Matrix Service Company — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2014; comparisons are with the periods ended December 31, 2013, unless noted. The company provides construction, maintenance, fabrication, and related services through Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial segments. Amounts below are in U.S. dollars; financial figures are in millions except per-share data.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $342.9; up 10.3% | $664.6; up 23.7% |
| Gross profit / margin | $16.0 / 4.7%, versus $34.2 / 11.0% | $44.3 / 6.7%, versus $59.6 / 11.1% |
| Operating income (loss) | $(3.7), versus $14.8 | $4.9, versus $25.6 |
| Net income (loss) attributable to Matrix | $3.3, or $0.12 diluted EPS, versus $10.3, or $0.38 | $9.2, or $0.34 diluted EPS, versus $16.9, or $0.63 |
| EBITDA, company-defined non-GAAP | $10.5, versus $18.6 | $26.2, versus $33.0 |
| Cash from operating activities | Not separately provided | $5.4, versus $50.5 |
Consolidated net loss was $4.8 million for the quarter and $0.2 million for the six months. Matrix-attributable net income was positive because the consolidated results include losses allocated to the noncontrolling interest in the acquired joint venture. The filing reports noncontrolling-interest losses of $8.1 million and $9.4 million, respectively.
At December 31, cash and cash equivalents were $68.6 million, down from $77.1 million at June 30, 2014. Total assets were $566.1 million and stockholders’ equity was $281.8 million. Balance-sheet borrowings under the senior credit facility were $11.8 million. Covenant-defined consolidated funded indebtedness was $34.2 million. The $200 million revolving facility had $145.9 million available after outstanding borrowings, letters of credit, and a leverage-based capacity constraint. Cash plus facility availability was reported as $214.4 million. The company stated that it was in compliance with all credit covenants.
Material changes and operating drivers
- The principal adverse item was a change in estimate on an acquired Electrical Infrastructure EPC joint-venture project, reducing operating income by $22.9 million in the quarter and $26.2 million year to date. The project was about 74% complete at December 31; completion was expected by the end of the fiscal year. Management cited delays, technical impacts, and additional work compressing the delivery schedule. Future revenue on the loss project is expected to carry zero margin.
- Revenue growth largely reflected a full period of Matrix NAC operations, acquired in December 2013. Industrial and Electrical Infrastructure revenue rose substantially; Storage Solutions revenue declined, mainly because the prior-year period had unusually high terminal balance-of-plant work.
- Quarterly operating results by segment included Electrical Infrastructure operating loss of $18.5 million, Oil Gas & Chemical income of $2.7 million, Storage Solutions income of $6.6 million, and Industrial income of $5.5 million. The Electrical Infrastructure loss reflected the EPC charge.
- Six-month operating cash flow fell to $5.4 million, with working-capital timing among the drivers: lower accounts payable reduced cash by $19.4 million, while contract billing positions provided a net $22.6 million cash benefit. Investing used $13.0 million, including $5.6 million for the HDB acquisition and $7.7 million of capital expenditures.
- Backlog was $839.0 million at December 31, down from $915.8 million at June 30. In January 2015, the company received an approximately $450 million award for a combined-cycle power station in Canada, to be added to backlog in the next quarter.
Outlook, risks, and notable items
- Management expected Oil Gas & Chemical margins to improve during the remainder of fiscal 2015 as higher work volumes improve construction-overhead utilization. No specific earnings or revenue guidance was provided.
- Management said the crude-price decline had not materially affected results or caused reported backlog cancellations through December 31. It cautioned that sustained low or further-declining prices could reduce customer spending, particularly in Storage Solutions and among some integrated oil and upstream customers; exposure to upstream activity was described as limited.
- Unapproved change orders and claims included in contract assets were $9.6 million, down from $13.1 million at June 30. Collection timing and ultimate recovery remain uncertain and could affect future earnings.
- The company acquired HDB Ltd. for $5.6 million in August 2014, funded with cash, to expand into upstream energy services. It also reported a $0.3 million quarterly interest-income item associated with a customer-dispute settlement award.
- The company cited normal seasonal variation, project execution and collection risks, insurance-retention exposure, and credit-facility capacity and covenant requirements. Management said known legal proceedings were not expected to have a material effect. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- Updated cost-to-complete estimates, remaining schedule, and final exposure for the EPC joint-venture loss project; its reported charges materially affected margins and earnings.
- Whether the expected fiscal-year project completion occurs as planned and whether further changes in estimates or claims arise.
- Conversion of the $839 million backlog and the timing, margins, and execution risks of the approximately $450 million Canadian award.
- Cash conversion and working-capital movements, including receivables, vendor payments, contract billings, and collection of unapproved claims.
- Facility availability and covenant headroom, particularly the leverage-based borrowing constraint, as well as customer spending trends if low crude prices persist.