Matrix Service Company — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended December 31, 2018; comparative periods ended December 31, 2017. The company provides engineering, construction, maintenance and related services across Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions and Industrial. Interim financial statements are unaudited.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $340.6m | $282.9m | $659.1m | $552.8m |
| Gross profit | $27.9m | $26.7m | $51.3m | $55.6m |
| Gross margin | 8.2% | 9.4% | 7.8% | 10.1% |
| Operating income | $5.5m | $5.2m | $7.7m | $12.5m |
| Net income | $3.9m | $4.5m | $6.2m | $8.4m |
| Diluted EPS | $0.14 | $0.17 | $0.23 | $0.31 |
| Operating cash flow | Not presented quarterly | $13.5m | $29.6m |
Q2 revenue rose about 20% year over year, while six-month revenue rose about 19%. Six-month net income declined about 25%; operating cash flow declined about 54%. Management attributed weaker margins primarily to the run-off of lower-margin work won in a competitive environment and lower-than-forecast margins on certain projects. Six-month interest expense fell to $0.7m from $1.4m, while interest income increased to $0.6m from $0.1m.
Segments and demand indicators
- Storage Solutions: Six-month revenue increased to $238.5m from $141.5m; operating income was $1.6m versus a $2.7m loss. Growth reflected more tank and terminal construction, but margins remained affected by lower-margin project work.
- Industrial: Six-month revenue rose to $155.9m from $92.5m, but operating income was $0.9m versus $1.2m; management cited cost escalation on a competitively bid capital project and lower-margin reimbursable work.
- Electrical Infrastructure: Six-month revenue fell to $102.9m from $144.8m and operating income to $1.1m from $4.7m, primarily reflecting reduced power-generation EPC work and margin pressure.
- Oil Gas & Chemical: Six-month revenue declined to $161.8m from $174.0m and operating income to $4.1m from $9.3m; lower capital and engineering work partly offset higher turnaround and maintenance activity.
- Backlog was $1.046bn at December 31, down from $1.219bn at June 30. Six-month book-to-bill was 0.7 overall. Remaining performance obligations were $882.4m, of which $739.0m was expected to be recognized within 12 months; these are separate measures disclosed by the company.
Financial position and liquidity
- Cash and cash equivalents were $71.5m, versus $64.1m at June 30. Current assets were $364.8m and current liabilities $244.4m.
- Cash from operations was $13.5m; investing used $1.2m and financing used $4.5m during the six months. Operating cash flow was reduced in part by a $10.6m increase in other assets and liabilities, including longer-dated project retentions and prepaid insurance.
- The $300m revolving facility had no borrowings outstanding; letters of credit totaled $28.7m and facility availability was $65.8m. Total liquidity, including cash, was $137.3m, compared with $137.2m at June 30.
- For covenant purposes, funded indebtedness was $28.7m and trailing-four-quarter Covenant EBITDA was $31.5m. The company reported compliance with all credit agreement covenants. The leverage covenant limit is 3.0-to-1.0; the facility also requires a fixed-charge coverage ratio of at least 1.25-to-1.0.
- Stockholders’ equity was $323.6m. The company repurchased 310,532 shares in December for $5.2m, including $2.0m accrued and cash-settled in January 2019.
Outlook, risks and notable items
- Management expected an effective tax rate of approximately 27% for the balance of FY2019. The filing provides no specific revenue or earnings guidance.
- Project awards are cyclical and can shift between periods; management cautioned that interim awards and results do not necessarily indicate longer-term opportunities or full-year performance. Seasonality, project timing, permitting and customer decisions can affect activity.
- Unpriced change orders and claims included in contract assets were $13.2m at December 31, down from $15.0m at June 30. Realized amounts may differ materially, and collection can be delayed pending resolution.
- The company sold non-core process-heating business assets for $3.9m cash and recorded a $0.4m gain; the disposed business’s results were not material.
- Adoption of revenue standard ASC 606 on July 1, 2018 had an immaterial cumulative effect on retained earnings. The company expected adoption of the new lease standard to materially affect its balance sheet, but not earnings or cash flows; its assessment of equipment rentals was incomplete.
- Management reported no goodwill impairment indicators at December 31, but deterioration in project opportunities or gross margins could prompt an interim test and potential impairment. Legal proceedings were not expected by management to have a material effect. Other cited risks include customer credit and collection issues, contract disputes, project delays, commodity and market conditions, and covenant capacity.
Key facts for investors to verify
- Whether margins and project cost estimates stabilize as lower-margin backlog runs off, especially in Electrical Infrastructure, Oil Gas & Chemical and Industrial.
- Backlog conversion, new awards and book-to-bill, given the decline in backlog and six-month ratio below 1.0.
- Cash conversion and working-capital movements, including collection of retentions and unpriced claims/change orders.
- Actual facility capacity and covenant headroom if operating performance weakens; reported availability was $65.8m despite $300m nominal facility size.
- The eventual balance-sheet effect of lease accounting adoption and whether any goodwill impairment indicators emerge.