test chambers for aerospace and defense industries and other infrastructure for industries including petrochemical, sulfur, mining and minerals primarily in the extraction of non-ferrous metals, cement, agriculture, wastewater treatment facilities and other industrial customers.
Operational Update
Our backlog has remained steady at a near-record level of $1.4 billion, and a trailing twelve-month book-to-bill ratio of 1.1x, reflecting a robust pipeline of projects and sustained demand for our services. We have demonstrated strong project execution across our portfolio. Our liquidity has grown to $181 million, and our debt position remains at zero. Although we experienced a decline in revenue year over year, the decline was primarily due to the completion of a large renewable diesel project. As we progress through the year, our business remains poised for significant growth, particularly in the Storage and Terminal Solutions segment, driven by the increasing demand for specialty storage solutions for LNG and NGLs. We expect this growth will result in improved fixed cost absorption, operating leverage, and margin improvement in the coming periods.
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Backlog
We define backlog as the total dollar amount of revenue that we expect to recognize as a result of performing work that has been awarded to us through a signed contract, limited notice to proceed ("LNTP") 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 LNTP, we include the entire scope of work in our backlog if we conclude that the likelihood of the full project proceeding is probable. 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, 2024:
| Storage and Terminal Solutions | Utility and Power Infrastructure | Process and Industrial Facilities | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Backlog as of June 30, 2024 | $ | 798,255 | $ | 379,697 | $ | 251,521 | $ | 1,429,473 | |||||||||||||||
| Project awards | 81,651 | 34,365 | 31,961 | 147,977 | |||||||||||||||||||
| Revenue recognized | (78,239) | (55,912) | (31,428) | (165,579) | |||||||||||||||||||
| Backlog as of September 30, 2024 | $ | 801,667 | $ | 358,150 | $ | 252,054 | $ | 1,411,871 | |||||||||||||||
Book-to-bill ratio(1) | 1.0 | x | 0.6 | x | 1.0 | x | 0.9 | x | |||||||||||||||
(1)Calculated by dividing project awards by revenue recognized.
In the Storage and Terminal Solutions segment, we booked $81.7 million of project awards during the first quarter of fiscal 2025. This segment includes significant opportunities for storage infrastructure projects related to natural gas, LNG, ammonia, NGLs and other forms of renewable energy. We believe LNG and ammonia projects in particular will be key growth drivers for this segment. Bidding activity on LNG and ammonia projects has been strong and we expect that to continue.
In the Utility and Power Infrastructure segment, we booked $34.4 million of project awards during the first quarter of fiscal 2025. Our opportunity pipeline for LNG peak shaving projects continues to be promising; however those awards, while significant, can be less frequent. Power delivery opportunities are expected to be driven over the long-term by increasing electrical demand and the related electrical grid requirements. Project opportunities and bidding activity are strong for both the power delivery portion of the business and LNG peak shaving.
In the Process and Industrial Facilities segment, we booked $32.0 million of project awards during the first quarter of fiscal 2025. During the quarter, we were notified of a five-year renewal of a refinery maintenance contract. We continue to see demand for thermal vacuum chambers in the coming quarters, as well as increasing opportunities in mining and minerals, chemicals, and renewables.
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. There is an inherent lag between the time a project is awarded and when it begins to have a material impact on revenue. This lag normally extends up to six months or longer in unique circumstances, depending on finalization of scopes, contracts, permits, and facility process requirements. Additionally, awards for larger construction projects may be recognized as revenue over a multi-year period as the projects may take a few years to complete.
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Three months ended September 30, 2024 Compared to the Three months ended September 30, 2023
The information below is an analysis of our consolidated results for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. See Results of Operations by Business Segment below for additional information describing the performance of each of our reportable segments.
Consolidated Results of Operations
| Three Months Ended | |||||||||||||||||||||||
| September 30, | 2024 v 2023 | ||||||||||||||||||||||
| 2024 | 2023 | $ | % | ||||||||||||||||||||
| Revenue | $ | 165,579 | $ | 197,659 | $ | (32,080) | (16) | % | |||||||||||||||
| Cost of revenue | 157,766 | 185,800 | (28,034) | (15) | % | ||||||||||||||||||
| Gross profit | 7,813 | 11,859 | (4,046) | (34) | % | ||||||||||||||||||
| Selling, general and administrative expenses | 18,580 | 17,113 | 1,467 | 9 | % | ||||||||||||||||||
| Operating loss | (10,767) | (5,254) | (5,513) | 105 | % | ||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (89) | (325) | 236 | (73) | % | ||||||||||||||||||
| Interest income | 1,572 | 150 | 1,422 | 948 | % | ||||||||||||||||||
| Other | 61 | 2,262 | (2,201) | (97) | % | ||||||||||||||||||
| Net loss | $ | (9,223) | $ | (3,167) | $ | (6,056) | 191 | % | |||||||||||||||
Revenue - The decrease in overall revenue of $32.1 million, or 16%, was primarily attributable to reduced revenue volumes in our Storage and Terminal Solutions and Process and Industrial Facilities segments, partially offset by an increase in Utility and Power Infrastructure.
Gross profit - Gross profit in the first quarter of fiscal 2025 decreased $4.0 million, or 34%, compared to the first quarter of fiscal 2024. Gross margin decreased to 4.7% for the first quarter of fiscal 2025 compared to 6.0% for the first quarter of fiscal 2024. While project execution remained strong, gross margins were negatively impacted by the under-recovery of construction overhead costs on the lower revenues.
Selling, general and administrative expenses - The increase in SG&A expenses of $1.5 million, or 9%, is primarily due to an increase in operations headcount required to support the strong market demand and growth in our business.
Interest income - The increase in interest income of $1.4 million is primarily due to an increase in our cash balance. In fiscal 2024 we invested excess cash balances in interest-bearing cash accounts.
Other income - The decrease in other income of $2.2 million is primarily due to the sale of our Burlington, Ontario facility in the first quarter of fiscal 2024. We received $2.5 million in net proceeds from the sale of the facility.
Provision for income taxes - Our effective tax rates for the three months ended September 30, 2024 and September 30, 2023 were zero. The effective tax rates during both periods were impacted by valuation allowances of $1.3 million and $0.2 million, respectively, placed on deferred tax assets generated during the quarters. We placed a valuation allowance on our deferred tax assets due to the existence of a cumulative loss over a three-year period. We will continue to place valuation allowances on newly generated deferred tax assets and will realize the benefit associated with the deferred tax assets for which the valuation allowance has been provided to the extent we generate taxable income in the future.
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Results of Operations by Business Segment
| Three Months Ended | |||||||||||||||||||||||
| September 30, | 2024 v 2023 | ||||||||||||||||||||||
| Dollars in thousands | 2024 | 2023 | $ | % | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Storage and Terminal Solutions | $ | 78,239 | $ | 90,144 | $ | (11,905) | (13) | % | |||||||||||||||
| Utility and Power Infrastructure | 55,912 | 32,395 | 23,517 | 73 | % | ||||||||||||||||||
| Process and Industrial Facilities | 31,428 | 75,120 | (43,692) | (58) | % | ||||||||||||||||||
Total revenue (1) | $ | 165,579 | $ | 197,659 | $ | (32,080) | (16) | % | |||||||||||||||
(1) Total revenues are net of inter-segment revenues which are primarily Process and Industrial Facilities and Storage and Terminal Solutions and were $0.9 million for the three months ended September 30, 2024. | |||||||||||||||||||||||
| Gross profit (loss) | |||||||||||||||||||||||
| Storage and Terminal Solutions | $ | 4,697 | $ | 4,953 | $ | (256) | (5) | % | |||||||||||||||
| Utility and Power Infrastructure | 1,307 | 3,697 | (2,390) | (65) | % | ||||||||||||||||||
| Process and Industrial Facilities | 1,997 | 5,078 | (3,081) | (61) | % | ||||||||||||||||||
| Corporate | (188) | (1,869) | 1,681 | (90) | % | ||||||||||||||||||
| Total gross profit | $ | 7,813 | $ | 11,859 | $ | (4,046) | (34) | % | |||||||||||||||
| Operating Income (loss) | |||||||||||||||||||||||
| Storage and Terminal Solutions | $ | (872) | $ | 324 | $ | (1,196) | (369) | % | |||||||||||||||
| Utility and Power Infrastructure | (2,669) | 2,149 | (4,818) | (224) | % | ||||||||||||||||||
| Process and Industrial Facilities | 231 | 1,991 | (1,760) | (88) | % | ||||||||||||||||||
| Corporate | (7,457) | (9,718) | 2,261 | (23) | % | ||||||||||||||||||
| Total Operating Loss | $ | (10,767) | $ | (5,254) | $ | (5,513) | 105 | % | |||||||||||||||
Storage and Terminal Solutions
Storage and Terminal Solutions revenues decreased by $11.9 million, or 13%, in the three months ended September 30, 2024 compared to the same period last year, driven by reduced volume of work for flat bottom tank new build, repair and maintenance work, partially offset by increases in LNG storage and specialty vessel projects.
Storage and Terminal Solutions gross profit decreased by $0.3 million, or 5%, in the three months ended September 30, 2024 compared to the same period last year. The segment gross margin was 6.0% for the three months ended September 30, 2024 compared to segment gross margin of 5.5% in the same period last year. Project execution was strong for the segment in the current quarter; however, both periods were impacted by the under-recovery of construction overhead costs.
Utility and Power Infrastructure
Utility and Power Infrastructure revenues increased by $23.5 million, or 73%, in the three months ended September 30, 2024 compared to the same period last year. The increase is primarily attributable to higher volumes of work for LNG peak shaving projects, partially offset by decreases in power delivery work.
Utility and Power Infrastructure gross profit decreased by $2.4 million, or 65%, in the three months ended September 30, 2024 compared to the same period last year. The segment gross margin was 2.3% for the three months ended September 30, 2024 compared to 11.4% in the same period last year. The segment gross margin in the current period was impacted by the under-recovery of construction overhead costs, primarily in our power delivery service line. Additionally, segment gross margin in the first quarter of fiscal 2024 benefited from favorable project closeouts.
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Process and Industrial Facilities
Process and Industrial Facilities revenues decreased by $43.7 million, or 58%, in the three months ended September 30, 2024 compared to the same period last year. The decrease is primarily attributable to lower revenue volumes for a now completed large renewable diesel project. We believe this reduction in revenue is temporary given our strong backlog, including a significant gas processing construction project that is expected to commence in late fiscal 2025.
Process and Industrial Facilities gross profit decreased by $3.1 million, or 61%, in the three months ended September 30, 2024 compared to the same period last year. The segment gross margin was 6.4% for the three months ended September 30, 2024 compared to 6.8% in the same period last year. Gross margins in both periods were negatively impacted by under-recovery of construction overhead costs.
Corporate
Unallocated corporate expenses net to $7.5 million during the three months ended September 30, 2024 compared to $9.7 million in the same period last year. The decrease of $2.3 million was primarily due to reduced legal expenses in the first quarter of fiscal 2025. Legal expenses incurred during the first quarter of fiscal 2024 included costs related to a jury trial that resulted in a verdict in our favor.
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, 2024 were unrestricted cash and cash equivalents on hand, capacity under our ABL Facility, and cash generated from operations. Unrestricted cash and cash equivalents at September 30, 2024 totaled $124.6 million and availability under the ABL Facility totaled $56.6 million, resulting in total liquidity of $181.2 million. During the first quarter of fiscal 2025, liquidity increased $11.6 million primarily as a result of cash provided by operating activities.
The following table provides a reconciliation of restricted cash and unrestricted cash in the Consolidated Balance Sheets to the total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows, as well as availability and total liquidity (in thousands):
| September 30, 2024 | June 30, 2024 | |||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 149,610 | $ | 140,615 | ||||||||||
| Less: Restricted cash | 25,000 | 25,000 | ||||||||||||
| Unrestricted cash | 124,610 | 115,615 | ||||||||||||
| Availability | 56,642 | 53,988 | ||||||||||||
| Total Liquidity | $ | 181,252 | $ | 169,603 | ||||||||||
The following table provides a summary of changes in our liquidity for the three months ended September 30, 2024 (in thousands):
| Liquidity at June 30, 2024 | $ | 169,603 | |||
| Cash provided by operating activities | 11,918 | ||||
| Capital expenditures | (1,944) | ||||
| Increase in availability under ABL Facility | 2,654 | ||||
| Cash used by financing activities | (1,189) | ||||
| Effect of exchange rate changes on cash | 210 | ||||
| Liquidity at September 30, 2024 | $ | 181,252 | |||
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:
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◦some fixed-price customer contracts allow for significant upfront billings at the beginning of a project, which temporarily increases liquidity near term;
◦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;
◦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 significant retentions. Retentions are normally held until certain contractual milestones are achieved; therefore, collection may extend beyond one year;
•the mix of work can impact liquidity. In periods where fixed-price contracts comprise a larger portion of revenue, liquidity may increase. In periods where time and material contracts comprise a larger portion of revenue, liquidity may decrease;
•other changes in working capital, including the timing of tax payments and refunds; and
•capital expenditures.
Other factors that may impact both short and long-term liquidity include:
•contract disputes;
•collection issues, including those caused by weak commodity prices, economic slowdowns or other factors which can lead to credit deterioration of our customers;
•borrowing constraints under our ABL Facility and maintaining compliance with all covenants contained in the ABL Facility;
•letters of credit. We have certain contracts with customers, and may have future contracts, that permit the customer to obtain, at the customer's expense, letters of credit as a form of security under the contract. Letters of credit reduce our borrowing availability under the Company's ABL Facility;
•acquisitions and disposals of businesses or assets; and
•purchases of shares under our stock buyback program.
ABL Credit Facility
On September 9, 2021, the Company and our primary U.S. and Canada operating subsidiaries entered into an asset-based credit agreement, which was most recently amended on May 3, 2024 (as amended, the "ABL Facility"), with Bank of Montreal, as Administrative Agent, Swing Line Lender and a Letter of Credit Issuer. The maximum amount of loans under the ABL Facility is limited to $90.0 million. 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 guaranteed by substantially all of our U.S. and Canadian subsidiaries and are secured by a first lien on all our assets under the ABL Facility. The ABL Facility matures, and any outstanding amounts become due and payable, on September 9, 2026.
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. The borrowing base is recalculated on a monthly basis and at September 30, 2024, our borrowing base was $61.4 million. During fiscal 2024, the Company repaid all outstanding borrowings under the ABL Facility. The Company had $4.8 million in letters of credit outstanding as of September 30, 2024, which resulted in availability of $56.6 million under the ABL Facility.
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Borrowings under the ABL Facility bear interest through maturity at a variable rate based upon, at our option, an annual rate of either a base rate (“Base Rate”), an Adjusted Term Secured Overnight Financing Rate ("Adjusted Term SOFR"), or at the Canadian Prime Rate, plus an applicable margin. The Adjusted Term SOFR is defined as (i) the SOFR plus (ii) 11.448 basis points for a one-month tenor and 26.161 basis points for a three-month tenor; provided that the Adjusted Term SOFR cannot be below zero. The Base Rate is defined as a fluctuating interest rate equal to the greater 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) Adjusted Term SOFR for one month period plus 1.00%; or (iv) 1.00%. Depending on the amount of average availability, the applicable margin is between 1.00% to 1.50% for Base Rate and Canadian Prime Rate borrowings, which includes either U.S. or Canadian prime rate, and between 2.00% and 2.50% for Adjusted Term SOFR borrowings. Interest is payable either (i) monthly for Base Rate or Canadian Prime Rate borrowings or (ii) the last day of the interest period for Adjusted Term SOFR borrowings, as set forth in the ABL Facility. 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 limit 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 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. We were in compliance with all covenants of the ABL Facility as of September 30, 2024.
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Cash Flows Provided by Operating Activities
Cash provided by operating activities for the three months ended September 30, 2024 totaled $11.9 million. Major components of cash flows provided by operating activities for the three months ended September 30, 2024 are as follows:
Net Cash Provided by Operating Activities
(In thousands)
| Net loss | $ | (9,223) | |||
Loss on sale of property, plant and equipment | 68 | ||||
| Depreciation and amortization | 2,515 | ||||
| Stock-based compensation | 2,311 | ||||
| Other non-cash expenses | 38 | ||||
| Cash effect of changes in operating assets and liabilities | 16,209 | ||||
| Net cash provided by operating activities | $ | 11,918 | |||
Cash effect of changes in operating assets and liabilities at September 30, 2024 in comparison to June 30, 2024 include the following:
•Accounts receivable, excluding credit losses recognized during the period and including retention amounts classified as non-current, increased by $5.1 million during the three months ended September 30, 2024, which decreased 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") decreased $2.1 million, which increased cash flows from operating activities. Billings on uncompleted contracts in excess of costs and estimated earnings ("BIE") increased $33.3 million, which increased 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.
•Accounts payable decreased by $3.9 million during the three months ended September 30, 2024, which decreased cash flows from operating activities. These operating liabilities can fluctuate based on business volumes; the timing of vendor payments; accruals; lease commencement, lease payments, expiration, or termination of operating leases; and other timing differences.
•Inventories, income taxes receivable, prepaid expenses, other current assets, operating right-of-use lease assets and other assets, non-current, increased $7.3 million during the three months ended September 30, 2024, which decreased cash flows from operating activities. These operating assets can fluctuate based on business volumes; the amount of long-term retention receivables; 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; and other timing differences.
•Accrued wages and benefits, accrued insurance, operating lease liabilities, other accrued expenses, and other liabilities, non-current decreased by $2.9 million during the three months ended September 30, 2024, which decreased cash flows from operating activities. These operating liabilities can fluctuate based on the timing of payroll, distributions, business volumes; vendor payments; accruals; lease commencement, lease payments, expiration, or termination of operating leases; and other timing differences.
Cash Flows Used by Investing Activities
Investing activities used $1.9 million of cash in the three months ended September 30, 2024 due to capital expenditures.
Cash Flows Used by Financing Activities
Financing activities used $1.2 million of cash in the three months ended September 30, 2024 primarily due to the repurchase of common stock for payment of statutory taxes due on equity-based compensation.
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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
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 three months ended September 30, 2024 and have no current plans to repurchase stock. As of September 30, 2024, there were 1,349,037 shares available for repurchase under the Stock Buyback Program. The terms of our ABL Facility 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.
Treasury Shares
We had 338,015 treasury shares as of September 30, 2024 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 2024 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 2024 Annual Report on Form 10-K.
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, 2024, filed with the Securities and Exchange Commission. For more information on market risk, see Part II, Item 7A in our fiscal 2024 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).
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, 2024. 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, 2024.
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, 2024.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to a number of legal proceedings. See Part I., Item 1. Financial Statements, Note 6 - Commitments and Contingencies, Litigation, for a description of our material ongoing litigation.
Item 1A. Risk Factors
There were no material changes in our Risk Factors from those reported in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
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. As of September 30, 2024, 1,349,037 shares were available for repurchase under the stock buyback program. 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 stock buyback program in the first quarter of fiscal 2025 and have no current plans to repurchase stock.
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
During the three months ended September 30, 2024, none of our directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or Non-Rule 10b5-1, as each term is defined under Item 408(a) of Regulation S-K.
A member of our Board of Directors, Jim Miller, purchased $5,000 of shares of our common stock through the 2011 Employee Stock Purchase Plan during the quarter ended September 30, 2024. The 2011 Employee Stock Purchase Plan may be considered a "Non-Rule 10b5-1 trading arrangement" under Item 408 of Regulation S-K.
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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 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 7, 2024 | By: /s/ Kevin S. Cavanah | ||||||
| Kevin S. Cavanah Vice President and Chief Financial Officer | ||||||||
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