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Matrix Service Co (NASDAQ:MTRX)
Q1 2021 Earnings Call
Nov 5, 2020, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Matrix Service Company First Quarter Fiscal 2021 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to one of your speakers today, Ms. Kellie Smythe. Ma'am, please go ahead.

Kellie Smythe -- Senior Director, Investor Relations

Thank you. Good morning, and welcome to Matrix Service Company's First Quarter of Fiscal 2021 Earnings Call. Participants on today's call will include John Hewitt, President and Chief Executive Officer; and Kevin Cavanah, Vice President and Chief Financial Officer. The presentation materials we will be referring to during the webcast today can be found under Events and Presentations on the Investor Relations section of matrixservicecompany.com. Before we begin, please let me remind you that on today's call, the company may make various remarks about future expectations, plans and prospects for Matrix Service Company that constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our annual report on Form 10-K for our fiscal year ended June 30, 2020, and in subsequent filings made by the company with the SEC. To the extent the company utilizes non-GAAP measures, reconciliations will be provided in various press releases, periodic SEC filings and on the company's website.

I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

John R. Hewitt -- President and Chief Executive Officer

Thank you, Kellie. Good morning, everyone, and thank you for joining us. At Matrix, we are, first and foremost, a people business. And as such, everything we do begins and ends with a focus on the health and safety of our employees and everyone within our sphere of influence. The way our engineers design our clients' infrastructure to the technology and other project elements we procure through construction, commissioning and maintenance in our offices, on our project sites and even while we're away from work, we work hard to put health and safety front and center to ensure that no one gets hurt. We know achieving 0 incident safety performance is possible. In the first quarter of fiscal 2021, even with the burden of added protocols related to COVID-19, our employees have remained focused. And through their strong performance, we completed the quarter with a total recordable incident rate of 0. I'd like to thank and congratulate our employees for watching out for one another and achieving this important goal. Turning now to our first quarter discussion.

The pandemic has continued to impact many of our clients, especially those in the energy industry, who were managing through low product demand and rigid health and safety protocols as well as political uncertainty, all of which has resulted in delayed and reduced spending priorities. In spite of reduced revenue volumes, our project execution and consolidated direct margins have been very strong. Overall bidding opportunities are improving and our project opportunity funnel is returning to normal. However, client decision-making in this environment may affect the timing of awards and starts. It is our expectations that bookings and revenue will improve as we move into the second half of this fiscal year. This improvement in business conditions, combined with our restructuring and continuing cost reduction efforts, position us to deliver better results. We remain focused on safety, winning work and executing our backlog. We will keep a strong balance sheet through controlling costs, minimizing capital expenditures, managing cash flow and maintain minimal or no debt. As is typical in our business, a revenue shortfall can create under-recovery of construction overhead costs. Construction overhead costs include estimating and proposal resources, operations staff, such as project managers, construction managers, field costs and accounting personnel, quality control, safety, company-owned equipment, insurance and divisional and site facilities.

These resources are critical to bidding and winning work, fulfilling our commitments for new work, existing backlog and normal day-to-day activities. Finding the right balance between the appropriate level of construction overhead and against the opportunities and their timing and in the market is a continuous challenge, particularly since certain costs, such as equipment fleet, facilities, IT infrastructure, insurance premiums, for example, are more difficult to shed rapidly if opportunities do not materialize. Further, we must ensure that we have the skill and expertise to provide high-quality service to our clients as ultimately it is this resource, our people, that they rely on to deliver safe, quality project work. As you are aware, during the latter part of fiscal 2020, we reduced construction overhead costs based on our view of the business and future revenue opportunities in the market. We did so based on our assessment of the market impact from the crude oil price war between Saudi Arabia and Russia and the uncertainty brought on by the global pandemic and the presidential election cycle. However, given the extended nature of the pandemic and its severe impact on energy and industrial clients as well as the global economy in general, which nobody fully anticipated, the revenue available to us this quarter was even lower than we assessed. In such instances, when revenue volumes are not as expected, there will be quarters where we do not achieve complete absorption of construction overhead costs. Of course, the opposite is true when revenue volumes exceed our expectations.

In today's unique and uncertain market, better visibility into revenue volumes beyond our contracted work is critical to our efforts to find the right balance between cost and opportunity. We are continuing to adjust our cost structure as we gain greater visibility into the timing of awards and starts for the balance of the fiscal year. The lower spending by our clients across the segments we serve has been indicative of the extremely challenging market conditions created by the global pandemic they face, including reduced energy demand, minimal GDP growth and uncertainty related to the U.S. presidential election. Having said that and while our energy and industrial clients have, in some cases, delayed capital projects and spread maintenance expenditures over longer periods, we do have significant near-term opportunities. While this may not materially impact our second quarter results, new awards and project starts will provide better visibility into volumes and overhead recovery for the balance of the fiscal year. Despite the challenges we face in this current environment, our overall cost structure has been materially reduced as compared to the prior year.

As a result, we are confident in our ability to exit this period as a stronger company. We're also confident in the long-term opportunities we have in the markets we serve and in our ability to capitalize on those opportunities. Through our subsidiaries, Matrix PDM Engineering, Matrix Service Inc. and Matrix NAC, we're designed to execute both small- and large-scale projects across diverse end markets. Our construction subsidiaries, Matrix Service Inc. and Matrix NAC, operate under a double-breasted structure, which allows us to provide either union or nonunion construction and project services. This separation in organizational structure is a strategic advantage for us and is critical to our success on how we approach the markets and our ability to serve our clients across all of their geographies. Matrix PDM Engineering's legacy in energy and industrial engineering, including more highly complex infrastructure, such as cryogenic storage and thermal vacuum chambers, reaches as far back as the 1960s. Matrix PDM not only supports our two construction subsidiaries but also works independently to provide FEL and FEED and engineering-led expertise to clients worldwide. Several Matrix PDM Engineering employees serve in leadership and other positions with key industry associations that set the standards for engineering and construction, including the American Petroleum Institute, the American Concrete Institute and the Construction Industry Institute. Operating our engineering subsidiary as a stand-alone entity is a strategic approach that allows Matrix PDM Engineering to support construction business in union and nonunion environments as well as execute projects with other partners, where their expertise aligns with a client-specific execution desires.

Collectively, this structure enables us to pursue broader opportunities and service our clients with the full strength of the enterprise across North America and in select international markets. For example, in the LNG peak shaving space, with a Matrix brand as a market leader, our ability to team our Matrix PDM cryogenic process and terminal design expertise with either of our construction entities allows us to provide a single point solution across the entire geography of North America and elsewhere. The identification and development of these opportunities for the enterprise will provide strong organic growth for the business, not only in the LNG peak shaving market but also other forms of renewable energy work.

Turning now to our markets and services and overall outlook. This quarter represents the first quarter where results are reported under our new reporting segmentation. As a reminder, this segmentation is designed to provide greater perspective into existing and new end markets, our strategic growth areas and to better represent our long-term vision. We believe there are significant long-term opportunities across each of our operating segments. In the near term, uncertainty from global energy markets, macroeconomic effects from the pandemic, health and safety of our clients' employees and political outcomes of the elections just held have all led to delayed and reduced spending in some of our markets. These market conditions have been particularly impactful in crude storage, terminals and refinery work and were further impacted by sequential hurricanes across the Gulf Coast. Clean energy and natural gas liquids infrastructure requests for proposals, including LNG, hydrogen and NGLs, are robust. Utility spending in our core markets is increasing. Mining and mineral work is strengthening with commodity pricing. And aerospace project opportunities remain strong.

Our project pipeline includes over $8 billion in projects across all three segments, $4 billion have anticipated award dates in fiscal 2021, excluding day-to-day maintenance and small project award activity. This represents an opportunity pipeline approaching normal volumes. We believe that many of the larger infrastructure projects will move forward with the majority of these potential awards occurring in the third and fourth quarter of fiscal 2021. We are expecting second quarter awards in the Utility and Power Infrastructure and Process and Industrial Facilities that have the potential to return our book-to-bill above 1. In our Utility and Power Infrastructure segment, we continue to benefit from our industry-leading position providing EPC services for utility-grade LNG peak shaving and related infrastructure. We currently have several LNG peak shaving and liquefaction facilities in our project opportunity pipeline that we expect to bid over the next six months. In power delivery, our improved performance and strengthened business development structure are resulting in increased activities as we continue to grow this part of the business.

Spending on upgrades in power generation has slowed. However, while larger build-outs of gas-fired power plants may be limited, we are seeing opportunity for smaller power peak shaving projects. In the near term, we are expecting continued backlog growth in this segment. In Process and Industrial Facilities, while the award of large-scale cryogenic natural gas processing facilities has slowed as a result of the current market environment, we are penetrating parts of the gas market, where we have not traditionally had a significant presence. For example, our engineering teams are currently responding to a number of opportunities for smaller projects, such as compressor stations. We're also seeing a marked increase in capital project opportunities with our mining and minerals clients as demand for precious industrial and rare earth minerals improve. Some of these opportunities are in response to the U.S. focus on ensuring secure and reliable supplies of critical minerals, which, among other things, are vital to renewable energy infrastructure, including solar, wind and batteries as well as electric vehicles and other consumer goods. Other opportunities, which are in various stages of the proposal and award cycle, are the result of gold prices, which are hovering near an all-time high, as well as copper prices, which have rebounded. Existing refinery and maintenance accounts are beginning to return to more normal levels. And we are seeing increased opportunities for nested maintenance services as refiners continue to look for strategies to trim operating costs. We're also seeing additional bidding activity as refiners take advantage of incentives to increase production of biofuels. Major turnaround spending continues to be delayed.

We also continue to benefit from opportunities in other markets accounted for in this segment. For example, in aerospace, where Matrix is considered the leader in the EPC of thermal vacuum chambers, as we near completion of our work on the thermal vacuum chamber for Lockheed Martin at their new gateway center in Littleton, Colorado, we also actively -- we're also actively involved in the development of multiple vacuum chambers for use in aerospace testing and other scientific applications. One such engineering and construction project, which has been awarded to Matrix PDM Engineering, is for Johns Hopkins Applied Physics Laboratory in Laurel, Maryland. This chamber, which relies on DynaVac integration and technology, is in support of their NASA-sponsored project to send Dragonfly rotorcraft lander expedition to Saturn's largest moon, Titan, as part of NASA's New Frontier program. Finally, as a result of our strategic focus on the chemical and petrochemical space, we are seeing a higher number of inquiries and requests for proposals due to continued demand for their products. Specifically, our pipeline includes multiple opportunities to establish master service agreements with Tier one chemical and petrochemical clients who are seeking single-point EPFC solutions for small- to mid-scale projects with qualified service providers that are more responsive to their needs rather than the large traditional EPC providers. In our Storage Solutions segment, the opportunities for continued growth in the demand for cleaner energy sources like LNG and hydrogen are significant.

Timing on these projects are mixed. The award cycle should strengthen in the back half of our fiscal year. As we have mentioned before, our subsidiary, Matrix Services, has been selected for Eagle LNG's Jacksonville LNG export facility, which we announced in early 2020. While this project is not yet in backlog, it continues to move forward, and we anticipate beginning engineering in this fiscal year. In the Caribbean, we are receiving multiple inquiries for long-term maintenance and hurricane repair projects from terminal owners. Additionally, with low stable natural gas prices, strong interest also exists in this geographic area for LNG regasification facilities that will allow utilities as well as commercial and industrial facilities to generate their own power from LNG delivered in ISO containers from the U.S. Elsewhere in North America, several opportunities in crude oil tank and terminal construction, maintenance and repair as well as NGL storage are also being pursued. In summary, it is our expectation that bookings and revenue will improve as we move into the second half of this fiscal year, backlog will flatten in the second quarter and start to turn up in the second half of the year. And we expect to achieve a consolidated book-to-bill of greater than 1.0 by fiscal year-end. As I explained earlier, we have taken numerous steps to rightsize portions of the business to reduce our cost structure, and we will continue to manage the appropriate balance between cost and winning and executing our work. Our restructuring and cost reduction efforts position us to deliver better results as market conditions improve. We will keep a strong balance sheet through controlling costs, minimize capital expenditures, managing cash flow and maintaining minimal or no debt. This strong balance sheet will provide us flexibility when making capital allocation decisions, including opportunistic share repurchases.

I'll now turn the call over to Kevin.

Kevin S. Cavanah -- Chief Financial Officer

Thank you, John. Before I get to the quarter results, I want to elaborate on the cost reduction efforts John has -- John just discussed. In the last half of fiscal 2020, the company took steps necessary to reduce our annual overhead cost structure by $45 million or about $11 million on a quarterly basis. The quarter we just completed is the first quarter in which those cost reduction efforts were fully in place. And the actual reduction in overhead costs was substantially higher than the estimated amount. SG&A in the quarter was $18.1 million as compared to $23.7 million in the first quarter of last year, a realized reduction of $5.6 million. Our construction overhead costs, which are included in cost of revenue, were $10.4 million lower in the first quarter of fiscal 2021 as compared to the first quarter of last year. This is a total reduction of almost $16 million or 25% on a quarter-over-quarter basis.

These cost reductions include lower variable costs, such as incentive compensation. In addition to the actions taken in fiscal 2020, we have and will continue to look for opportunities to reduce costs further until we see project awards and revenue volume recover. Moving on to the quarterly results. Consolidated revenue was $183 million for the first quarter of fiscal 2021 compared to $338 million in the same period of the prior fiscal year. Revenue in all three segments has been impacted by the current market environment. Project execution was strong again this quarter as our operating personnel continue to work effectively in this tough environment. The consolidated direct gross margin earned was at the upper end of our normal gross margin expectations. As I just discussed, significant cost reductions were realized in the quarter. However, we still had significant under-recovery of construction overhead costs as a result of the low revenue volume. While we expect our quarterly revenue run rate to improve, we can't say with certainty when and how quickly we return to pre-COVID levels. We must continue to conservatively manage our cost structure, look for additional opportunities for reductions. But we must do so with a balanced approach based upon our assessment of the project opportunity funnel. Consolidated gross profit decreased to $14.4 million in the three months ended September 30, 2020, compared to $32.5 million in the same period in the prior fiscal year. Gross margin decreased to 7.9% in the first quarter of fiscal 2021 compared to 9.6% in the same period in fiscal 2020.

As I mentioned earlier, we realized a 23.6% decrease in SG&A costs as a result of planned cost reductions as well as significantly lower incentive compensation. Corporate costs are included within SG&A. They were $6.9 million in the quarter as compared to $7.8 million in the first quarter last year, a reduction of 12.3%. Despite the lower cost, SG&A as a percent of revenue was 9.9% in the quarter. While our SG&A percent exceeds our target, we expect to see it improve as revenue recovers and additional cost reductions are made. Over the last 10 years, we have achieved an average SG&A of 6.7% of revenue, which is better than the majority of our peers. We will continue to work to optimize our SG&A cost structure and to leverage that cost structure as we grow our revenue with an ultimate goal of achieving an SG&A below 6% of revenue. As a result of the low revenue volume, the company incurred an operating loss of $3.5 million in the first quarter as compared to positive operating income of $8.8 million in the prior year first quarter. The effective tax rate in the quarter was an unusual negative 9.8% as a result of a deferred tax asset adjustment. We continue to expect a normal effective tax rate of 27%. For the quarter, we had a net loss of $3 million or $0.12 per fully diluted share compared to net income of $6.2 million or $0.22 per fully diluted share in the first quarter of the prior year.

Adjusted EBITDA was $1.9 million in the first quarter as compared to $14 million last year. Our backlog decreased $80 million in the first quarter to $678 million as significant project awards continued to be delayed. We have $103 million of project awards in the quarter, resulting in a book-to-bill of 0.6. As John mentioned, the strength of the project funnel provides the company an opportunity to return to a book-to-bill above one as we move through fiscal 2021. Before I get into segment results, we changed our segment reporting effective at the beginning of the fiscal year. To assist with understanding the impact of this change, the company filed a Form 8-K on September 30, 2020, which provided restated segment quarterly and annual disclosures for fiscal years 2019 and 2020. In addition, backlog and project award information were provided for those same periods. Let's start with the Utility and Power Infrastructure segment.

This segment is essentially the former Electrical Infrastructure segment plus liquefied natural gas utility peak shaving, which was previously included in the old Storage Solutions segment. Revenue for the Utility and Power Infrastructure segment was $61 million in the three months ended September 30, 2020, compared to $48 million in the same period last year. The increase is due to a higher volume of LNG utility peak shaving work, partially offset by lower volumes of power delivery and power generation work. The segment gross margin was 11.4% in fiscal 2021 compared to a negative 0.4% in fiscal 2020. The fiscal 2021 segment gross margin was positively impacted by strong project execution on peak shaving and power delivery projects. We are encouraged by our growing market share in LNG peak shaving and results in the power delivery business, which have benefited from our business improvement plan implemented last fiscal year. We remain focused on increasing volumes and expanding our geographic reach in order to achieve consistent gross margins at these levels.

Operating income was $4.7 million as compared to an operating loss of $2.8 million in the first quarter of last year. Our Process and Industrial Facilities segment consists of our former Oil Gas & Chemical segment as well as work in the industries such as aerospace and mining and minerals that were previously reported in the Industrial segment. Revenue for the Process and Industrial Facilities segment was $46 million in the first quarter compared to $155 million in the same period last year. The decrease is due to our strategic exit from the domestic iron and steel industry in the third quarter of fiscal 2020 and lower volumes of turnaround, refinery maintenance and midstream gas processing work, all of which have been negatively impacted by the COVID-19 pandemic. The segment gross margin was 8% for the three months ended September 30, 2020, compared to 8.8% in the same period last year. Project execution in fiscal 2021 has been strong, but gross margin was negatively impacted by lower volumes, which led to the under-recovery of construction overhead cost. As a result of the lower revenue volume, operating income in the quarter was only $0.1 million as compared to $6.7 million in the prior year first quarter.

The Storage and Terminal Solutions segment consists of the former Storage Solutions segment minus the LNG peak shaving work, which is now included in the Utility and Power Infrastructure segment. Revenue for the Storage and Terminal Solutions segment was $76 million in the first quarter compared to $136 million last year. The decrease in segment revenue is primarily the result of lower volumes of tank and crude oil terminal capital work and repair and maintenance work. As a result of COVID-19, global energy demand and regulatory issues, we continue to experience slower project award activity, which has negatively impacted revenue volume. Segment gross margin was 5% in the three months ended September 30, 2020, compared to 14.6% last year. The fiscal 2021 segment gross margin was negatively impacted by lower volumes, which led to the under-recovery of construction overhead costs and lower than previously forecasted margin on a crude oil storage terminal project nearing completion. Storage and Terminal Solutions incurred an operating loss of $1.4 million in the quarter compared to operating income of $12.8 million in the prior year first quarter.

Moving to our balance sheet and liquidity. At June 30, 2020, the company had a cash balance of $82 million, debt of $9 million and liquidity of $134 million. During the first quarter, the company used $18 million of cash to fund working capital needs that resulted from the timing of milestone billings on larger capital projects. Our approach of maintaining a strong balance sheet and good liquidity has been a consistent and important part of our strategy. This includes operating with a revolving credit facility that is primarily utilized to provide letters of credit for certain project and insurance needs and to provide funding of working capital needs. As the credit facility was scheduled to mature in a little over a year, the company just completed an extension of the facility to November 2, 2023. The terms of the updated facility will be disclosed in the Form 10-Q to be filed this week. We believe the extended credit facility, along with our strong balance sheet, provides us with the liquidity we need to both operate in this current environment and to grow the business as the markets recover. Our capital allocation priorities for fiscal 2021 are to fund working capital as needed, to fund limited capital expenditures, which we expect to be less than 1% of revenue, and to opportunistically repurchase stock. While growth through synergistic tuck-in acquisitions remain an important part of our long-term strategy, we will not be pursuing any acquisitions until the business environment improves. In closing, first quarter revenue of $183 million and a loss per share of $0.12 were impacted by the COVID-19 pandemic.

The market environment driving those results still exist today. But as John said, we are seeing signs of improvement. While the timing of the recovery remains uncertain and the second quarter will continue to be impacted by this pandemic market, we are encouraged by the project pipeline, which includes over $8 billion in projects across all three segments, $4 billion of which have anticipated award dates in fiscal 2021. As a result, we expect improved project awards, increased revenues and improved operating results in the second half of the fiscal year.

I will now turn the call back to John.

John R. Hewitt -- President and Chief Executive Officer

Thank you, Kevin. The challenges of the pandemic and its effect on global energy demand and macroeconomics has certainly not been kind to our business. These challenges have tested us. But I want to assure you that their impact will pass and we will emerge as an even stronger company. We have been proactive and successful at protecting the health and safety of our most valuable resource, our employees and the people who work for our business partners and clients. We also continue to proactively review and adjust our cost structure in order to find the right balance between the available market and where we see the opportunities lining up across our operating segments. This is a time of transition for our markets, society and our business, and we are making that transition. It remains our goal to provide safe, high-quality services, grow the company, be thoughtful and conservative with our balance sheet, drive better and more consistent financial outcomes and create value for all of our stakeholders. These steps have are taken -- these steps we have taken over the past few years are instrumental to achieving these objectives. Among them have been expanding our engineering capability with the acquisition of Houston Interests, which, among other things, accelerated our full tank and terminal growth and extended services in the midstream natural gas processing markets as well as the chemical and petrochemical markets; modifying our EPC power generation construction to package work, thus minimizing risk and increasing margins; exiting the domestic iron and steel market to improve our consolidated financial performance, safety outcomes, working capital demand and portfolio cyclicality; investing in our people and systems to ensure we are offering best-in-class people and to better focus business development efforts of the enterprise to the growth areas of the company. There's no more evident than this in our commanding position in small- to mid-scale LNG peak shaving, export and bunkering facilities and the growth opportunities it presents for us. Resegmenting the company to Utility and Power Infrastructure, Process and Industrial Facilities and Storage and Terminal Solutions to provide a clear picture of our direction; reorganizing our power delivery business to improve performance and prepare for growth and expansion as it becomes a larger element of our business; sustaining our bank agreement to provide, among other things, more flexibility for capital allocation as we work to balance the needs for working capital, letters of credit, capex and share repurchases in these uncertain times. Modifying elements of the organizational design and structure for efficiency while reducing costs to reflect not only the short-term challenges brought on by the pandemic but also to prepare the business for better outcomes with a strong opportunity pipeline we see in front of us. This process continues today. We are confronting the pandemic-instigated challenges as well as other critical business issues, including diversity, equity and inclusion and sustainability with strength and are clearly focused on the opportunities in front of us. In closing, I want to thank all of our stakeholders for your continued commitment and support. I'll now open the call up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of John Franzreb with Sidoti & Company.

John Edward Franzreb -- Sidoti & Company -- Analyst

Good morning, gentlemen. I'd like to start with the quarterly results, first and foremost, a couple of quick questions there. How much of the revenue decrease year-over-year represents the exiting of the steel and iron business?

Kevin S. Cavanah -- Chief Financial Officer

So our revenues were down about $155 million quarter-over-quarter. About half of that is related to our exit of iron and steel. We had a larger capital project going on in that piece of the business in the first quarter of last year. The other half is related to the current market we're in.

John Edward Franzreb -- Sidoti & Company -- Analyst

Okay. And the utility business seems to be operating at the higher end of your gross margin bandwidth. Is there anything in particular that we should note there that why it's doing so well?

Kevin S. Cavanah -- Chief Financial Officer

Well, it's a combination of things. So the peak shaving projects, we've really got a good reputation there for that type of work. And we've moved that into that segment now that we saw the work we're doing there is producing a good, reasonable margin. The -- and secondly, the power delivery business, we talked last year or last couple of calls about what we're doing there to try to improve operating performance. And so this is the second quarter in a row that, that piece of the business has seen good margins. So we're continuing to see some benefit from the changes we put into the business. For that segment, we need to get the volumes up to make sure that we can consistently see that type of margin.

John Edward Franzreb -- Sidoti & Company -- Analyst

Okay. And on the quarter, you realized $16 million in cost savings relative to your run rate of $11 million. And you mentioned in your commentary additional cost cuts. How should I think about that $16 million going forward? Is that a one-time-only kind of affair? Or how should we think about that?

Kevin S. Cavanah -- Chief Financial Officer

We're going to do our best to keep it at that level or lower, looking for other opportunities until we see backlog awards start to hit, revenue volumes increasing, so we have more confidence going forward. The cuts we made last year were pretty significant. But I think our operations groups and our support groups are continuing to do a good job of looking for opportunities to further reduce costs. And another impact on the savings is, in an environment where operating results aren't good, you're not seeing incentive compensations. So that's lower this year.

John Edward Franzreb -- Sidoti & Company -- Analyst

All right. And I'll squeeze one last question before I get back in the queue. You said there's an $8 billion opportunity pipeline. $4 billion, you think, would be realized in the -- or awarded in the third and fourth quarter. John, what do you think is a good hit rate? I'm sure you want all of it. But what do you think would be a good target of that $3 billion to $4 billion?

John R. Hewitt -- President and Chief Executive Officer

Yes. That pipeline is -- that $8 billion extends out probably 12 -- over 12 months. About half of that are projects that we have handicapped that could be awarded between now and the end of June of '21, so within our fiscal year. And our hit rate is usually anywhere between 20% to 30% on projects. Usually, the larger the project, the lower -- the smaller the amount of competitors in those projects. And so that gives us an opportunity to amp up that hit rate a little bit. But thinking about 20% to 30% is probably pretty reasonable on average. And that -- the other thing to think about, too, is that $4 billion is really probably more along the lines of kind of larger capital projects. When I say larger, like $25 million and up, and -- but there's the day-to-day stuff that kind of runs through the company. Some of it hits backlog, some of it never hits backlog because it's in and out in the quarter. And so when you see the award cycle in Q1 of around $100 million, that's -- in this environment is kind of that normal sort of, what I'd call, ham and egg-ing our way through the quarter by picking up those smaller maintenance and construction projects.

John Edward Franzreb -- Sidoti & Company -- Analyst

Got it. Okay, I'm going to go back in the queue.

Operator

[Operator Instructions] Our next question comes from the line of Will Jellison with D.A. Davidson.

William Jellison -- D.A. Davidson & Co -- Analyst

Good morning, John and Kevin. Kevin, regarding the $18 million cash outflow this quarter, was all of it attributable to the milestone billings? And then how much of that could we expect to come back throughout the fiscal year?

Kevin S. Cavanah -- Chief Financial Officer

Yes. So if you look at our working capital accounts, the net amount of the change in the quarter was, I think, $18.4 million. So that is the change in cash in the quarter. I would expect, based upon the jobs that those milestone billings relate to, that we would see that come back in the second and third quarters.

William Jellison -- D.A. Davidson & Co -- Analyst

Okay. Great. That's helpful. Thank you. And then looking at the Process and Industrial segment, as you're exiting the domestic steel and iron business, do you plan to reallocate the resources freed up from that within the Process and Industrial segment or to other segments of the business?

Kevin S. Cavanah -- Chief Financial Officer

The majority of those -- some of those resources are reallocated to other project opportunities. A large percentage of those resources have been let go.

William Jellison -- D.A. Davidson & Co -- Analyst

Understood. Okay. Thank you. And then lastly, you mentioned that some of the SG&A benefit came from lower incentive-based comp. I'm just wondering, at the manager level of your different operations, how are those managers incentivized? Is it based on revenue or profit or something different?

Kevin S. Cavanah -- Chief Financial Officer

Fundamentally, it's off of operating income.

William Jellison -- D.A. Davidson & Co -- Analyst

Thank you. I'll get back in queue.

Operator

And we do have a follow-up question from the line of John Franzreb with Sidoti & Company.

John Edward Franzreb -- Sidoti & Company -- Analyst

Yes. I just want to talk about the reset of the credit agreement. Can you talk a little bit about the Board's appetite for repurchasing stock? It certainly, hopefully, can't get much lower. But what are the thought -- what's the thought process there? That would be helpful.

Kevin S. Cavanah -- Chief Financial Officer

Yes. So that was something we tried to achieve with the credit facilities to give ourselves the flexibility to repurchase stock. So we said we're going to be opportunistic about that and we will consider it. We haven't made a final decision about when and if and how much we're going to repurchase. But it's definitely something that we're continually assessing. And we'll continue to do that as we move through the rest of the fiscal year.

John R. Hewitt -- President and Chief Executive Officer

Yes. The flexibility there, John, I mean, the credit agreement, as Kevin said, has given us more flexibility. But there's still a balance there between meeting some covenant ratios and operating income and all that ties together. And so as we get a picture -- better picture on the year and start to realize the booking levels that we think are coming in the near term and then that will give us a better perspective on how we're managing our cash overall and how we will be able to get in the market to repurchase shares. So we want to make sure we're balancing all of those factors and -- before we make a heavy commitment into repurchasing shares at this level. Certainly, we think that is -- would be a capital allocation priority for us to do that. But we want to make sure we're balancing that against our other demands for our balance sheet.

John Edward Franzreb -- Sidoti & Company -- Analyst

John, I just want to make sure I didn't hear something improperly in that response. Are there still covenant restrictions based on operating income that prevents you from buying back stock?

Kevin S. Cavanah -- Chief Financial Officer

No. No, there are not. We've -- there was previously some restrictions under the old facility. Our primary purpose for the amendment was to extend the facility. But we also have altered the calculation of a couple of those covenants so that we have the flexibility to not even include share repurchases in the fixed charge coverage ratio under certain circumstances. And so it gives us the flexibility we need. So if we decided, tomorrow it's time for us to start buying stock, we can do it.

John Edward Franzreb -- Sidoti & Company -- Analyst

Okay. Thanks, Kevin, that's helpful. Okay. That's it for now. Thank you for taking my questions.

Operator

And I'm showing no further questions at this time. And I would like to turn the conference back over to Mr. John Hewitt for any further remarks.

John R. Hewitt -- President and Chief Executive Officer

Thank you, everybody, for attending our conference call today, and wish everybody to stay safe and healthy in this environment. Thank you very much.

Kevin S. Cavanah -- Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Kellie Smythe -- Senior Director, Investor Relations

John R. Hewitt -- President and Chief Executive Officer

Kevin S. Cavanah -- Chief Financial Officer

John Edward Franzreb -- Sidoti & Company -- Analyst

William Jellison -- D.A. Davidson & Co -- Analyst

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