Matrix Service Company — Form 10-Q Summary
Business context and period: The company provides engineering, construction, fabrication, maintenance and repair services across Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions and Industrial. This report covers the three months ended September 30, 2019, the first quarter of fiscal 2020, compared with the three months ended September 30, 2018. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $338.1 | $318.5 |
| Gross profit / gross margin | $32.5 / 9.6% | $23.4 / 7.4% |
| Operating income / operating margin | $8.8 / 2.6% | $2.2 / 0.7% |
| Net income / net margin | $6.2 / 1.8% | $2.3 / 0.7% |
| Diluted EPS | $0.22 | $0.08 |
| Operating cash flow | $56.1 | $8.8 |
| Capital expenditures | $8.7 | $2.5 |
Operating cash flow included a $39.9 million positive working-capital effect, chiefly from lower contract assets and higher contract liabilities; the company cautions that contract billing and working-capital balances can fluctuate substantially. Cash rose to $139.9 million from $89.7 million at June 30, 2019.
At September 30, 2019, total assets were $672.8 million, current assets $439.4 million, current liabilities $285.3 million, total liabilities $315.3 million and stockholders’ equity $357.4 million. The balance sheet included $24.7 million of operating lease liabilities and a corresponding $23.6 million right-of-use asset, following adoption of the new lease standard on July 1, 2019.
Revolver borrowings were $11.4 million; reported availability was $168.4 million, after letters of credit and a leverage-based capacity constraint. Cash plus revolver availability totaled $308.3 million. Covenant funded indebtedness was $59.4 million and trailing-four-quarter covenant EBITDA was $75.9 million. The company reported compliance with all credit-agreement covenants; the facility expires February 2022.
Material changes and segment results
Revenue grew 6.1% year over year, while gross profit rose 38.6% and net income increased to $6.2 million from $2.3 million. Gross-margin improvement was driven principally by strong execution on Storage Solutions projects. SG&A increased to $23.7 million from $21.2 million, mainly due to higher incentive compensation and business investments. The effective tax rate rose to 30.6% from 16.4%; management attributed the difference in part to stock-award tax effects.
| Segment | Revenue | Operating income (loss) | Key reported trend |
|---|---|---|---|
| Electrical Infrastructure | $31.5 million, down from $44.7 million | $(1.8) million, versus $0.7 million | Lower volumes and a project charge for productivity and craft-retention costs pressured results. |
| Oil Gas & Chemical | $57.5 million, down from $75.5 million | $(1.8) million, versus $0.5 million | Lower capital, turnaround and maintenance volumes; a capital-project equipment issue and overhead under-recovery also weighed on margins. |
| Storage Solutions | $150.1 million, up from $112.8 million | $9.5 million, versus $0.3 million | Higher construction and maintenance activity and strong large-project execution lifted results. |
| Industrial | $99.0 million, up from $85.6 million | $2.9 million, versus $0.8 million | Higher iron and steel volumes and better project execution improved results. |
Outlook, risks and contingencies
Management expected the fiscal 2020 effective tax rate to be approximately 27%. The filing provides no specific revenue, earnings or margin guidance. Remaining performance obligations were $756.7 million at September 30, 2019, with approximately $637.6 million expected to be recognized within twelve months. Backlog was $1.082 billion, down from $1.098 billion at June 30; quarterly book-to-bill was 1.0 overall, with segment ratios of 1.0, 1.6, 1.0 and 0.6 for Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions and Industrial, respectively. Management says quarterly awards may not indicate full-year trends.
Costs and estimated earnings in excess of billings included $8.5 million of revenue from unpriced change orders and claims. Management notes that ultimate collection may differ materially from recorded amounts. Other disclosed risks include fixed-price project cost overruns, customer credit and collection risk, project delays, workforce under-utilization, commodity and industry conditions, litigation, insurance coverage limitations and potential goodwill impairment if project-opportunity or margin expectations deteriorate. The company reported no goodwill impairment indicators at quarter-end and said known legal proceedings were not expected to have a material effect.
Results may be seasonal and fluctuate with customer outages, utility work schedules, weather, project timing and billing milestones. The company said market-risk disclosures and risk factors were not materially changed from its fiscal 2019 Form 10-K. It reported effective disclosure controls as of September 30, 2019.
Important facts for investors to verify
- Whether the improved consolidated margin is sustained, particularly given the losses in Electrical Infrastructure and Oil Gas & Chemical and the concentration of profit improvement in Storage Solutions.
- Project cost-to-complete estimates, execution and recovery on the underperforming projects, and the collectibility and timing of the $8.5 million in unpriced change orders and claims.
- Whether backlog and remaining performance obligations convert to revenue and cash as expected; backlog and awards are timing-sensitive and are not guarantees of future results.
- How much of the strong operating cash flow reflects repeatable operating performance versus timing-driven contract billing and working-capital movements.
- Liquidity and covenant headroom, including the effects of letters of credit, capacity constraints, lease obligations and any change in customer or market conditions.