Matrix Service Company — Form 10-Q Summary
Reporting period: The filing covers the three months ended September 30, 2016, the first quarter of fiscal 2017 (not calendar 2016 Q1). Amounts below are in U.S. dollars; financial statement figures are generally rounded to millions.
Business context and results
Matrix provides construction, maintenance and specialty products across Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial. Revenue growth was driven by Storage Solutions terminal work and a Canadian power-generation project; weaker commodity-related activity weighed on Oil Gas & Chemical and Industrial.
| Metric | Quarter ended Sep. 30, 2016 | Prior-year quarter |
|---|---|---|
| Revenue | $341.8 million | $319.3 million |
| Gross profit / margin | $32.3 million / 9.4% | $34.6 million / 10.8% |
| Operating income | $14.3 million | $15.1 million |
| Net income attributable to Matrix | $9.3 million | $9.9 million |
| Diluted EPS | $0.35 | $0.37 |
| Operating cash flow | $(49.6) million | $(14.4) million |
Revenue increased about 7%, but gross margin fell 1.4 percentage points and operating income declined about 5%. SG&A was $18.0 million versus $19.5 million, largely reflecting a change in allocation of IT costs. Interest expense was $0.2 million. The effective tax rate was 33.6%, including $0.4 million of excess stock-compensation tax benefits, which added approximately $0.01 to EPS.
Financial position and segment trends
- At September 30, cash was $35.6 million, down from $71.7 million at June 30. Current assets were $384.3 million and current liabilities $224.1 million.
- Revolver borrowings were $17.2 million; the filing reports consolidated funded indebtedness of $30.1 million. Revolver availability was $137.6 million, giving reported available liquidity of $173.2 million. The company was in compliance with covenants, although the leverage covenant constrained facility capacity.
- Operating cash outflow primarily reflected a $40.6 million increase in receivables, lower accounts payable, and contract billing timing. Investing cash outflow was $1.7 million, mainly capital expenditures; financing provided $15.4 million, primarily net revolver borrowings.
- Electrical Infrastructure revenue rose to $88.0 million; operating income was $1.1 million. Oil Gas & Chemical revenue fell to $32.5 million and recorded an operating loss of $2.9 million. Storage Solutions revenue increased to $199.5 million, with operating income of $16.8 million. Industrial revenue fell to $21.7 million and recorded an operating loss of $0.6 million.
- Backlog was $786.6 million at quarter-end, down from $868.7 million at June 30. Storage Solutions backlog fell as work progressed on the Dakota Access Pipeline terminal project; Oil Gas & Chemical backlog increased on new awards.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said remaining liquidity and operating cash generation were expected to support business objectives, while noting a significant cash acquisition could require a larger credit facility.
- A fixed-price Canadian power-generation project expected to finish in fiscal 2018 incurred a first-quarter project charge. Costs relate partly to owner-provided engineering and equipment, additional work, and a delayed completion date. Negotiations seek recovery of claim costs and a schedule extension; the outcome is unpredictable and could materially affect results and financial position.
- The filing reports $26.2 million of unapproved change orders and claims in contract assets, compared with $10.3 million at June 30. Commodity-price weakness, cautious or delayed customer spending, reduced project volumes, customer credit risk, seasonal fluctuations, and project cost or schedule changes remain risks. Management noted losses in Oil Gas & Chemical and Industrial but did not consider them goodwill impairment triggers at this time.
- Management said legal proceedings were not expected to have a material effect and reported no material change in risk factors. No formal outlook was quantified; interim results may not indicate full-year performance.
Most important facts for investors to verify
- Reconcile the project-claim disclosures: the financial-statement note says first-quarter recognition of $5.8 million in unapproved change orders and an $11.4 million claim, while MD&A says $7.7 million and $15.0 million, respectively. Confirm the correct amounts and their relationship to the $26.2 million recorded balance.
- Track cash conversion, receivable collections, project billings and revolver usage, particularly for the Canadian power project and Dakota Access work.
- Assess the power-project charge, claim recoverability, schedule extension negotiations, and potential additional cost estimates.
- Monitor segment margins and backlog conversion, especially continued weakness in Oil Gas & Chemical and Industrial and the decline in Storage Solutions backlog.
- Confirm ongoing compliance with the credit-facility covenants and the effect of the leverage-based borrowing constraint on available liquidity.