Matrix Service Company — Form 10-Q Summary
Reporting period: Three months ended September 30, 2015, the company’s fiscal 2016 first quarter (despite the request metadata referring to 2015 Q1). The financial statements are unaudited. Matrix provides construction, maintenance, fabrication and related services through Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions and Industrial segments.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2015 | Prior-year quarter |
|---|---|---|
| Revenue | $319.3 million | $321.7 million |
| Gross profit / margin | $34.6 million / 10.8% | $28.4 million / 8.8% |
| Operating income | $15.1 million | $8.5 million |
| Net income attributable to Matrix | $9.9 million | $5.9 million |
| Diluted EPS | $0.37 | $0.22 |
| Operating cash flow | $(14.5) million | $5.1 million |
| Capital expenditures | $3.9 million | $3.7 million |
SG&A was $19.5 million, or 6.1% of revenue, versus $19.8 million, or 6.2%. Net interest expense was approximately $0.2 million; the effective tax rate was 34.3%, compared with 43.7%. EBITDA, a non-GAAP measure, was $20.7 million, versus $15.7 million.
At September 30, cash was $69.2 million, down from $79.2 million at June 30. Total assets were $536.6 million and stockholders’ equity was $302.0 million. Credit-facility borrowings were $9.8 million; total funded indebtedness under the credit agreement was $25.1 million. Reported liquidity was $194.4 million, comprising cash and $125.2 million of facility availability. Availability is subject to a leverage-based capacity constraint. The company reported compliance with its credit covenants.
Operating cash use reflected working-capital movements, including a $26.2 million reduction from accounts payable and a $21.4 million decrease in billings in excess of contract costs; the net change in contract assets and liabilities used $19.0 million of cash. Financing cash flow included an $8.4 million contribution from the noncontrolling-interest partner in the acquired EPC joint venture.
Material changes and segment results
Revenue declined slightly overall, but gross profit, operating income and Matrix-attributable earnings improved substantially year over year. The prior-year comparison included a $3.3 million charge on an acquired EPC joint-venture project, which reduced prior-year operating income; current-quarter revenue of $12.7 million on that project was recognized at zero margin as the company worked through final closeout.
| Segment | Revenue, 2015 / 2014 | Operating income (loss), 2015 / 2014 |
|---|---|---|
| Electrical Infrastructure | $65.6m / $55.7m | $1.2m / $(3.7)m |
| Oil Gas & Chemical | $68.3m / $53.4m | $1.4m / $0.6m |
| Storage Solutions | $144.2m / $133.3m | $11.5m / $7.1m |
| Industrial | $41.2m / $79.4m | $0.9m / $4.5m |
Storage Solutions benefited from stronger domestic balance-of-plant work, overhead absorption and project execution. Oil Gas & Chemical revenue increased on higher capital and maintenance activity. Industrial revenue fell with lower iron and steel customer volumes; the segment also had an $11.5 million project cancellation attributed by management to commodity-price weakness, not company performance.
Backlog was $1.285 billion at September 30, down from $1.421 billion at June 30. Awards of $183.4 million were below revenue recognized of $319.3 million. Management said awards in Storage Solutions and Electrical Infrastructure were somewhat below anticipated but generally in line with expectations.
Outlook, risks and contingencies
- No quantified revenue, earnings or margin guidance is provided. Management said the observed effect of declining crude prices on the quarter was not significant and cancellations related to crude prices had not materially reduced backlog. It cautioned that continued low or declining prices could reduce customer spending, particularly in Storage Solutions and among some integrated oil customers.
- Management expects routine maintenance and turnaround activity in midstream and downstream markets to be relatively resilient, but reported mixed customer signals on the timing and magnitude of work. Exposure to upstream exploration customers is described as limited.
- Results can vary with seasonality, project timing, permitting, customer decisions, weather and contract mix. Working-capital timing, retentions, letters of credit and credit-facility capacity can affect liquidity.
- The company recorded $13.1 million of revenue for unapproved change orders and claims in contract assets. Collection timing and ultimate recovery are uncertain and could differ materially from estimates.
- Insurance reserves involve estimates and self-insured exposure; management cautioned that claims outcomes could differ from reserves. Management considered known legal proceedings not material to financial position, results, operations or liquidity.
- The credit facility is $200 million and expires March 2019. The leverage covenant constrained capacity by $41.7 million at quarter-end; remaining availability was $125.2 million. The company said cash, facility availability and operating cash generation should provide sufficient liquidity, while noting the capacity constraint.
- Management reported no current goodwill impairment indicators and no material changes to risk factors from its fiscal 2015 Form 10-K. Disclosure controls were assessed effective at the reasonable-assurance level.
Investor verification priorities
- Track conversion of the $1.285 billion backlog into revenue and new awards, especially the continued contraction in Industrial backlog and the $11.5 million cancellation.
- Review operating cash flow and working-capital movements, including contract billings, collections, accounts payable and retentions.
- Monitor credit-covenant headroom, funded indebtedness and facility availability, including the impact of the leverage-based borrowing restriction.
- Assess recovery and timing of the $13.1 million in unapproved change orders and claims, and the final closeout and margin effect of the EPC joint-venture project.
- Watch customer spending and project cancellations if crude prices remain low or decline, as well as the effect of commodity weakness on Industrial customers.