Matrix Service Company — Form 10-Q summary
Business context and period: The filing covers the quarter and six months ended December 31, 2019, the second quarter of fiscal 2020. Matrix provides engineering, construction, maintenance and related services through Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial segments.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | $318.7 million | $656.8 million | $340.6 million quarter; $659.1 million six months |
| Gross profit and margin | $30.0 million; 9.4% | $62.5 million; 9.5% | $27.9 million; 8.2% quarter; $51.3 million; 7.8% six months |
| Operating income (loss) | $(31.7) million | $(22.9) million | $5.5 million quarter; $7.7 million six months |
| Net income (loss) | $(28.0) million | $(21.9) million | $3.9 million quarter; $6.2 million six months |
| Diluted EPS | $(1.04) | $(0.81) | $0.14 quarter; $0.23 six months |
| Adjusted EBITDA (non-GAAP) | $12.6 million | $26.6 million | $10.4 million quarter; $18.0 million six months |
Revenue fell 6.4% in the quarter and 0.3% for the six-month period. Gross profit and margin improved in both comparisons, but reported operating results and net income were sharply reduced by a $38.5 million non-cash impairment charge. Management’s non-GAAP adjusted net income was $5.2 million for the quarter and $11.4 million for six months, or $0.19 and $0.41 per diluted share, respectively; these measures exclude the impairments and a Canadian deferred-tax valuation allowance.
Cash, debt and liquidity
- Six-month operating cash flow was $38.6 million, versus $13.5 million in the prior-year period. Working-capital movements supported cash generation; accounts payable and accrued expenses declined $55.7 million.
- Cash was $110.5 million at December 31, 2019, up from $89.7 million at June 30, 2019. Capital expenditures were $14.5 million.
- Revolver borrowings were $14.8 million; availability under the $300 million facility was $166.0 million. Including cash, reported available liquidity was $276.5 million.
- For covenant purposes, funded indebtedness was $68.5 million and Covenant EBITDA was $78.2 million for the trailing four quarters. The company reported compliance with all credit agreement covenants.
- Total assets were $591.9 million and stockholders’ equity was $322.8 million at December 31, 2019. Operating lease liabilities totaled $33.4 million.
Material changes and segment developments
- Electrical Infrastructure: Quarterly revenue declined to $30.0 million from $58.2 million; the segment reported a $2.9 million gross loss. Poor execution, including a charge on a transmission and distribution project, and reduced work volumes contributed. The company fully impaired $24.9 million of segment goodwill and is changing leadership, operations and business-development resources.
- Oil Gas & Chemical: Quarterly revenue fell to $56.0 million from $86.3 million, largely due to lower turnaround volumes; lower volume also reduced overhead recovery. Management expected revenue and margin improvement in the second half from capital, retrofit and midstream natural-gas work.
- Storage Solutions: Quarterly revenue rose to $142.8 million from $125.7 million, and gross margin improved to 13.9% from 8.9%, reflecting stronger tank and terminal activity and project execution. A subsequent Eagle LNG export-facility award was expected to begin in 2020 and was not included in December backlog.
- Industrial: Quarterly revenue increased to $89.9 million from $70.4 million, but outlook weakened after a key iron-and-steel customer canceled awarded work. The customer represented almost 70% of current-year segment revenue, directly and through a joint venture. The company recorded $8.0 million of goodwill impairment and $5.6 million of customer-relationship intangible impairment, plans to reduce its focus on iron and steel, expects substantially lower second-half segment volumes, and is assessing disposition alternatives.
Backlog was $872.2 million at December 31, down from $1.10 billion at June 30. The decline included $88.3 million of Industrial cancellations. Six-month book-to-bill was 0.8 overall; Electrical Infrastructure 0.7, Oil Gas & Chemical 1.2, Storage Solutions 0.9, and Industrial 0.5. Remaining performance obligations were $645.0 million, of which $540.9 million was expected to be recognized as revenue within 12 months.
Outlook, risks and unusual items
- The $38.5 million impairment comprised $24.9 million of Electrical Infrastructure goodwill, $8.0 million of Industrial goodwill and $5.6 million of Industrial customer-relationship intangible assets. Management said further impairment testing could be required if project or margin expectations deteriorate.
- A $2.4 million valuation allowance on Canadian tax assets followed cancellation of a Canadian iron-and-steel project. The reported effective tax rates were 10.5% for the quarter and 2.6% for six months; management expected approximately 28% for the remainder of fiscal 2020.
- Unpriced change orders and claims included in contract assets were $9.1 million at quarter-end. Management cautioned that actual collections could differ materially and may be delayed pending resolution.
- Other identified risks include fixed-price project cost overruns, customer credit and collection issues, project delays, workforce utilization, cyclical end markets, and credit-facility covenant capacity. Management characterized liquidity as adequate for near- and long-term needs.
- The filing does not provide a formal consolidated revenue or earnings forecast. Segment commentary is qualitative and subject to project timing and market conditions.
Key facts for investors to verify
- Whether the Electrical Infrastructure improvement plan produces sustained revenue and margin recovery after its steep revenue decline and impairment.
- How much of Industrial backlog and expected activity remains exposed to the key customer, and the outcome of the company’s review of disposition alternatives.
- Whether the $872.2 million backlog converts to revenue as expected, particularly given cancellations and the overall 0.8 six-month book-to-bill ratio.
- Whether operating cash flow remains durable as working-capital balances and project billing and collection timing change.
- Whether the expected 28% remainder-of-year tax rate and the Canadian deferred-tax asset valuation remain appropriate, and whether any additional impairment indicators arise.