This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Form 10-Q which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements. The words "believes," "intends," "expects," "anticipates," "projects," "estimates," "predicts" and similar expressions are also intended to identify forward-looking statements.
These forward-looking statements include, among other things, such items as:
•the amounts and nature of future project awards, revenues and margins for each of our segments;
• our ability to generate sufficient cash from operations, access our credit facility or raise cash to meet our short and long-term capital needs;
•our ability to comply with the covenants of our credit agreement;
•the impact on our business of general economic, market or trading conditions and in the oil, natural gas, power, petrochemical, agricultural and mining sectors in particular;
•the impact of inflation on our operating expenses and business operations;
•the likely impact of new or existing regulations or market forces on demand for our services;
•the impact on our business of supply chain disruptions, inflation and the availability of materials and labor;
•our expectations regarding the likelihood of future impairment; and
•Expansion and other trends in the industries we serve.
These statements are based on certain assumptions and analyses we made in light of our experience and our historical trends, current conditions and expected future developments as well as other factors we believe are appropriate. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including: •any risk factors discussed in this Form 10-Q, Form 10-K for the fiscal year ended
June 30, 2022, and in our other filings with the Securities and Exchange Commission;
• economic, market or business conditions in general and in the oil, natural gas, electricity, petrochemicals, agriculture and mining sectors in particular;
•the transition to renewable energies and its impact on our current customers;
•under- or over-utilization of our workforce;
• delays in the start-up or progress of major projects, whether due to permit issues or other factors;
•the lower solvency of our customers and the increased risk of non-payment of receivables;
•the inherently uncertain outcome of current and future litigation;
•the adequacy of our provisions for claims and contingencies; and
• changes in laws or regulations, including the imposition, cancellation or deferral of tariffs on imported goods.
Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences or effects on our business operations. We assume no obligation to update publicly, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise. -19- --------------------------------------------------------------------------------
Table of Contents RESULTS OF OPERATIONS Overview We report our results of operations through three reportable segments: Utility and Power Infrastructure, Process and Industrial Facilities, and Storage and Terminal Solutions. •Utility and Power Infrastructure: consists of power delivery services provided to investor-owned utilities, including construction of new substations, upgrades of existing substations, transmission and distribution line installations, upgrades and maintenance, as well as emergency and storm restoration services. We also provide engineering, fabrication, and construction services for LNG utility peak shaving facilities, and provide construction and maintenance services to a variety of power generation facilities, including natural gas fired facilities in simple or combined cycle configuration. •Process and Industrial Facilities: primarily serves customers in the downstream and midstream petroleum industries who are engaged in refining crude oil and processing, fractionating, and marketing of natural gas and natural gas liquids. We also serve customers in various other industries such as petrochemical, sulfur, mining and minerals companies engaged primarily in the extraction of non-ferrous metals, aerospace and defense, cement, agriculture, and other industrial customers. Our services include plant maintenance, turnarounds, industrial cleaning services, engineering, fabrication, and capital construction. •Storage and Terminal Solutions: consists of work related to aboveground crude oil and refined product storage tanks and terminals. We also include work related to cryogenic and other specialty storage tanks and terminals, including LNG, liquid nitrogen/liquid oxygen, liquid petroleum, hydrogen and other specialty vessels such as spheres in this segment, as well as work related to marine structures and truck and rail loading/offloading facilities. Our services include engineering, fabrication, construction, and maintenance and repair, which includes planned and emergency services for both tanks and full terminals. Finally, we offer tank products, including geodesic domes, aluminum internal floating roofs, floating suction and skimmer systems, roof drain systems and floating roof seals. Operational Update Bidding activity, project award volumes, and revenue volumes all continued to improve from the two year period impacted by the pandemic and we are now beginning to see these trends positively affect our operating results. Repair and maintenance activities have increased significantly and returned to near pre-pandemic levels. In addition, capital project award opportunities have strengthened during the past year, which has resulted in more project awards and is beginning to drive higher revenue volumes. We expect these trends to continue and expect significant project awards in the second quarter of fiscal 2023. Gross margins are also improving as lower margin projects bid competitively during the pandemic continue to be completed and are being replaced by projects with an improved margin profile. Higher revenue volumes have also resulted in improved overhead cost recovery, which is critical to improved gross margin and operating income performance. We have still not reached the level of revenue that allows us to fully recover construction overhead costs and to adequately leverage SG&A costs, but we expect to see significant progress towards those objectives as we progress through fiscal 2023. -20- --------------------------------------------------------------------------------
Adjusted net loss
In order to more clearly describe our basic profitability, the following tables present our results of operations after certain adjustments:
Reconciliation of Net Loss to Adjusted Net Loss(1) (In thousands, except per share data) Three Months Ended
2022 2021 Net loss, as reported
$ (6,512) $ (17,538)Restructuring costs 1,287 605 Accelerated amortization of deferred debt amendment fees(2) - 1,518 Tax impact of above adjustments (331) (546) Deferred tax asset valuation allowance(3) 1,394 - Adjusted net loss $ (4,162) $ (15,961)Loss per share, as reported $ (0.24) $ (0.66)Adjusted loss per share $ (0.15) $ (0.60)(1)This table presents non-GAAP financial measures of our adjusted net loss and adjusted loss per share for the three months ended September 30, 2022and 2021. The most directly comparable financial measures are net loss and loss per share, respectively, presented in the Condensed Consolidated Statements of Income. We have presented these non-GAAP financial measures because we believe they more clearly depict our core operating results during the periods presented and provide a more comparable measure of our operating results to other companies considered to be in similar businesses. Since adjusted net loss and adjusted loss per share are not measures of performance calculated in accordance with GAAP, they should be considered in addition to, rather than as a substitute for, the most directly comparable GAAP financial measures. (2)Interest expense in fiscal 2022 included $1.5 millionof accelerated amortization of deferred debt amendment fees. (3)See Item 1. Financial Statements, Note 7 - Income Taxes, for more information about the deferred tax asset valuation allowance.
We have presented Adjusted EBITDA, which we define as net loss before restructuring costs, stock-based compensation, interest expense, income taxes, and depreciation and amortization, because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses. We believe that the line item on our Condensed Consolidated Statements of Income entitled "Net loss" is the most directly comparable GAAP measure to Adjusted EBITDA. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. Adjusted EBITDA, as we calculate it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure is not a measure of our ability to fund our cash needs. As Adjusted EBITDA excludes certain financial information compared with net loss, the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions that are excluded. Our non-GAAP performance measure, Adjusted EBITDA, has certain material limitations as follows:
•It does not include restructuring costs. Restructuring costs represent significant costs that have been incurred and are often cash expenses. Therefore, any measure that excludes restructuring costs has significant limitations.
•It does not include stock-based compensation. Stock-based compensation represents material amounts of equity that are awarded to our employees and directors for services rendered. While the expense is non-cash, we release vested shares out of our treasury stock, which has historically been replenished by using cash to periodically repurchase our stock. Therefore, any measure that excludes stock-based compensation has material limitations. •It does not include interest expense. Because we have borrowed money to finance our operations and acquisitions, pay commitment fees to maintain our credit facility, and incur fees to issue letters of credit under the credit facility, interest expense is a necessary and ongoing part of our costs and has assisted us in generating revenue. Therefore, any measure that excludes interest expense has material limitations. •It does not include income taxes. Because the payment of income taxes is a necessary and ongoing part of our operations, any measure that excludes income taxes has material limitations. -21- --------------------------------------------------------------------------------
•It does not include depreciation or amortization expense. Because we use capital and intangible assets to generate revenue, depreciation and amortization expense is a necessary element of our cost structure. Therefore, any measure that excludes depreciation or amortization expense has material limitations.
A reconciliation of adjusted EBITDA and net loss follows:
Three Months Ended September 30, September 30, 2022 2021 (In thousands) Net loss
$ (6,512) $ (17,538)Restructuring costs 1,287 605 Stock-based compensation 2,055 1,869 Interest expense 372 1,999 Benefit for federal, state and foreign income taxes -
Depreciation and amortization 3,642 4,052 Adjusted EBITDA $ 844
Three months completed
Consolidated revenue was
$208.4 millionfor the three months ended September 30, 2022, compared to $168.1 millionin the same period last year. On a segment basis, revenue increased in the Process and Industrial Facilities and Storage and Terminal Solutions segments by $42.7 millionand $9.9 million, respectively. The increases were partially offset by a decrease in revenue of $12.3 millionin the Utility and Power Infrastructure segment. Consolidated gross profit increased to $13.0 millionin the three months ended September 30, 2022compared to a gross loss of $3.5 millionin the same period last year. Gross margin (loss) increased to 6.2% in the three months ended September 30, 2022compared to (2.1%) in the same period last year. Gross margins in the first quarter of fiscal 2023 improved significantly from recent quarters, but were still negatively impacted by the under recovery of construction overhead costs. Gross margins in the first quarter of fiscal 2022 were negatively impacted by a lower than previously forecasted margin on a large capital project and an unfavorable settlement of a claim with a customer, both in the Utility and Power Infrastructure segment, and by lower than previously forecasted margins on a limited number of projects in the Storage and Terminal Solutions segment. In addition, gross margins in the first quarter of fiscal 2022 were also negatively impacted by lower than forecasted volumes, which led to under recovery of construction overhead costs.
Consolidated SG&A expenses were
We recorded restructuring costs of
Interest expense was
$0.4 millionin the three months ended September 30, 2022compared to $2.0 millionin the three months ended September 30, 2021. Interest expense in the three months ended September 30, 2022consisted primarily of interest on debt outstanding, unused capacity fees, amortization of deferred debt issuance costs, and letter of credit fees. Interest expense in fiscal 2022 included $1.5 millionof accelerated amortization of deferred debt amendment fees associated with terminating our prior credit facility. Our effective tax rates for the three months ended September 30, 2022and September 30, 2021were 0.0% and 23.1%, respectively. The effective tax rate during the first quarter of fiscal 2023 was impacted by a $1.4 millionvaluation allowance placed on deferred tax assets generated during the quarter. We placed a full valuation allowance on our deferred tax assets in the second quarter of fiscal 2022 due to the existence of a cumulative loss over a three-year period. We will continue to place valuation allowances on newly generated deferred tax assets and will realize the benefit associated with the deferred tax assets for which the valuation allowance has been provided to the extent we generate taxable income in the future, or cumulative losses are no longer present and our future projections for growth or tax planning strategies are demonstrated. -22- --------------------------------------------------------------------------------
For the three months ended
Utility and power infrastructure
Revenue for the Utility and Power Infrastructure segment was
$44.9 millionin the three months ended September 30, 2022compared to $57.2 millionin the same period last year. The decrease is primarily due to lower volumes of LNG peak shaving work, partially offset by higher volumes of power delivery and power generation work. The segment gross margin (loss) was 3.8% in fiscal 2023 compared to (10.7%) in fiscal 2022. The segment gross margin for the first quarter of fiscal 2023 was negatively impacted by low revenue volume, which led to the under recovery of construction overhead costs, and work on a large capital project with a previously reduced gross margin. The fiscal 2022 segment gross margin was negatively impacted by an increase in the forecasted costs to complete a large capital project, which resulted in a decrease in gross profit of $5.9 million. The change in estimate was principally due to unexpected equipment repairs during commissioning that delayed the scheduled completion and increased the estimated costs to complete. In addition, segment gross margin was negatively impacted by an unfavorable settlement of a claim with a customer, and low volumes, which led to the under recovery of construction overhead costs.
Industrial processes and installations
Revenue for the Process and Industrial Facilities segment was
$86.6 millionin the three months ended September 30, 2022compared to $43.9 millionin the same period last year. This 97.3% increase reflects the improved market environment and was primarily due to higher volumes of refinery maintenance and turnaround work, work on a capital project at a biodiesel facility, and higher volumes of midstream gas processing capital work. The segment gross margin was 5.0% for the three months ended September 30, 2022compared to 6.5% in the same period last year. The segment gross margin in the first quarter of fiscal 2023 was negatively impacted by work on a midstream gas processing project that experienced increases in forecasted costs to complete in the prior year, which reduced the remaining margin realized on the project. In addition, revenue volumes were still too low to fully recover construction overhead costs, which negatively impacted segment gross margin.
The segment’s gross margin in fiscal 2022 was negatively impacted by low revenue volume, resulting in under-recovery of construction overhead.
Storage and terminal solutions
Storage and Endpoint Solutions revenue was
The segment gross margin was 9.8% for the three months ended
September 30, 2022compared to 0.6% in the same period last year. The fiscal 2023 segment gross margin was positively impacted by strong project execution, partially offset by low revenue volume, which led to under recovery of construction overhead costs. The fiscal 2022 segment gross margin was negatively impacted by lower than previously forecasted margins on a limited number of projects and a higher percentage of lower margin maintenance work. Segment gross margin in fiscal 2022 was also negatively impacted by low revenue volume, which led to under recovery of construction overhead costs.
Unallocated corporate expenses were
We define backlog as the total dollar amount of revenue that we expect to recognize as a result of performing work that has been awarded to us through a signed contract, limited notice to proceed or other type of assurance that we consider firm. The following arrangements are considered firm:
• fixed prices;
•minimum customer commitments on cost-plus price agreements; and
• certain temporal and material arrangements in which the estimated value is firm or can be estimated with a reasonable degree of certainty both in terms of timing and amounts.
For long-term maintenance contracts with no minimum commitments and other established customer agreements, we include only the amounts that we expect to recognize as revenue over the next 12 months. For arrangements in which we have received a limited notice to proceed ("LNTP"), we include the entire scope of work in our backlog if we conclude that the likelihood of the full project proceeding as high. For all other arrangements, we calculate backlog as the estimated contract amount less revenue recognized as of the reporting date.
The following table provides a summary of the changes in our backlog for the three months ended
Process and Storage and Utility and Power Industrial Terminal Infrastructure Facilities Solutions Total (In thousands) Backlog as of June 30, 2022 $ 102,059
$ 292,287 $ 195,114 $ 589,460Project awards 42,618 59,982 132,028 234,628 Revenue recognized (44,870) (86,628) (76,933) (208,431) Backlog as of September 30, 2022 $ 99,807 $ 265,641 $ 250,209 $ 615,657Book-to-bill ratio(1) 0.9 0.7 1.7 1.1
(1) Calculated by dividing project awards by revenue recognized during the period.
The backlog has increased
In the Utility and Power Infrastructure segment, backlog decreased by 2.2% as we booked
$42.6 millionof project awards during the first quarter of fiscal 2023, primarily related to power delivery work. Our opportunity pipeline for LNG peak shaving projects continues to be promising, however those awards, while significant, can be less frequent. While we did not book any LNG peak shaver projects in the first quarter of fiscal 2023, early in the second quarter, the Company was awarded the engineering, procurement, and construction of upgrades being made to an existing LNG peak shaving facility that include a new gas liquefaction system and vaporization system. Project opportunities and bidding activity are strong for both the power delivery portion of the business and LNG peak shaving. In the Process and Industrial Facilities segment, backlog decreased by 9.1% as we booked $60.0 millionof project awards during the first quarter of fiscal 2023. Client spending related to refinery maintenance and turnaround operations has returned to near-normal pre-pandemic levels. We continue to see strong demand for thermal vacuum chambers in the coming quarters, as well as increasing opportunities in mining and minerals, and chemicals. In addition, we are seeing more opportunities for midstream gas work, including some larger scale projects. In the Storage and Terminal Solutions segment, backlog increased by 28.2% as we booked $132.0 millionof project awards during the first quarter of fiscal 2023. We received an LNTP on a significant ethane/ethylene tank EPC project during the quarter and booked several other storage projects related to a variety of other refined products. We were also awarded a large-scale specialty vessel project early in the second quarter of fiscal 2023. This segment includes significant opportunities for storage infrastructure projects related to natural gas, LNG, ammonia, hydrogen, NGLs and other forms of renewable energy. We believe LNG and hydrogen projects in particular will be key growth drivers for this segment. Bidding activity on LNG projects has been strong and we have been positioning ourselves for growth in hydrogen by entering into key relationships, such as the signing of a memorandum of understanding ("MOU") with Korea Gas Corporation in August 2022to support South -24- --------------------------------------------------------------------------------
Korea'sdevelopment of a hydrogen economy as it transforms itself from natural gas and the signing of a MOU with Chart Industries, Inc. in January of 2021 to support the development of hydrogen solutions. Oil and natural gas producers have remained cautious with capital spending, which has limited opportunities in crude oil tanks and terminals. However, the price of crude oil and natural gas increased significantly since the world emerged from the COVID-19 pandemic, which, if sustained, may lead to higher production volumes and more opportunities for crude oil tanks, terminals and export facilities in the coming quarters. Project awards in all segments are cyclical and are typically the result of a sales process that can take several months or years to complete. It is common for awards to shift from one period to another as the timing of awards is dependent upon a number of factors including changes in market conditions, permitting, off take agreements, project financing and other factors. Backlog volatility may increase for some segments from time to time when individual project awards are less frequent, but more significant. The level of awards presented above only represents an interim period and may not be indicative of full year awards. Seasonality and Other Factors Our operating results can exhibit seasonal fluctuations, especially in our Process and Industrial Facilities segment, for a variety of reasons. Turnarounds and planned outages at customer facilities are typically scheduled in the spring and the fall when the demand for energy is lower. Within the Utility and Power Infrastructure segment, transmission and distribution work is generally scheduled by the public utilities when the demand for electricity is at its lowest. Therefore, revenue volume in the summer months is typically lower than in other periods throughout the year. Our business can also be affected, both positively and negatively, by seasonal factors such as energy demand or weather conditions including hurricanes, snowstorms, wildfires and abnormally low or high temperatures. Some of these seasonal factors may cause some of our offices and projects to close or reduce activities temporarily. In addition to the above noted factors, the general timing of project starts and completions could exhibit significant fluctuations. Accordingly, results for any interim period may not necessarily be indicative of operating results for the full year. Other factors impacting operating results in all segments come from decreased work volume during holidays, work site permitting delays or customers accelerating or postponing work. The differing types, sizes, and durations of our contracts, combined with their geographic diversity and stages of completion, often results in fluctuations in our operating results.
Our overhead structure is generally fixed. Significant fluctuations in revenue generally result in over or under recovery of fixed overhead, which can materially impact our gross margin and profitability.
CASH AND CAPITAL RESOURCES
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, 2022were 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, 2022totaled $14.3 millionand availability under the ABL Facility totaled $42.3 million, resulting in total liquidity of $56.6 million.
The following table provides a reconciliation of cash, cash equivalents and restricted cash in the condensed consolidated balance sheets to the total cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows (in thousands) :
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