Matrix Service Company — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended March 31, 2017 (fiscal 2017); the supplied “2016 Q3” metadata does not match the filing period. Matrix provides engineering, construction, maintenance, and storage-tank services through Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial segments.
Financial results and liquidity
| Metric | Three months ended Mar. 31, 2017 | Nine months ended Mar. 31, 2017 |
|---|---|---|
| Revenue | $251.2 million | $905.7 million |
| Gross profit (loss) / margin | $(2.6) million / (1.0)% | $57.9 million / 6.4% |
| Operating income (loss) | $(21.2) million | $1.3 million |
| Net income (loss) attributable to Matrix | $(13.8) million | $0.8 million |
| Diluted EPS | $(0.52) | $0.03 |
- Quarterly revenue fell 18.8% year over year; nine-month revenue declined 4.9%. Nine-month net income attributable to Matrix fell from $19.7 million to $0.8 million.
- Operating cash flow was $(25.6) million for the nine months, versus $24.5 million provided in the prior-year period. Investing used $48.1 million, principally for the Houston Interests acquisition and capital expenditures; financing provided $42.4 million.
- Cash was $39.7 million at March 31, 2017, and revolver availability was $106.8 million, for reported available liquidity of $146.5 million. Revolver borrowings were $44.1 million; funded indebtedness for covenant purposes was $51.7 million. The company reported compliance with credit covenants.
- Working-capital pressures included a $23.5 million increase in accounts receivable and a $45.7 million decrease in accounts payable during the nine months. Contract assets less billings shifted to a net contract liability of $5.4 million from a net contract asset of $45.7 million at June 30, 2016.
- Backlog was $790.4 million at March 31, 2017, down from $868.7 million at June 30, 2016. Total assets were $580.3 million and stockholders’ equity was $320.2 million.
Material changes versus the prior comparable periods
- The largest driver of the quarter’s deterioration was a major Electrical Infrastructure project: revised cost estimates reduced gross profit by $18.9 million in the quarter and $13.7 million for the nine months. Electrical Infrastructure reported a quarterly operating loss of $16.3 million.
- Quarterly Storage Solutions revenue decreased $58.5 million, mainly as the Dakota Access-related terminal project neared completion. Nine-month Industrial revenue fell $43.2 million, while Oil Gas & Chemical revenue fell $28.5 million amid lower market activity.
- Houston Interests was acquired on December 12, 2016, for a net purchase price of $40.8 million. It contributed $16.4 million of revenue and a $0.4 million operating loss for the nine months. The acquisition added $35.0 million of preliminary goodwill.
- SG&A declined year over year, partly due to reversal of incentive compensation expense and, for the nine-month comparison, a prior-year $5.2 million bad-debt charge. Interest expense increased with higher borrowings.
Outlook, commentary, and risks
- Management said fourth-quarter projected cash flow was strong, including expected collection of significant Storage Solutions project retentions. It did not provide specific earnings or revenue guidance. It did not expect a significant increase in revolver availability until the second half of fiscal 2018, but believed liquidity was sufficient to fund the business.
- Management expected Dakota Access-related terminal work to be completed in fiscal 2017, with revenue declining as the project winds down. Commodity-price volatility, customer spending restraint, delayed awards, and weakness in steel, mining, and energy markets remain risks.
- The Electrical Infrastructure project remains exposed to cost and schedule overruns. Its forecast assumes potential reimbursement of additional costs and receipt of schedule-based incentive revenue; management cautioned that changes in these estimates could materially affect future results and financial position.
- Unapproved change orders and claims included in contract assets were $18.1 million, versus $10.3 million at June 30, 2016; final recoveries and timing of collection are uncertain. Customer retentions included in receivables were $55.0 million.
- The company planned its fiscal 2017 annual goodwill impairment test for May 31, 2017; management said it could result in impairment depending on forecasts and market conditions. No interim impairment test was considered necessary at March 31.
- The nine-month effective tax rate was 933.6%, reflecting a small pretax loss and tax adjustments; the rate is not a representative operating measure for the period. Management also noted that reported results for the nine months may not indicate full-year results.
Important facts for investors to verify
- Progress, remaining cost, schedule, customer reimbursement, and incentive-revenue assumptions for the troubled Electrical Infrastructure project.
- Collection of the $55.0 million of retentions and the $18.1 million of unapproved claims and change orders.
- Future operating cash flow, revolver availability, covenant headroom, and the planned retention collection underpinning management’s liquidity outlook.
- Backlog conversion and new awards, particularly as the Dakota Access project winds down and energy and industrial customer spending remains cautious.
- Results of the May 31, 2017 goodwill impairment test and final purchase-price allocation for Houston Interests.