Matrix Service Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2017; comparisons are with the corresponding 2016 periods. Amounts are in U.S. dollars unless stated otherwise.
Business and financial performance
Matrix provides engineering, construction, maintenance and related services through Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial segments.
| Metric | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2017 |
|---|---|---|
| Revenue | $282.9 million, down 9.5% | $552.8 million, down 15.5% |
| Gross profit / margin | $26.7 million / 9.4% (prior: $28.2 million / 9.0%) | $55.6 million / 10.1% (prior: $60.5 million / 9.2%) |
| Operating income | $5.2 million (prior: $8.2 million) | $12.5 million (prior: $22.5 million) |
| Net income | $4.5 million; diluted EPS $0.17 | $8.4 million; diluted EPS $0.31 |
| Operating cash flow | $29.6 million for six months, versus cash used of $30.9 million in 2016 |
Six-month EBITDA, a non-GAAP measure, was $23.5 million versus $32.6 million. The filing cautions that EBITDA is not a substitute for GAAP earnings or a measure of cash available to fund obligations.
Changes and segment trends
- Revenue and net income declined in both comparisons, despite higher gross margins. Management attributed margin improvement principally to strong project execution and improved construction-overhead recovery; higher SG&A and interest expense weighed on earnings.
- Storage Solutions revenue fell $58.4 million in the quarter and $186.8 million year to date, mainly because delayed awards did not replace prior-year Dakota Access-related work. Margins also declined due to a less favorable work mix; the segment reported operating losses in both comparisons for the six-month period.
- Electrical Infrastructure revenue decreased amid lower high-voltage activity and the prior-year power-generation project. Oil Gas & Chemical and Industrial revenue rose, supported by higher turnaround, maintenance, construction, and iron-and-steel work. Oil Gas & Chemical operating results improved substantially year over year.
- Backlog was $725.0 million at December 31, up from $682.3 million at June 30; six-month book-to-bill was 1.1. Management cited increased Storage Solutions awards as commodity conditions improved and significant Industrial awards in iron and steel.
Liquidity, debt and other key items
- Cash was $74.1 million; revolving-credit borrowings were $50.9 million. Facility availability was $25.6 million, giving reported available liquidity of $99.7 million, down from $122.2 million at June 30. Letters of credit were $27.0 million.
- The $300 million revolving facility matures in February 2022. The company reported compliance with covenants at quarter-end, following an August 2017 amendment that temporarily raised the leverage limit to 4.0x, suspended fixed-charge coverage testing for the September and December quarters, and added a minimum EBITDA covenant. The leverage limit reverts to 3.0x and fixed-charge testing resumes beginning with the March 2018 quarter. Availability was constrained by the leverage covenant and letters of credit.
- After quarter-end, the company repaid $35 million of revolver borrowings while maintaining cash above $60 million, according to management.
- Six-month investing cash use was $5.3 million, including $4.1 million of capital expenditures. Cash increased by $30.3 million over the six months.
- The Tax Cuts and Jobs Act produced a $1.2 million deferred-tax remeasurement benefit and contributed to a tax benefit in the quarter. The company had not completed its accounting for the Act; management expected a 32% effective tax rate for the remainder of fiscal 2018.
- In December, the company exchanged a portion of a customer receivable for $50 million of expected backlog over six years and recorded a $2.0 million customer-based intangible asset. Unapproved change orders and claims included in contract assets totaled $10.5 million.
Outlook, risks and contingencies
Management expected liquidity to improve through the third and fourth quarters of fiscal 2018 and said improving crude prices were prompting more Storage Solutions awards. Customer spending may lag commodity-price changes. Results remain exposed to project timing, seasonal activity, award delays, execution and cost estimates, customer credit and collections, and commodity-market conditions. Management identified a reporting unit with $8.0 million of goodwill whose fair value exceeded carrying value by 9% at the May 2017 impairment test; the anticipated project award was subsequently received, and management reported no impairment indicators at December 31.
The company planned to adopt the new revenue standard on July 1, 2018 using the modified retrospective method. Management expected changes to performance obligations and potentially earlier profit recognition on certain unapproved changes and claims, but could not reliably estimate any transition adjustment. Management considered known legal proceedings not material to its financial position, results or liquidity. Disclosure controls were reported effective at the reasonable-assurance level.
Investor verification points
- Track Storage Solutions award timing, backlog conversion and segment margins, alongside the recovery in Electrical Infrastructure.
- Verify post-quarter revolver repayment, cash levels, covenant headroom and the return to standard covenant tests in the March 2018 quarter.
- Assess cash conversion, working-capital movements, receivable collections and the concentration of contract assets, retainage and claims.
- Monitor the final tax-reform accounting and the July 2018 revenue-standard transition impact.
- Review future goodwill headroom and the assumptions behind project awards, margins and cash-flow forecasts.