Matrix Service Company — Form 10-Q Summary
Business context and period: Matrix Service provides construction, maintenance and related services across Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions and Industrial. This unaudited filing covers the three and six months ended December 31, 2015 (fiscal Q2 and first half of fiscal 2016); comparisons are to the same periods of fiscal 2015. Unless noted, amounts are in millions of dollars.
Key financial results
| Metric | Three months ended Dec. 31, 2015 | Prior-year quarter | Six months ended Dec. 31, 2015 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $323.5 | $342.9 | $642.9 | $664.6 |
| Gross profit / margin | $30.0 / 9.3% | $16.0 / 4.7% | $64.6 / 10.0% | $44.3 / 6.7% |
| Operating income (loss) | $4.9 | $(3.7) | $20.0 | $4.9 |
| Net income (loss) attributable to Matrix | $5.4 | $3.3 | $15.4 | $9.2 |
| Diluted EPS | $0.20 | $0.12 | $0.56 | $0.34 |
| Operating cash flow | Not stated for quarter | $6.4 | $5.4 |
For the quarter, consolidated net income was $3.1 million, versus a $4.8 million loss a year earlier; the difference from Matrix-attributable earnings reflects losses attributable to noncontrolling interests. Six-month net income was $12.9 million, versus a $0.2 million loss. Six-month EBITDA, a non-GAAP measure, was $33.2 million versus $26.2 million.
Balance sheet and liquidity at December 31, 2015: Cash was $82.4 million; total assets were $572.1 million; total liabilities were $267.2 million; and stockholders’ equity was $304.9 million. Borrowings under the revolving facility were $7.2 million; covenant-defined funded indebtedness was $22.3 million. Facility availability was $133.2 million, giving stated total available liquidity of $215.6 million including cash. The $200 million facility expires March 2019. The company reported compliance with its covenants, although leverage limits constrained access to some facility capacity. Six-month capital expenditures were $7.5 million.
Changes and operating drivers
- Quarterly revenue declined 5.6%; first-half revenue declined 3.3%. First-half Industrial revenue fell $68.9 million, partly offset by a $42.8 million increase in Electrical Infrastructure revenue.
- Profitability improved substantially year over year, in part because the acquired EPC joint-venture project incurred smaller charges: $5.4 million in the quarter and $5.5 million in the first half, versus $22.9 million and $26.2 million, respectively, in the prior-year periods. The fiscal 2016 charge reflected higher-than-expected closeout costs; the project had reached substantial completion in fiscal Q4 2015.
- Quarterly SG&A rose to $25.1 million from $19.6 million, primarily due to a non-routine $5.2 million bad-debt charge following an unexpected client bankruptcy. First-half SG&A was $44.6 million versus $39.5 million.
- Storage Solutions first-half revenue increased slightly to $266.4 million and segment operating income rose to $17.9 million from $13.7 million, helped by better overhead recovery and project execution. Electrical Infrastructure first-half revenue grew to $157.0 million, but operating income was only $0.5 million after EPC project charges. Oil Gas & Chemical first-half revenue was broadly flat at $129.9 million, with an operating loss of $1.6 million. Industrial revenue fell to $89.6 million and operating income to $3.2 million, amid weaker iron, steel and mining activity and a fertilizer project nearing completion.
- Backlog declined to $1.117 billion at December 31 from $1.421 billion at June 30. It included a $22.0 million removal for indefinitely delayed Canadian storage-terminal work and an $11.6 million mining-project cancellation. The company said the cancellation was not related to its performance.
Outlook, risks and unusual items
- Management said the effect of falling crude prices on reported operating income had not been significant to date. It expected some reduction in Storage Solutions customer spending and noted uncertainty around customer spending in Oil Gas & Chemical; it could not predict the ultimate effect of commodity prices.
- Management cited continued weakness and uncertainty in iron and steel, mining and minerals, including lower customer capital and maintenance spending. It did not provide numerical earnings or revenue guidance.
- Contract execution and cash conversion remain sensitive to milestone billing, retentions, project timing, customer delays, and working-capital movements. Accounts receivable included a $5.5 million provision for uncollectible accounts in the first half; unapproved change orders and claims totaled $11.3 million, and ultimate collection could differ materially from recorded amounts.
- Insurance reserves depend on estimates, and insurance or subcontractor coverage may not fully cover valid claims. The company said known legal proceedings were not expected to have a material effect.
- On February 1, 2016, after quarter-end, the company acquired Baillie Tank Equipment for $15.4 million in cash, funded from cash on hand. The preliminary purchase-price allocation was still in progress; the business will be reported in Storage Solutions.
- The company recorded discrete tax benefits of $0.9 million for the quarter and $1.4 million for the first half, primarily related to retroactive R&D tax credits and, for the first half, a foreign-currency item. It retrospectively adopted deferred-tax balance-sheet presentation guidance, reclassifying $6.6 million each of deferred tax assets and liabilities on the prior balance sheet.
Important facts for investors to verify
- Whether the $5.2 million client-bankruptcy bad-debt charge signals further collection risk, and whether related receivables or allowances changed after quarter-end.
- Final costs and closeout performance for the acquired EPC joint-venture project, including whether additional charges or cash requirements arise.
- Backlog conversion, especially the Canadian storage-terminal delay, project cancellations, and exposure to commodity-driven customer spending.
- Liquidity and covenant headroom: the company reported $133.2 million of facility availability, but leverage constraints reduced access to the full commitment.
- The final purchase-price allocation and integration impact of the $15.4 million Baillie Tank Equipment acquisition.