Matrix Service Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2016 (fiscal Q3 and year to date). The request metadata says “2015 Q3,” but the filing itself reports fiscal 2016 results.
Business context and financial performance
Matrix provides construction, maintenance, turnaround and storage-tank services through Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions and Industrial segments. Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $309.4 | $314.2 | $952.3 | $978.7 |
| Gross profit | $27.3 | $2.6 | $91.9 | $47.0 |
| Gross margin | 8.8% | 0.8% | 9.6% | 4.8% |
| Operating income (loss) | $6.3 | $(14.4) | $26.4 | $(9.6) |
| Net income (loss) attributable to Matrix | $4.4 | $(3.0) | $19.7 | $6.2 |
| Diluted EPS | $0.16 | $(0.11) | $0.73 | $0.23 |
Year-to-date operating cash flow was $21.3 million, down from $37.0 million; investing used $24.5 million and financing used $1.9 million. Cash declined $5.8 million from June 30, 2015 to $73.4 million. Working-capital movements included a $36.5 million cash use from changes in contract costs/billings.
At March 31, cash plus available revolving-credit capacity was $239.9 million. The $200 million secured revolver had $3.8 million drawn, $20.6 million in letters of credit, and $166.5 million available. Funded indebtedness was $16.8 million; the company reported compliance with covenants, but the leverage covenant constrained access to $9.0 million of facility capacity. Total assets were $549.6 million and stockholders’ equity was $309.9 million.
Changes versus prior comparable periods
- Q3 revenue fell 1.5% year over year, while year-to-date revenue declined 2.7%. The improvement in profit chiefly reflects much smaller charges on an acquired EPC joint-venture project than in the prior year.
- Electrical Infrastructure revenue rose to $94.4 million in Q3 and $251.4 million year to date, with operating income of $4.9 million and $5.4 million, respectively; prior-year results were burdened by the EPC project charge.
- Storage Solutions revenue grew to $132.6 million in Q3 and $399.0 million year to date; year-to-date operating income increased to $24.3 million. Higher activity and project execution supported margins.
- Oil Gas & Chemical revenue declined to $55.7 million in Q3 and $185.6 million year to date, reflecting lower capital work and the prior-year turnaround comparison. Q3 segment operating loss was $2.0 million.
- Industrial revenue declined to $26.7 million in Q3 and $116.2 million year to date amid weakness in iron, steel and mining and a fertilizer project nearing completion. Q3 segment operating loss was $3.0 million.
- Backlog was $1.03 billion at March 31, down from $1.42 billion at June 30, 2015. The filing cites work progressing on major projects, a $22.0 million indefinite delay in Storage Solutions and an $11.6 million mining-project cancellation in Industrial.
Outlook, commentary and risks
- Management expected its annual effective tax rate on operations attributable only to Matrix to be 36.5%.
- Management said the credit-facility capacity constraint was expected to persist at June 30, 2016, but not to impair operations; it expected cash, remaining facility availability and operating cash generation to support business objectives.
- Management reported that prolonged low crude prices were slowing capital spending and delaying awards, especially in Oil Gas & Chemical and Storage Solutions. Low steel and copper prices and industry uncertainty were weighing on Industrial. The company could not predict the scale of future effects.
- The acquired EPC joint-venture project generated additional charges of $1.6 million in Q3 and $7.1 million year to date in FY2016, principally from higher-than-expected closeout costs. The project had reached substantial completion in Q4 FY2015.
- Year-to-date SG&A included a $5.2 million bad-debt charge following an unexpected client bankruptcy, higher incentive costs, severance and $0.9 million of acquisition costs. Q3 also included $0.8 million of acquisition costs.
- Unapproved change orders and claims included in contract assets were $11.1 million; actual collections may differ and could take longer than expected. The filing also identifies insurance-retention exposure, customer credit and collection risk, seasonality, project delays, commodity-market weakness and contract/covenant constraints.
- On February 1, 2016, Matrix acquired Baillie Tank Equipment for a net purchase price of $13.0 million. The acquired business contributed $3.5 million revenue and $0.7 million operating income through March 31; purchase accounting remained preliminary.
Important facts for investors to verify
- Progress and final cost/closeout exposure on the acquired EPC joint-venture project, including the remaining impact of charges and its effect on borrowing capacity.
- Quality and collectability of receivables, especially the $5.2 million bankruptcy-related bad-debt charge and $11.1 million of unapproved change orders and claims.
- Backlog conversion, project delays or cancellations, and new awards as commodity prices and customer spending evolve.
- Performance in the weak Industrial and Oil Gas & Chemical segments and execution/margins on major Storage Solutions projects.
- Final valuation and integration results for Baillie Tank Equipment, and actual liquidity and covenant headroom under the credit agreement.
- The filing includes a May 3, 2016 credit-agreement amendment as an exhibit; investors should review its terms for changes subsequent to quarter-end.