Matrix Service Company — FY2018 Form 10-K
Period clarification: The supplied filing is for the fiscal year ended June 30, 2018, filed September 12, 2018; it is not a filing for calendar 2017 Q4. Matrix provides engineering, fabrication, construction, infrastructure and maintenance services across Electrical Infrastructure, Oil, Gas & Chemical, Storage Solutions, and Industrial markets.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1,091.6 million | $1,197.5 million |
| Gross profit / margin | $91.9 million / 8.4% | $81.0 million / 6.8% |
| Operating income (loss) | $(10.5) million / (1.0)% | $4.9 million / 0.4% |
| Net income (loss) attributable to Matrix | $(11.5) million; $(0.43) per diluted share | $(0.2) million; $(0.01) per diluted share |
| Adjusted EBITDA | $28.8 million | $25.9 million |
| Operating cash flow | $74.7 million | $(18.7) million |
| Cash and working capital at year-end | $64.1 million / $118.6 million | $43.8 million / $139.7 million |
| Revolving-credit borrowings at year-end | None | $44.7 million |
Capital expenditures were $8.7 million. Total reported liquidity was $137.2 million, comprising cash and $73.2 million of revolver availability; availability was limited by the leverage-based capacity constraint and letters of credit. The $300 million revolving facility expires February 2022. The company reported compliance with its covenants. It also reported $37.1 million of covenant-defined funded indebtedness, despite no revolver borrowings at year-end; investors should note the differing definitions.
Material changes and segment trends
- Revenue declined 8.8% year over year, while gross margin improved by 1.6 percentage points. The company attributed the margin improvement mainly to the prior-year power-generation project impact and better overhead recovery.
- Electrical Infrastructure revenue fell to $255.9 million from $373.4 million; the segment recorded a $16.5 million operating loss. Matrix shifted away from full EPC power-generation projects toward smaller packages; sluggish high-voltage market spending and competition also weighed on results.
- Oil, Gas & Chemical revenue increased to $322.8 million from $240.5 million and segment operating income improved to $8.8 million from an $8.8 million loss, supported by higher turnaround, maintenance and construction activity and improved execution.
- Storage Solutions revenue declined to $314.7 million from $481.7 million; the segment recorded a $5.9 million operating loss. Lower volume and overhead under-recovery offset favorable project execution in the prior year.
- Industrial revenue increased to $198.2 million from $101.9 million, and operating income rose to $3.2 million from a $1.0 million loss, mainly on stronger iron and steel volumes.
- Backlog rose to $1.219 billion from $682.3 million, with a consolidated book-to-bill ratio of 1.5. Storage Solutions backlog was $613.4 million; the company expected to recognize about 74% of total backlog within 12 months. Backlog is not a guarantee of revenue or profit.
Outlook, commentary and key risks
- Management expected improvement in Electrical Infrastructure in FY2019, but said timing depended on market recovery and planned geographic expansion. It anticipated near-term strong Storage Solutions awards and continued strong iron and steel spending; Oil, Gas & Chemical market conditions were described as favorable.
- FY2019 capital expenditures were projected at approximately $28.3 million to support anticipated growth and expanded project opportunities. Management expected an effective tax rate of 27.0%, versus 5.5% in FY2018.
- FY2018 included $18.0 million of impairment charges: $17.3 million of Electrical Infrastructure goodwill and $0.7 million of acquired customer relationships. The goodwill impairment reflected lower projections following the strategic shift and weak spending in certain high-voltage markets; management warned further impairment could result if assumptions deteriorate.
- Operating cash flow improved substantially, aided by working-capital movements, including higher customer billings in excess of costs. Cash generation can vary with project billing and collection timing, retentions, customer disputes and contract execution.
- Key risks include project cost overruns and estimate revisions under percentage-of-completion accounting, disputed or unapproved change orders and claims ($15.0 million recognized in contract assets), customer credit and concentration (U.S. Steel represented 11.4% of FY2018 revenue), commodity-driven customer spending, tariffs and material costs, safety and environmental exposures, and possible liabilities from multiemployer pension plans. Legal proceedings were described as typical, with management not expecting a material impact; outcomes remain uncertain.
- The Tax Cuts and Jobs Act produced provisional accounting effects; certain foreign tax and GILTI analyses remained incomplete. The company adopted the new revenue standard July 1, 2018 and reported an immaterial transition adjustment and no expected material ongoing impact. Lease accounting effects were still under evaluation; operating lease commitments totaled $33.1 million.
Most important facts for investors to verify
- Whether backlog converts to profitable work on schedule, particularly the large Storage Solutions awards, and whether the expected FY2019 market recovery materializes.
- Whether Electrical Infrastructure performance stabilizes and whether further goodwill or other asset impairments are needed.
- Quality and sustainability of operating cash flow, including customer collections, contract assets, retentions and the effect of project billing timing.
- Revolver availability, covenant headroom and the reconciliation of year-end zero borrowings with $37.1 million of covenant-defined funded indebtedness.
- Exposure and collectibility associated with the $15.0 million of unapproved change orders and claims, customer concentration, and multiemployer pension obligations.
- Execution of the $28.3 million FY2019 capital spending plan, tax-rate outlook and remaining Tax Cuts and Jobs Act and lease-accounting assessments.