Matrix Service Company — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017, compared with the three months ended September 30, 2016. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. The company provides engineering, construction, maintenance and related services across Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $269.9 | $341.8 |
| Gross profit / margin | $28.9 / 10.7% | $32.3 / 9.4% |
| Operating income | $7.3 | $14.3 |
| Net income | $3.8 | $9.3 |
| Diluted EPS | $0.14 | $0.35 |
| EBITDA (company-defined, non-GAAP) | $13.1 | $19.2 |
| Operating cash flow | $6.8 | $(49.6) |
| Capital expenditures | $1.9 | $1.8 |
Revenue fell 21.0% year over year. Gross margin improved, which management attributed mainly to stronger project execution and better recovery of construction overhead costs. SG&A rose to $21.6 million from $18.0 million, primarily reflecting the Houston Interests acquisition. Net interest expense increased to $0.6 million from $0.2 million. The effective tax rate rose to 44.5% from 33.6%, affected by a higher projected U.S. income mix and a $0.5 million stock-compensation tax adjustment.
Segments and backlog
- Electrical Infrastructure: Revenue $80.0 million versus $88.0 million; operating income $3.6 million versus $1.1 million. Revenue declined with lower volume on a power-generation project; margin improved with execution and overhead recovery.
- Oil Gas & Chemical: Revenue $85.7 million versus $32.5 million; operating income $4.1 million versus an operating loss of $2.9 million. Growth reflected project work, Houston Interests, and higher turnaround and maintenance volumes.
- Storage Solutions: Revenue $71.0 million versus $199.5 million; operating loss $0.1 million versus operating income of $16.8 million. The prior-year period included unusually high Dakota Access pipeline-related terminal work; lower current volume weighed on overhead recovery.
- Industrial: Revenue $33.3 million versus $21.7 million; operating loss $0.3 million versus a loss of $0.6 million. Higher iron and steel activity and improved overhead recovery contributed to the increase.
Backlog increased to $728.8 million at September 30, 2017, from $682.3 million at June 30, 2017. The quarterly book-to-bill ratio was 1.2 overall, but varied substantially by segment: Electrical Infrastructure 0.5, Oil Gas & Chemical 0.4, Storage Solutions 0.9, and Industrial 5.5. Industrial backlog growth reflected significant iron and steel maintenance and capital awards. Management said significant project awards continued to be delayed amid customer caution and market uncertainty.
Cash, debt and liquidity
- Cash and cash equivalents were $46.1 million at September 30, 2017, versus $43.8 million at June 30, 2017.
- Revolver borrowings were $42.1 million; letters of credit were $8.1 million. Availability under the $300 million revolving facility was $85.7 million. Including cash, reported available liquidity was $131.8 million.
- Consolidated funded indebtedness under the credit agreement was $50.2 million, against trailing-four-quarter covenant EBITDA of $34.0 million. The company reported compliance with all credit covenants at quarter-end.
- Operating cash flow was $6.8 million, compared with cash used of $49.6 million a year earlier. Working-capital movements included a $15.7 million net cash benefit from contract asset and liability balances, partly offset by lower accounts payable and higher receivables.
- Total assets were $572.5 million and stockholders’ equity was $328.4 million at quarter-end.
Outlook, risks and notable items
- Credit amendment: An August 31, 2017 amendment temporarily raised the maximum leverage ratio to 4.00 for the September and December 2017 quarters, suspended fixed-charge coverage testing for those quarters, and added a minimum $15 million covenant EBITDA requirement for the four quarters ending December 31, 2017. The leverage limit returns to 3.00 and fixed-charge coverage testing resumes beginning with the March 2018 quarter. The amendment also limits dividends and share repurchases through December 31, 2017, subject to a $5 million combined cap and a pro forma leverage-ratio condition of 2.50 or less. A higher pricing tier may apply if leverage exceeds 3.00 during the relief period.
- Management said projected cash flow over the next four quarters was strong, including expected collection of significant Storage Solutions project retention, and that it believed liquidity was sufficient. It did not provide quantitative earnings or revenue guidance. Management did not expect significant increases in revolver availability until the second half of fiscal 2018.
- Commodity-price uncertainty continued to pressure Oil Gas & Chemical and Storage Solutions, with customers delaying capital projects and elective maintenance. Management reported improving routine maintenance and turnaround prospects, stronger iron and steel activity, and increased mining-sector bidding, but not a corresponding increase in mining awards.
- Costs and estimated earnings in excess of billings included $12.4 million of revenue from unapproved change orders and claims. Collection and final resolution could take longer than a year, and realized amounts could differ materially from recorded amounts.
- The annual goodwill impairment test found no impairment. A reporting unit with $8.0 million of goodwill had only 9% headroom at the prior test; management said a significant project award subsequently resolved the assumed contingency and current forecasts did not indicate impairment.
- Houston Interests, acquired in December 2016 for a net purchase price of $42.5 million, contributed to revenue and SG&A growth. The company said the acquisition’s purchase-price allocation remained preliminary.
- The company plans to adopt the new revenue standard on July 1, 2018 using the modified retrospective method. Management expected fewer performance obligations for some projects and potentially earlier profit recognition on unapproved change orders and claims, but could not reliably estimate any transition adjustment.
- Management considered known legal proceedings not material. It also noted risks from project estimates, contract execution, customer credit and collections, insurance exposure, seasonality, commodity markets, and credit-facility capacity and covenant compliance.
Important facts for investors to verify
- Whether backlog converts to revenue and earnings as expected, particularly the Industrial awards and low book-to-bill ratios in Electrical Infrastructure and Oil Gas & Chemical.
- Progress against the December 2017 minimum covenant EBITDA requirement and the scheduled return to tighter credit tests in 2018.
- Timing and collection of significant project retentions, and recoverability of the $12.4 million in unapproved change orders and claims.
- Whether improved gross margins can persist despite lower Storage Solutions volume and ongoing customer caution.
- The eventual effect of the revenue-recognition standard on reported revenue, profit timing, disclosures, and retained earnings.