Matrix Service Company — FY2016 Form 10-K
Reporting period: Fiscal year ended June 30, 2016. The filing is an annual report, not a calendar-year 2015 or standalone fourth-quarter filing; fourth-quarter figures are noted separately below. Matrix provides engineering, fabrication, construction, infrastructure and maintenance services across power, energy, storage and industrial markets.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $1,311.9 million | $1,343.1 million |
| Gross profit / margin | $126.0 million / 9.6% | $87.4 million / 6.5% |
| Operating income / margin | $40.9 million / 3.1% | $8.8 million / 0.7% |
| Net income attributable to Matrix | $28.9 million; diluted EPS $1.07 | $17.2 million; diluted EPS $0.63 |
| Operating cash flow | $30.3 million | $24.4 million |
| Capital expenditures | $13.9 million | $15.8 million |
| Backlog at year-end | $868.7 million | $1,420.6 million |
Consolidated net income was $25.5 million in FY2016; attributable income was higher because the consolidated EPC joint venture recorded a loss allocated partly to its noncontrolling interest. Cash was $71.7 million, working capital $129.4 million, and total assets $565.0 million at June 30, 2016. The company reported no revolver borrowings and $159.1 million of facility availability, after letters of credit and a leverage-based capacity constraint. It reported $13.1 million of Consolidated Funded Indebtedness for covenant purposes. The $200 million revolving facility expires in March 2019; the company stated it complied with its covenants.
FY2016 fourth-quarter revenue was $359.6 million, gross profit $34.1 million, operating income $14.5 million, net income attributable to Matrix $9.1 million, and diluted EPS $0.34.
Segments and changes versus FY2015
- Electrical Infrastructure: Revenue rose 35% to $349.0 million; operating income was $11.1 million versus a $44.3 million loss. Results improved substantially, but included a further $7.1 million charge on the acquired EPC joint-venture project, compared with $53.4 million in FY2015.
- Oil, Gas & Chemical: Revenue fell 18% to $249.8 million and the segment recorded a $3.5 million operating loss, versus $7.1 million operating income. Lower capital work, lower volume and under-recovered overhead weighed on results.
- Storage Solutions: Revenue increased 12% to $563.5 million and operating income rose to $33.4 million. Strong project execution and overhead recovery helped; activity included Dakota Access Pipeline-related terminal work.
- Industrial: Revenue declined 46% to $149.6 million and the segment recorded a $0.2 million operating loss, compared with $17.0 million income. Lower steel and mining activity and a fertilizer project nearing completion contributed.
Overall revenue decreased 2.3%, while gross profit and operating income recovered from FY2015. Matrix attributed the improvement in part to the much smaller EPC project charge. FY2016 SG&A increased to $85.1 million, including a $5.2 million bad-debt charge, higher incentive expense, severance and $1.2 million of BTE acquisition costs. The allowance for doubtful accounts increased to $8.4 million from $0.6 million.
Outlook, risks and unusual items
- Management expected FY2017 capital expenditures of approximately $20.1 million and anticipated a higher international revenue share than FY2016. The filing provides no quantified revenue or earnings guidance.
- Backlog fell 39% year over year, reflecting revenue recognized, lower awards, a $22.0 million indefinite delay in Storage Solutions and an $11.6 million mining-project cancellation in Industrial. Management cautioned that project awards, timing, delays and cancellations can make backlog and results volatile.
- Prolonged low oil and other commodity prices were reducing customer spending, particularly in Oil, Gas & Chemical, Storage Solutions, steel and mining. Management said it could not predict the extent of future effects.
- Customer concentration is significant: TransCanada represented 14.8% of FY2016 revenue and Energy Transfer Partners 10.6%. Customer credit deterioration, delayed collections and project disputes could pressure working capital; operating cash flow also reflected a $27.8 million net cash use from changes in operating assets and liabilities.
- Two significant fixed-price multi-year projects remained in progress, expected to finish in FY2017 and FY2018. Cost estimates, schedules, change orders and claims could materially affect future results. The EPC project generated cumulative charges of $60.5 million across FY2015 and FY2016.
- Other material risks include fixed-price overruns, safety and environmental claims, workforce utilization and labor obligations, acquisition integration, goodwill impairment, and credit-facility covenants. The filing reports $10.3 million of revenue for unapproved change orders and claims at year-end; collection timing is uncertain.
- Matrix acquired Baillie Tank Equipment for a net purchase price of $13.0 million, adding tank-product capabilities to Storage Solutions. The acquired business contributed $5.4 million revenue and $0.3 million operating income from February through June 2016.
Management and Deloitte reported effective internal control over financial reporting, and the independent auditor issued an unqualified opinion on the financial statements. Management stated that known legal proceedings were not expected to have a material effect.
Most important facts for investors to verify
- Whether the sharp backlog reduction translates into lower FY2017 revenue, particularly after major projects complete or are delayed.
- Progress, remaining costs and final closeout exposure on the EPC joint-venture project and the two other large fixed-price projects.
- Receivable collectibility and working-capital movements, including the $5.2 million bad-debt charge and larger allowance.
- Customer spending trends and concentration, commodity-related demand, and the effect of California prevailing-wage and workforce requirements on Oil, Gas & Chemical work.
- Revolver covenant headroom and liquidity under weaker operating conditions, alongside planned capital spending and any further acquisitions or repurchases.