Business context and reporting period
Matrix Service Company’s unaudited Form 10-Q covers the three months ended September 30, 2018, its first quarter of fiscal 2019. The company provides engineering, procurement, construction, repair and maintenance services through Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial segments.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $318.5 million | $269.9 million |
| Gross profit / margin | $23.4 million / 7.4% | $28.9 million / 10.7% |
| Operating income | $2.2 million | $7.3 million |
| Net income | $2.3 million | $3.8 million |
| Diluted EPS | $0.08 | $0.14 |
| EBITDA (non-GAAP) | $7.6 million | $13.1 million |
| Operating cash flow | $8.8 million | $6.8 million |
Cash and cash equivalents were $74.7 million at September 30, 2018, versus $64.1 million at June 30, 2018. Total assets were $587.2 million and stockholders’ equity was $322.8 million. The company reported $1.5 million of revolving-credit borrowings; covenant-defined funded indebtedness was $39.2 million. Revolver availability was $54.6 million after letters of credit and borrowing-capacity constraints. Total available liquidity, including cash, was $129.3 million.
Segment results
- Electrical Infrastructure revenue was $44.7 million and operating income $0.7 million; revenue declined mainly following completion of a large power-generation project.
- Oil Gas & Chemical revenue was $75.5 million and operating income $0.5 million; lower capital work and a greater mix of lower-margin maintenance work weighed on results.
- Storage Solutions revenue was $112.8 million and operating income $0.3 million; higher construction and maintenance volumes were offset by margin pressure.
- Industrial revenue was $85.6 million and operating income $0.8 million; higher iron and steel and thermal-vacuum work drove growth, while project cost escalation affected margins.
Material changes and management commentary
Revenue rose year over year, led by Storage Solutions and Industrial, but gross profit, gross margin, operating income, net income and EBITDA declined. Management attributed the companywide margin contraction mainly to work bid in a highly competitive environment in prior periods, lower-than-forecast margins on certain projects, and overhead under-recovery in some segments. SG&A was modestly lower. The effective tax rate fell to 16.4% from 44.5%, including a $0.3 million benefit from excess tax benefits on vested stock awards; management expects an approximately 27% rate for the balance of fiscal 2019.
Operating cash flow was $8.8 million. Working-capital movements included higher receivables and accounts payable; investing cash flow was positive $1.5 million, including $3.7 million of proceeds from a business sale and $2.5 million of capital expenditures. The company sold non-core process-heating business assets for $3.9 million and recorded a $0.4 million gain.
Outlook, risks and unusual items
- Backlog was $1.109 billion at quarter-end, down from $1.219 billion at June 30; quarterly book-to-bill was 0.7. Remaining performance obligations were $958.9 million, of which $733.7 million were expected to be recognized as revenue within 12 months. Management cautioned that one quarter of awards is not indicative of longer-term opportunities.
- The filing provides no specific revenue or earnings guidance. Results may fluctuate with project awards and timing, seasonality, permitting, customer decisions, weather and industry conditions.
- Fixed-price project cost-to-complete estimates require significant judgment; revisions can cause cumulative revenue and profit adjustments. Unpriced change orders and claims included in contract assets were $18.8 million, and final collection or resolution could differ materially from recorded amounts.
- The $300 million revolving facility matures in February 2022. The company reported compliance with all covenants; the leverage limit is 3.0 times covenant EBITDA and the minimum fixed-charge coverage ratio is 1.25 times. Availability fell from $73.2 million at June 30, partly due to borrowing-capacity constraints.
- Management reported no goodwill impairment indicators at September 30, but said deterioration in project opportunities or gross margins could trigger an interim review and potential impairment. Accounting for certain Tax Cuts and Jobs Act effects remained incomplete; the company said its analysis could affect foreign-tax-credit valuation allowances or taxes on foreign earnings.
- Management did not expect known legal proceedings to materially affect the company, while acknowledging litigation outcomes are uncertain. The company approved a new buyback program on November 6, 2018, permitting up to $30 million of repurchases per calendar year, subject to a 10% share limit; it had not repurchased shares under the new program.
Important facts for investors to verify
- Whether margins recover as lower-priced backlog is completed, and whether any project cost overruns arise.
- Backlog conversion, new awards and book-to-bill trends by segment.
- Collection and resolution of the $18.8 million in unpriced change orders and claims, alongside receivables and contract-balance movements.
- Liquidity and revolver availability, covenant headroom, and the effect of letters of credit and funded indebtedness.
- Final tax accounting under the Tax Cuts and Jobs Act, including the expected tax rate and potential foreign-tax-credit effects.