Matrix Service Company — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2015, filed September 11, 2015. Although the request metadata says “2014 Q4,” the filing covers fiscal 2015; its fourth-quarter figures are for the three months ended June 30, 2015. Matrix provides engineering, fabrication, construction, infrastructure and maintenance services across power, oil and gas, petrochemical, storage and industrial markets.
Financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $1.343 billion | $1.263 billion |
| Gross profit / margin | $87.4 million / 6.5% | $136.5 million / 10.8% |
| Operating income / margin | $8.8 million / 0.7% | $58.6 million / 4.6% |
| Net income (loss), consolidated | $(1.9) million | $36.9 million |
| Net income attributable to Matrix; diluted EPS | $17.2 million; $0.63 | $35.8 million; $1.33 |
| Cash from operations | $24.4 million | $77.0 million |
| Capital expenditures | $15.8 million | $23.6 million |
The consolidated net loss differs from income attributable to Matrix because the acquired joint venture’s $19.1 million loss was allocated to noncontrolling interest. Cash and cash equivalents were $79.2 million at year-end; working capital was $114.2 million. Total assets were $568.3 million and total liabilities were $283.8 million.
At June 30, 2015, borrowings under the revolving credit facility were $8.8 million. Reported availability was $95.6 million, after a $55.0 million borrowing-capacity constraint under the leverage covenant and $40.6 million of letters of credit. The company reported compliance with its other covenants. Backlog increased to $1.421 billion from $915.8 million.
Material changes and unusual items
- Revenue rose 6.3%, primarily because FY2015 included a full year of Matrix NAC activity following its December 2013 acquisition. Storage Solutions revenue declined $107.8 million, partly offset by growth in Industrial, Oil Gas & Chemical, and Electrical Infrastructure.
- A $53.4 million charge on an acquired engineering, procurement and construction joint-venture power project drove the sharp margin and operating-income decline. The charge reflected labor productivity and compression issues, technical rework, and installation and commissioning complexity. The project reached substantial completion in Q4; management did not expect significant further earnings impact.
- FY2015 effective tax rate was 123.2%, principally because the joint-venture loss attributable to the noncontrolling interest generated no corresponding tax benefit. Net income attributable to Matrix fell 52% from FY2014.
- Segment operating results were uneven: Electrical Infrastructure recorded a $44.3 million operating loss, including the project charge; Oil Gas & Chemical earned $7.1 million; Storage Solutions earned $29.1 million; and Industrial earned $17.0 million.
- In Q4 FY2015, revenue was $364.4 million, operating income $18.4 million, net income attributable to Matrix $10.9 million, and diluted EPS $0.40. Q4 FY2014 figures were $344.4 million, $14.2 million, $7.6 million, and $0.28, respectively.
Outlook, risks and contingencies
- No numerical consolidated revenue or earnings guidance is provided. Management expected Canadian revenue to increase in FY2016, while Industrial revenue was expected to decline following completion of a fertilizer project and Industrial margins to face pressure from challenging steel-industry conditions.
- Management said cash on hand, operating cash generation and available credit were expected to support operations and business objectives. However, the EPC project charge constrained revolver capacity; liquidity depends in part on working capital, project billing and collections, and continued covenant compliance.
- Key business risks include cyclical customer capital and maintenance spending, commodity and industry conditions, timing or cancellation of project awards, fixed-price cost overruns, customer payment and change-order disputes, workforce utilization and safety, and reliance on key customers. Enbridge represented 12.3% of FY2015 consolidated revenue, all in Storage Solutions.
- Other disclosed exposures include environmental, warranty, insurance and litigation claims; potential liabilities from multiemployer pension plans; weather and labor disruptions; and foreign-exchange, materials-cost and cybersecurity risks. Management considered known legal matters not material, but acknowledged litigation outcomes are uncertain.
- The company repurchased $5.0 million of stock in FY2015 and had never paid cash dividends; the credit agreement limits dividends and share repurchases. The company reported effective internal control over financial reporting, and the auditor issued an unqualified opinion on the financial statements and internal controls.
Investor verification priorities
- Review the detailed EPC joint-venture loss, noncontrolling-interest allocation, project completion status and any remaining contractual exposure.
- Check the credit agreement’s leverage and fixed-charge tests, the $55.0 million capacity constraint, letters of credit and actual borrowing availability after year-end.
- Assess backlog composition, cancellation and margin risks, including concentration by customer and segment; backlog is not a guarantee of revenue or profit.
- Examine working-capital movements, cash conversion, receivables and unapproved change orders or claims, which totaled $12.7 million at year-end.
- Compare FY2016 results with management’s limited outlook on Canadian and Industrial activity, and monitor steel-market conditions and project execution.