Matrix Service Co (MTRX) Q2 2021 Earnings Call Transcript

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Matrix Service Co (MTRX -0.85%)
Q2 2021 Earnings Call
Feb 9, 2021, 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 Conference Call to discuss Results for the Second Quarter Fiscal 2021. [Operator Instructions] Please be advised that today's conference may be recorded.

I'd now like to hand the conference over to your host today, Ms. Kellie Smythe, Senior Director of Investor Relations. Please go ahead.

Kellie Smythe -- Senior Director, Investor Relations

Good morning and welcome to Matrix Service Company's second quarter 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 the 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 of 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 I'd like to open with a thank you to our employees for continued strong performance and safety through the first two quarters of fiscal 2021. Even with the increased pressure of protecting our employees from the COVID-19 pandemic, our total recordable incident rate through these first six months is 0.19. This outstanding performance is truly a testament to the strong leadership and focus by our teams. Now, turning to our business discussion, as we communicated on our last earnings call, we expected second quarter results to further -- to be further affected by the continued impact COVID-19 has had on health and safety protocols, energy demand and global economies.

These impacts resulted in reduced revenues and disrupted the timing of awards on what we consider to be a strong opportunity pipeline. Our direct operational results have been strong across the business with bottom line results weighed down by lower volumes, under absorption of construction overheads, additional restructuring costs, and a challenging Storage project, which is now materially complete. I do want to make the point that while we have made significant cuts in SG&A and construction overhead, the level of deal -- those cuts that have been made to support the conversion of the extensive opportunity pipeline into backlog and then revenue. We expect both awards and revenue to improve as we move through the balance of fiscal 2021.

Therefore, we will also see improvement in overhead absorption as revenues return. This imbalance between construction overhead and current revenue creates some short-term pain, but is critical to generate much improved earnings in the future and in the long-term the earnings potential of the business has been greatly improved. Related to our award cycle, our consolidated book-to-bill for the quarter and year-to-date remains below 1. However, through the end of January, award activity is beginning to improve. Process and industrial facilities is currently above 1 for the year. And when combined with utility and power infrastructure, the backlog level has remained fairly stable over the past four quarters as we continue to expand our service offering in these two segments. I would also note that even though the book-to-bill and utility and power infrastructure for the quarter was at 0.3, the overall book-to-bill for the segment is heavily dependent on larger awards in LNG peak shaving, the size of these projects, combined with the burn rate of existing LNG peak shaving backlog has a significant impact on the segment ratio.

We have several solid LNG peak shaving opportunities, which we expect to positively impact the segment awards by the end of the fiscal year. As it relates to the Storage and Terminal Solutions backlog, this segment, primarily driven by larger awards and changes in the awards cycle, can create the most variability. However, based on the quality of the diversified opportunities that we are working on, our expectation is that this segment will reflect increasing strength as we move through the year. Kevin will review the financial results in detail in a few minutes. But before he does, I'd like to highlight several key objectives that we have accomplished over the past few months that have us well positioned as our end markets recover. Importantly, as of today, we have materially completed our overall cost reductions in organizational and restructuring actions.

While we believe we have made all the appropriate adjustments required to fit the future opportunity potential, we will always look for area to improve our efficiency and competitiveness. As we look to the future in the energy and infrastructure markets, the accelerated drive to reduce carbon emissions globally should act as a strong tailwind over the coming years. We believe that we are firmly positioned to support this initiative across our segments in power delivery, gas-fired power generation, LNG peak shaving, natural gas processing and small to mid-scale LNG facilities as well as the application of our cryogenic tank terminal and general industrial construction expertise to the expanding hydrogen market. To that end, in January, we executed a Memorandum of Understanding with Chart Industries for the development of standardized hydrogen solutions which I will discuss shortly.

In the first quarter of this fiscal year, we implemented a new reporting segmentation to provide greater transparency into existing markets as well as strategic growth areas. This change provides a better understanding of our long-term vision and enables us in the second quarter to change our Global Industrial Classification Standard or GICS code from energy equipment and services to industrial construction and engineering. This classification now provides a more accurate representation of our work. Finally, we have and will continue to keep a strong balance sheet by controlling costs, minimizing capex spending, managing cash flow, and maintaining minimal or no debt. Since the beginning of the pandemic, we have focused on finding the right balance between working capital needs, capex spend, project letter of credit requirements, bank covenants, capital allocation alternatives, and credit facility constraints driven by reduced earnings.

As noted, our opportunity pipeline is full, and we must be in position to support working capital demand until earnings improve which capital demand until earnings improve, which in turn will reduce credit facility capacity constraints. Even more importantly will be letter of credit availability to support the award of larger capital projects in our pipeline. We are well-positioned financially to support the award and revenue improvement in vision. During times like this, it would be easy to lose focus on our various ESG initiatives across the enterprise. But we recognize the critical importance this focus has on our success in attracting and retaining best-in-class people supporting the projects and business objectives of our clients and investors, identifying and acting on strategic opportunities, and ensuring organizational resilience and long-term sustainable growth.

This includes our work to advance diversity, equity and inclusion across our company, industry, communities and in every sphere where we can have influence. And while there is still much to be done, we have implemented enterprisewide training focused on inclusive practices and unconscious bias, performing third-party pay equity analysis, evaluated our recruiting and employment practices to look for ways to attract and engage an increasingly diverse workforce, assured our policies and practices meet the standard for fairness and equity, engaged in various community and industry initiatives and events including in a nationwide movement CEO action for inclusion and diversity, and establish metrics against which we can benchmark our progress.

We will publish our first sustainability report this coming fall following our fiscal 2021 year-end. Moving on to our operating segments and services, as the world transitions toward new cleaner forms of energy and more electrification, we are also transitioning our services and expertise to create solutions to the evolving infrastructure needs of our customers both near and long term. This is demonstrated by our leadership position in small to mid-sized LNG terminals, capabilities in utility and power infrastructure and renewable energy opportunities such as hydrogen. Across our segments, our multi-billion dollar opportunity pipeline find us projects we will bid, are bidding, have already bid or are negotiating contract terms remain strong with anticipated awards across our segments accelerating as we move through the last half of the fiscal year.

In power generation and delivery services, which is reported in our Utility and Power Infrastructure segment, we continue to see significant revenue opportunities in LNG peak shaving. Additionally, our expectations are that as the new US administration pursues its proposed infrastructure plan and regulatory changes, there will be significant opportunities in transmission, distribution and substations and general electrical work to address the country's aging infrastructure. Renewable projects such as wind and solar will require electrical tie-ins to transformers and substations and the overall grid while the drive toward energy efficiency and lower carbon generation assets are likely to result in increased projects for load volume such a simple cycle units, reciprocating engine projects, battery backup, hydrogen, carbon capture and combined heat and power.

In our Process in Industrial Facilities segment, headwinds persist in the refining market as our clients continue to stretch the time between turnaround events as a result of the current demand environment. However, we do expect refining activities and turnarounds and maintenance to strengthen in the last two quarters of this fiscal year. In addition, projects associated with sulfur reduction, biofuels and refinery conversions will accelerate in future periods. Our expansion in the chemicals and petrochemicals is also gathering momentum as more opportunities are becoming an increasing component of our pipeline. Project opportunities include Storage-related solutions, consumer waste chemicals, plastic recycling to support green chemical initiatives, rail, material handling and logistics upgrades.

They also plant design, installations as well as maintenance and turnaround work. Our dominant position in the engineering fabrication and construction of thermal vacuum chambers for the aerospace industry is attracting solid opportunities as this market continues to demand new and upgraded facilities to service the growing private and government satellite markets. Increasing demand for basic and rare earth metals and minerals including copper, lithium, and nickel, for example, is creating more mining project opportunities for the business as the push for electric vehicles, renewable power, and infrastructure spending consume more of these elements. Additionally, there has been an underinvestment in the exploration and development, which will result in a strong upcycle in the broader metals and mining sector.

This dramatic increase in the demand for certain mining commodities can result in rise in commodity prices over the last year, a significant increase in Matrix bidding activity on various mining and mineral projects. We are seeing the strongest opportunity pipeline in this market that we have seen in several years, including a January award by American Pacific Borates for the first phase of construction of its Fort Cady borate mine facility in Southern California. We've begun integration with ADR's Fort Cady Borate Mine management team to ensure completion of the initial borate operation in Q3 of calendar year 2021. ADR's current plan is to retain Matrix for the balance of the three production phases of the Fort Cady Borate Mine.

Boron is used in a variety of applications including agriculture and other industries that manufacture a wide range of products, including detergents, flame retardants, personal care products, gypsum, permanent magnets, electric vehicles, wind turbines, glass and more. Investment in the Midstream gas space is beginning to return as demonstrated by a recent award of our subsidiary Matrix PDM for the engineering, procurement and construction of a natural gas pipeline compressor station upgrade. This project will use highly efficient single turbine compressor to replace the four existing compressors supporting the client's commitment to reduce greenhouse gas emissions.

This project also represents our strategic focus on extending our services to the Midstream natural gas value chain beyond cryogenic processing facilities, which will include among other projects, the injection of hydrogen in the natural gas pipeline system. With the customers' position, we hope to issue a formal press release in the near future. In Storage and Terminal Solutions, while the opportunities in crude oil are currently limited, we are pursuing a strong funnel of opportunities in North America, Central America and the Caribbean for Storage Infrastructure projects related to natural gas, LNG, ammonia, renewable energy and NGLs that support clean energy initiatives and demand for chemical feedstocks. Across our reporting segments, our strategic transition and diversification of services all align with the change in infrastructure needs of our customers as the world moves toward reducing carbon emissions.

In small and midsized LNG storage tanks and terminals where Matrix has a strong brand awareness as an industry leader. Activity remains robust, supporting both our utility and power infrastructure and Storage and Terminal Solution segments. We are currently embedding multiple small to mid-sized LNG peak shaving, export and other bunkering facilities across North America and the Caribbean with an expectation that the world will start to enter backlog in fiscal 2021. As a reminder, LNG Peak Shaving Units reported in our Utility and Power Infrastructure segment are used by our utility customers for storing surplus natural gas to meet consumer demand during different seasons in times of peak consumption. Bunkering facilities allow for storage and transfer of LNG to a ship for use as fuel, providing a cleaner method when compared to marine gas and heavy fuel oil.

On export front, our work is focused on small to mid-scale export and receiving terminals from the U.S. and neighboring islands in Latin American countries. During the month of January, we announced a Memorandum of Understanding with Chart Industries, a leading diversified global manufacturer of highly engineered equipment for the industrial gas and clean energy industries for the development of standardized turnkey hydrogen solutions. Hydrogen has significantly -- potential to help reduce greenhouse gas emissions across the transportation, power generation, industrial, and waste sectors as well as commercial and residential buildings. In transportation, hydrogen offers potential use in fuel cells for high efficient zero-emission electric vehicles and other hydrogen-powered transportation applications such as rail, trucking, heavy equipment, hydrogen-based synthetic fuels in aviation as well as shipping in marine applications.

In power generation, hydrogen can support decarbonization of power generation networks and provide a key storage solution to support intraday and seasonal storage needs while adding flexibility through natural gas integration. Hydrogen can also be used to decarbonize heating in industrial facilities, homes and buildings. Industrial applications include oil refining, metals production, cement, chemical processes such as production of ammonia and ethanol, as well as other processes that require high temperatures. Our focus on hydrogen value chain builds on our 50-plus years of expertise in cryogenic storage tanks, terminals and overall construction capabilities. This relationship with Chart has its foundation in cooperative work we've been doing around LNG for peak shaving, bunkering and exports.

With Chart, we will expand our services in this growth area as we work together to develop turnkey standardized hydrogen solutions that include hydrogen liquefaction plants, green bunkering, fueling stations, plant expansion, storage expansion and other hydrogen-related facilities in response to industrial demand. This collaborative approach will provide customers with more cost-competitive and scalable ways to increase hydrogen as a key part of the clean energy transition. Since the MoU was announced, we have received multiple inquiries from prospective customers, including landfill gas conversion, transportation fueling, power generation, production and storage, natural gas pipeline integration to name a few.

We are excited about our position in an industry that is expected to see dramatic annual investment growth from both private and public entities between now and beyond the end of the decade. We expect additions from this initiative to impact our backlog starting over the next 6 to 12 months. Our opportunity to support carbon reduction initiatives across North America is not limited to natural gas and hydrogen. We're also working with clients on carbon capture projects, liquid air compression and storage use in solar power, molten solar storage tanks, biofuel conversions, biomass and waste-to-energy applications, as well as solar and wind interconnect installations.

With end-to-end expertise across the energy and industrial landscape, we have long enjoyed a reputation for working with our customers to develop infrastructure solutions that help them achieve their business objectives. Our size affords us flexibility not available with larger EPC contractors, while our expertise in engineering, procurement, fabrication and construction, along with our financial strength along with our financial strength and stability allow us to take on larger, more complex projects. This positions us to create value for our shareholders and for all of our stakeholders as we serve the evolving infrastructure needs of our customers in both the near and the long term.

I'll now turn the call over to Kevin.

Kevin S. Cavanah -- Chief Financial Officer

Thanks, John. During the second quarter, we implemented additional planned actions related to reduce -- reducing our cost structure. As John mentioned, these actions included targeted headcount reductions, full and partial furloughs, salary reductions and a reduction in size or closure of our office facilities. As a result, the company incurred approximately $5 million of restructuring costs in the second quarter. The table presented provides a reconciliation of earnings for the second quarter and first six months of fiscal 2021. Earnings per share for the quarter was a loss of $0.17 which included the impact of the restructuring costs that reduced earnings by $0.14 per share. Excluding the restructuring costs, the quarterly adjusted earnings per share was a loss of $0.03.

For the six months of fiscal 2021, the earnings per share was a loss of $0.29 which included the impact of the restructuring costs that reduced earnings by $0.13 per share. Excluding the restructuring items, adjusted earnings per share for the six months was a loss of $0.16. Over the last year, the company has reduced its cost structure in excess of $60 million or approximately 25% with a third of those reductions related to SG&A and the rest related to construction overhead, which is included in cost of revenue on the income statement. As John noted, even with these dramatic reductions in construction overhead the current revenue levels will not allow for complete recovery which reduces the gross margin. However, based on our opportunity pipeline and the strength we see returning to the business in the near term, the current adjusted overhead levels are appropriate.

The company will continue to manage our cost structure. We're now focused on rebuilding our backlog and revenue volume. Our backlog at December 31, 2020, is $623 million, a decrease of $56 million in the quarter. Our book-to-bill was 0.7 in the quarter on project awards of $112 million. While the volume of project awards in the first half of fiscal 2021 has been lower than normal, we see positive signs in our markets. It remains our expectation that bookings and revenue will improve as we move through the second half of the fiscal year, and we expect to achieve an annual consolidated book-to-bill of greater than 1 by fiscal year-end. Then I will move to operating results for the quarter. In the second quarter, we produced revenue of $167 million compared to $319 million last year.

Approximately half of the decrease is related to the current market environment, and the other half is related to our exit from the iron and steel business and the completion of a major capital project in the Process and Industrial Facility segment. Our gross margin in the quarter was 9.1% as compared to 9.4% in the second quarter of fiscal 2020. Overall project execution was strong with consolidated direct gross margins within the range of our normal expectations of 10% to 12%. Project execution was the strongest in the Utility and Power Infrastructure and Process and Industrial Facility second. However, direct margins were impacted by additional costs recognized on our crude terminal project in our Storage and Terminal Solutions segment. In addition, low revenue volume led to under-recovery of overheads which brought the gross margin performance down for the quarter.

Our SG&A was $16.7 million in the quarter, as compared to $23.2 million in the same quarter last year. The 28% decrease in SG&A is primarily the result of cost reduction actions previously discussed as well as a onetime item. We expect our base SG&A levels to approximate $18 million per quarter for the remainder of fiscal 2021. Their primary variable cost within SG&A is incentive compensation, which would increase as the company returns to profitability. Consolidated operating income was a loss of $6.5 million or 3.9% of revenue. Adjusted operating income, which excludes restructuring cost, was a loss of $1.4 million or 0.8% of revenue. Overall strong project execution, positive contract closeouts and good cost control was offset by lower revenue volume, which resulted in loss margin opportunity and under-recovery of overhead costs.

Our effective tax rate for the quarter was 20.9%, compared to 10.5% for the same period a year ago. We expect to operate with an effective tax rate of approximately 27% for the remainder of fiscal 2021. For the quarter, we produced a loss of $0.17 per fully diluted share. Excluding restructuring costs, we produced an adjusted loss per share of $0.03. Adjusted EBITDA was also impacted by lower revenue volumes. For the quarter, adjusted EBITDA was $4.2 million, compared to $12.6 million in the prior year. Now, let's talk about the specific results for each of our segments. Revenue for the Utility and Power Infrastructure segment increased from $49 million in the three months ended December 31, 2019 to $52 million in the recently completed quarter. The increase is due to higher volumes of LNG peak shaving activity, partially offset by lower levels of power work. The segment gross margin was 10.8% in the quarter compared to a negative 2.5% in the fiscal 2020 second quarter.

The third quarter gross margin was positively impacted by improved execution on power delivery work and continued strong execution on LNG peak shaving projects. SG&A for the segment was $2.6 million compared to $2.8 million in the prior year. Segment operating income was $2.2 million or 4.2%. Adjusted operating -- segment operating income which excluding structuring costs was $3 million or 5.8% of revenue. While additional revenue volume is needed, overall segment performance has significantly improved over the last year due to project execution and a decreased cost structure. Moving to the Process and Industrial Facilities segment, revenue was $51 million in the second quarter compared to $143 million in the same period last year.

The decrease is primarily due to the strategic exit from the domestic iron and steel business, completion of a major capital project as well as lower volumes of midstream gas projects and refinery maintenance and turnaround work. The segment gross margin was 15.3% for the quarter compared to 9.7% in the same period last year. The 15.3% segment gross margin was primarily due to strong project execution and favorable contract closeouts while the segment have under recovery of construction overhead cost as a result of lower revenue volumes, the under recovery was offset by a onetime worker's compensation item. SG&A for the segment was $3.4 million compared to $7.4 million in the prior year. The decrease in SG&A is the direct result of cost reduction efforts.

Segment operating income was $1.1 million or 2.2% of revenue, while adjusted segment operating income was $4.5 million or 8.7% of revenue. Overall, the segment performance was impacted by lower revenue, but benefited from strong project execution and a reduced cost structure. Next, we will cover the Storage and Terminal Solutions segment. Revenue was $64 million in the three months ended December 31, 2020, compared to $127 million in the same period last year. Revenue volume continues to be impacted by the current environment this has resulted in a significant decline in project awards. The gross margin for the quarter was only 2.9% as compared to 14.2% in the prior-year quarter.

Despite the majority of the segment executing at a high level, two items negatively impacted the quarterly gross margin. First, the low revenue volume resulted in under recovery of construction overhead cost. And second, the company incurred an increase in the cost to complete the construction of a large crude terminal. The company has achieved mechanical completion, is demobilizing from the site and is working through final close out and change orders with the client. The impact of this project charge reduced the second gross margin by 9.7%. SG&A was $3.9 million compared to $6.8 million in the prior year due to cost-reduction efforts.

Segment operating income was a loss of $2.7 million or a negative 4.2% of revenue, adjusted operating income which excludes restructuring costs was a loss of $2.1 million or a negative 3.2% of revenue. Overall segment performance was impacted by an almost 50% reduction in revenue as well as the project charge. Now I'll briefly discuss the six-month results. Consolidated revenue was $350 million for the six months ended December 31, 2020 compared to $657 million in the prior fiscal year. The 47% decline was a combination of the exit from the iron and steel business, completion of a major capital construction project and the impact of the COVID environment. On a segment basis, revenue decreased $201 million in Process and Industrial Facilities and $122 million in Storage and Terminal Solutions.

These decreases were partially offset by a $16 million increase in Utility and Power Infrastructure. Consolidated gross profit decreased from $62.5 million in fiscal 2020 to $29.7 million in fiscal 2021. Gross margin decreased from 8.5% in fiscal 2020 to 8.3% in fiscal 2021. Fiscal 2021 gross margin was positively impacted by overall strong project execution that was partially offset by under recovery of construction overhead costs because of the decrease in revenue volume. Consolidated SG&A expenses were $34.9 million in the first six months of fiscal 2021 compared to $46.9 million in the same period a year earlier. The 26% reduction is a result of cost reduction efforts the company implemented throughout calendar 2020. Consolidated operating income was a loss of $9.9 million or 2.8% of revenue.

Adjusted operating income which excludes restructuring costs was a loss of $5.2 million or 1.5% of revenue. Overall strong project execution and good cost control was offset by lower revenue volume which resulted in lost margin opportunity and other recovery of overhead costs. For the six months of fiscal 2021, we produced a loss for $0.29 per fully diluted share. Excluding restructuring costs, we produced an adjusted loss per share of $0.16. Adjusted EBITDA for the six months of fiscal 2021 was $6.2 million or 1.8% of revenue. Moving on to our balance sheet and liquidity, our financial position remains strong with current liquidity of $127 million. During the quarter, we generated $20.8 million of cash from operations and utilized $9.4 million to pay off all outstanding debt. We ended the quarter with a cash balance of $93 million and availability under our credit facility is $33 million.

Our capital expenditures in the quarter were only $300,000 as we continued to limit capital expenditures until revenue volumes return. We have spent $3 million on capital expenditures in the first half of the fiscal year, which represents less than 1% of revenue. Our approach of maintaining a strong balance sheet and good liquidity remains; this approach along with our cost reduction efforts have allowed us to remain financially strong in a difficult environment. Before we open the call up for questions, I want to discuss expectations for the last half of fiscal 2021. As we've previously discussed, the pandemic has significantly impacted our business and revenue volume. Based upon the robust project pipeline, we expect to grow backlog as we move through the balance of the year. While the exact timing of project awards can be difficult to forecast, we could see some improvement in revenue in the third quarter and a more significant improvement in the fourth quarter.

Now, let's open for questions.

Questions and Answers:

Operator

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

John Franzreb -- Sidoti & Company, LLC -- Analyst

Good morning, John, Kevin, Kellie. I actually like to start at the Storage business. I was kind of surprised by the revenue level and also surprised by the charge that was taken in the quarter for that one project. Could you talk a little bit about, I guess, first, on the revenue side, the cadence going forward on that business because Kevin you just alluded to you expect revenues to improve going forward. If so, is it an improvement in Storage? And secondly, I want to -- I'm curious about what was unique about this project that resulted in the roughly 9.2% hit to the gross margin?

Kevin S. Cavanah -- Chief Financial Officer

So, I'll handle the revenue cadence. So, the segment has been impacted by this market environment and project awards being delayed. As a result, our revenues have decreased. I would expect that the third quarter we might see a little bit of improvement. But it's going to be dependent on the timing of project awards. Based on what we currently see in the pipeline, the expected award dates, we would expect a much more significant improvement in the fourth quarter.

John R. Hewitt -- President and Chief Executive Officer

And as it relates to that specific project, John, I can't give you a lot of details about that because we're not having reached final completion yet and working through some details with our client. But it's not unusual even in Storage where we can have a project that's got some challenges for a lot of reasons. Sometimes it don't always come to light in an environment where revenues are really high -- are high in our Storage segment. Margins there are usually always strong as they were here with work other than this project. So sometimes those -- these kinds of projects don't identify themselves in the mix of work within our Storage segment. I can't tell you -- to keep in mind that this project was heavily in the middle of the COVID environment, had a lot of weather impacts as we move through the year, and so those are things that we need to work through as we're bringing the project to a close.

John Franzreb -- Sidoti & Company, LLC -- Analyst

So, John, is it fair to assume that Storage margins will return to normal next quarter?

John R. Hewitt -- President and Chief Executive Officer

Yeah. I mean., I think if you -- we had some -- which is fairly typical for our company as we work through backlog, we will find a lot of times the performance is there, and we'll find opportunities to bring -- to upsize our margins because of that performance. And so as we're in this swing from a declining backlog to an increasing backlog, there will be more new project starts as we move through the course of the year and the opportunity for a contract -- strong contract closeouts maybe won't be as much there as would've been in this quarter. So all the back and forth there, I think we will -- we are continuing to think that our performance in the Storage segment will operate at the gross margins that we have indicated. And so for now, it's just going to be, for us, about the backlog.

Kevin S. Cavanah -- Chief Financial Officer

Yeah. So when you think about the third quarter specifically, John, the level of revenue won't support full recovery of overhead. So that will still have some impact on gross margins. As we get into the fourth quarter if everything falls like we expect, then we'd be back in the range.

John Franzreb -- Sidoti & Company, LLC -- Analyst

Well, I'm just -- I mean the level of revenue is flattish. That would still suggest a gross margin roughly 12% for the segment. Is that unfair to assume or no?

Kevin S. Cavanah -- Chief Financial Officer

Well, so I would say, the direct margin that would be behind us soon. But -- what did we do, $64 million of revenue this quarter? If we do something similar or little better, we're still going to have under recovery that will bring that direct margin down below our normal range.

John Franzreb -- Sidoti & Company, LLC -- Analyst

Okay. And John, regarding the Chart Technologies Memorandum, you mentioned that there's already been some discussions about potential orders somewhere in the 6 to 12 month time range. Could you put a size to those orders? Are they small jobs? Are they big jobs? Give us some sort of context of what you're looking at as far as project activity?

John R. Hewitt -- President and Chief Executive Officer

I think they're going to be similar to our mix of work in our current business. So we're -- so for instance, we're -- hydrogen market is not completely new to us. So we currently are constructing a sphere for hydrogen application in the Western U.S. And so, that project I think is in kind of the teens sort of size range. So I would expect projects in this hydrogen market to be projects in the $10 million to $100 million, $150 million kind of range individual projects dependent on the size and scope of the -- and what the application is.

John Franzreb -- Sidoti & Company, LLC -- Analyst

That's a pretty wide range. Do the bigger projects come first or the smaller ones?

John R. Hewitt -- President and Chief Executive Officer

It's hard for me to handicap that. I mean we're -- like I said, we're -- we've opened up the business development both between ourselves and Chart, and we're looking at the projects that we're going to chase jointly. And I don't have a clear list in my mind here what the value of all those projects are.

John Franzreb -- Sidoti & Company, LLC -- Analyst

Okay. And just on the turnaround season, how is it shaping up for the spring season versus the fall?

John R. Hewitt -- President and Chief Executive Officer

Last fall?

John Franzreb -- Sidoti & Company, LLC -- Analyst

Yes. The past fall. Correct.

John R. Hewitt -- President and Chief Executive Officer

So, our -- we've got three fixed space maintenance operations currently. And those have fundamentally returned to, let's say, normal kind of services. And so, we're also expecting a stronger turnaround cycle this spring than, certainly, last fall and, for sure, last spring. And so, it will be at a "normal level" for us. I don't think so. But it's going to be -- certainly going to be better than we've seen for 12 months.

John Franzreb -- Sidoti & Company, LLC -- Analyst

Got it. Thanks, guys. I'll get back in the queue.

John R. Hewitt -- President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from Zane Karimi with D.A. Davidson.

Zane Karimi -- D. A. Davidson & Co. -- Analyst

Hey, gentlemen. How are you today?

John R. Hewitt -- President and Chief Executive Officer

Very good. Thank you.

Zane Karimi -- D. A. Davidson & Co. -- Analyst

So my first one here is some of the small and mid-sized LNG Peak Shaving Facilities are in a product pipeline and -- do you have any sense of time line for those? Can we realistically see one or more of them move forward in your fiscal 2H?

John R. Hewitt -- President and Chief Executive Officer

I would -- based on what we're looking at, what we have on our pipeline and things that we have been working on over the past three or four months, it's entirely possible that one or two of those would move forward into a contract within the -- this fiscal year.

Zane Karimi -- D. A. Davidson & Co. -- Analyst

Okay. And then a little bit more detail on the hydrogen opportunity there. But have you guys looked it around like a 12 to 24-month plan or have you commented on targets around that for the hydrogen opportunity?

John R. Hewitt -- President and Chief Executive Officer

So a couple of things there. The market -- we think the market is an expanding multibillion dollar annual market that's going to continue to grow as you move out the time. We are working with our partner, our technology partner here on developing that plan and strategy for the -- for where we see the opportunities where we see our strengths in that opportunity pipeline. And so we have not set a revenue goal against that opportunity pipeline. I can just tell you that the opportunities that we're seeing today would lead us to believe that the -- within three years, this could be a pretty substantial market for our business, flowing through on an annual basis.

Zane Karimi -- D. A. Davidson & Co. -- Analyst

Okay. That makes sense there. And then on to the Utility segment real quick. So with regard to the power delivery portion of the Utility segment, we were seeing capital plans with customers and then also your efforts to extend your service territory either organically or through M&A.

John R. Hewitt -- President and Chief Executive Officer

Right. So right now, we've been focused on improving the performance which we've done. Our direct margin performance in that business over the past couple of quarters has been really strong. Bidding environment is exceptionally robust. And from an organic basis, we have moved into what I'll call the Ohio Valley area with some new clients. We've expanded some our clients. We've been able to get to MSA agreements with suppliers we had worked with in the past. So we're continuing to do things we need to do to expand that. We've been very active with storm response throughout the Northeast. And so we're -- from an organic basis, from a performance basis, from our ability to expand our client base, we're -- we are not satisfied at where we are today, but we are pretty satisfied with the progress that we've made. And that continues to be an area for the company where we want to grow that service offering and make it a larger part of the company's overall portfolio and ultimately to make that a coast-to-coast delivery.

Zane Karimi -- D. A. Davidson & Co. -- Analyst

Okay. And I have -- last one from me then will be more on cash flows. I was just hoping to hear your thoughts and expectations around sustaining positive cash flow in the next couple of quarters even as revenue and earnings might remain relatively speaking like under pressure.

Kevin S. Cavanah -- Chief Financial Officer

Yeah. So I think a couple of things there. First of all, the fact that we entered this COVID period with a very strong balance sheet was a significant asset to us. And I think we've done a good job of maintaining a good strong financial position over the last year. And so we're kind of set up for growth trend to support the growth as it returns. Over the next couple of quarters, the fact that we've reduced so much cost out of our company, we're able to even in a quarter we have slightly negative earnings still be positive to neutral on cash flow. And I'd expect that to continue as we work through the third quarter. And then when we return to stronger performance, we might have short-term impacts to working capital needs. When revenue comes, it'll depend on the mix of revenue, how much is reimbursable type work that is built in arrears versus lump sum works that couldn't -- work that could have some down payments. So I think we're positioned to cover that. And in addition to -- we're also in position to cover the letter of credit requirements that some capital projects could have.

Zane Karimi -- D. A. Davidson & Co. -- Analyst

Got you. I appreciate the color. Thanks, Joe.

Operator

We have a follow-up question from the line of John Franzreb with Sidoti. Your line is now open.

John Franzreb -- Sidoti & Company, LLC -- Analyst

Yeah, John just on the mining market, with commodities and prices improving, can you give us a sense of scale for your business? How big of a business that is for you and what the opportunity pipeline looks like in that business in the year ahead?

John R. Hewitt -- President and Chief Executive Officer

Yeah. So we just -- a little history there. We got into that business about nine years ago. Basically, the -- within there, organically, by hiring a group of managers, open up an office in the Arizona region, started servicing fundamentally copper mines. And for about three, four years, we have some really good success there, was really one of the main revenue and margin drivers in our Industrial segment. And then the bottom fell out of global commodities market. And really, for the last five years, that business has been very flat. Now, the resources associated with that are also resources that we move around other projects. So, it isn't like there is a unique specialty there. Certainly, the client relationship pieces, especially part, but the actual services we're providing are very similar to the other construction services we provide, so a little background there.

So, over the probably the last five, six months, I think you've seen global commodity prices start to tick up. Copper for instance, a general rule of thumb is copper is trading at anything less than $2.70 a pound. They're not spending -- the clients are not spending any money on production expansion and significant maintenance in their operations. So, copper is hovering at $3.50 to $3.60. And so, you take that and you think about the all the other basic minerals that are going to be required as the North America and then, frankly, the world moves to electrified cars, more renewables, more solar panels, and just the basic infrastructure spending that's pent-up in the market because of the pandemic, we think you're going to see a huge demand on metals and minerals.

And there's going to be a lot of opportunities domestically for mining companies, they're going to want to -- that need to increase their production in their facilities. And so pick a metal whether it's copper, or lithium or borate, which is not a metal, but it's a mineral. And so our bidding environment right now is very, very full. And so we think that, in or out over the future here, over the next two, three years, we're going to see some really good increases in our backlog and revenues across the business. That's in that sector. What could it be? I think in the next couple of years, we could be seeing the kind of $5,000 million kind of revenue levels within our Mining segment that we saw six years ago.

John Franzreb -- Sidoti & Company, LLC -- Analyst

And is that limited to North America? Because Lithium, I thought was largely a South American mining operations?

John R. Hewitt -- President and Chief Executive Officer

Yeah. Currently, I mean our focus currently is on North America. We have aspirations and are working on projects in the Caribbean that's more related to LNG-related infrastructure, maybe some hydrogen infrastructure. And so we'll watch how that expansion goes. And if opportunities present itself way out into the future into maybe into Mexico or Central America, we might consider those. But right now, that's not on the pick.

John Franzreb -- Sidoti & Company, LLC -- Analyst

And you said sensitivity and copper spending is below the $3 threshold?

John R. Hewitt -- President and Chief Executive Officer

Yeah, general rule of thumb is if the price of copper is below $2.70 and $2.60 per pound then usually the -- for a contract or the work kind of dries up.

John Franzreb -- Sidoti & Company, LLC -- Analyst

Got it. Got it. Thank you for that color. Appreciate it John.

John R. Hewitt -- President and Chief Executive Officer

You're welcome.

Operator

I'm showing no further questions in queue at this time. I'd like to turn the call back to John Hewitt for closing remark.

John R. Hewitt -- President and Chief Executive Officer

Yeah. So I want to thank you everybody for being with us today. I'm hoping to take away from the call today was an appreciation that we think our future is very bright and our vision is very clear on where we are going. We're very excited about our role in the strong infrastructure spending that we see is on the horizon. I really want to thank our employees for their hard work in these extremely challenging times as we transition to a much more improving business and pandemic environment. So thank you to our investors too for supporting our business. And we look forward to talking with all of you in the near future. And I encourage everybody to please stay healthy and safe.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Kellie Smythe -- Senior Director, Investor Relations

John R. Hewitt -- President and Chief Executive Officer

Kevin S. Cavanah -- Chief Financial Officer

John Franzreb -- Sidoti & Company, LLC -- Analyst

Zane Karimi -- D. A. Davidson & Co. -- Analyst

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