Matrix Service Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2019. The filing is for fiscal 2019 Q3, notwithstanding the request metadata’s “2018 Q3.” Matrix provides engineering, construction, fabrication, maintenance and repair services across Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions and Industrial markets.
Financial performance and position
| Metric | Three months ended March 31, 2019 | Nine months ended March 31, 2019 |
|---|---|---|
| Revenue | $358.9 million; prior year $245.6 million | $1,018.0 million; prior year $798.5 million |
| Gross profit / margin | $36.9 million / 10.3%; prior year $14.9 million / 6.1% | $88.2 million / 8.7%; prior year $70.5 million / 8.8% |
| Operating income (loss) | $12.8 million; prior year $(5.9) million | $20.5 million; prior year $6.6 million |
| Net income (loss) | $8.9 million; diluted EPS $0.33; prior year $(5.2) million and $(0.19) per diluted share | $15.2 million; diluted EPS $0.55; prior year $3.2 million and $0.12 per diluted share |
| Cash from operations | $(1.1) million for the nine months, compared with $45.9 million provided in the prior-year period |
Quarterly gross-margin improvement reflected higher volume, better overhead recovery and improved project execution. Nine-month gross margin was slightly lower year over year, with early-year results affected by the wind-down of lower-margin work and revised estimates on certain projects. Nine-month EBITDA, a non-GAAP measure, was $35.6 million versus $22.8 million.
At March 31, 2019, cash was $49.7 million, current assets were $415.2 million and current liabilities were $289.5 million. Revolver borrowings were $2.2 million; facility availability was $130.3 million, bringing reported available liquidity to approximately $180.0 million. Covenant-defined funded debt was $23.9 million against covenant EBITDA of $51.4 million for the preceding four quarters. The company reported compliance with its credit covenants. Total assets were $631.4 million and stockholders’ equity was $336.1 million.
Changes versus the prior comparable period
- Quarterly revenue increased across all four segments. Storage Solutions and Industrial contributed the largest increases; quarterly revenue rose to $134.4 million and $81.3 million, respectively.
- For the nine months, Storage Solutions revenue rose to $372.9 million and Industrial to $237.2 million. Electrical Infrastructure revenue declined to $163.5 million, primarily reflecting a strategic shift away from larger power-generation EPC projects and lower power-delivery volume.
- Nine-month operating income and net income improved substantially. Interest expense declined to $1.0 million from $2.1 million, while the nine-month effective tax rate fell to 27.9% from 38.1%.
- Cash declined by $14.4 million over the nine months. Operating cash use reflected a $71.4 million increase in receivables and higher retentions and other working-capital needs, partly offset by increased payables and accrued expenses.
Outlook, risks and unusual items
- Backlog was $1.146 billion at March 31, down from $1.219 billion at June 30, 2018. Nine-month book-to-bill was 0.9; quarterly book-to-bill was 1.3. Storage Solutions had the largest backlog, $652.8 million. Management cautioned that interim-period awards are cyclical and not indicative of longer-term opportunities.
- Remaining performance obligations were $805.3 million, of which approximately $714.2 million was expected to be recognized as revenue within twelve months. This measure is distinct from the company’s reported backlog.
- Management expected a fiscal 2019 effective tax rate of approximately 27%. No specific revenue or earnings guidance was provided in the supplied filing text.
- Fixed-price project profitability depends on cost-to-complete estimates, which require significant judgment. Unpriced change orders and claims included in contract assets totaled $11.5 million, versus $15.0 million at June 30, 2018; actual collections may differ materially from recorded amounts.
- Risks cited include project delays, changing customer activity and commodity-market conditions, customer credit and collection issues, contract disputes, seasonality, and compliance with credit-facility covenants. Management noted no goodwill impairment indicators at quarter-end but said deterioration in project opportunities or margins could lead to impairment.
- In August 2018, the company sold non-core process-heating business assets for $3.9 million in cash and recorded a $0.4 million gain. The disposed business’s results were not material.
- The company recorded a $0.6 million valuation allowance on Canadian foreign tax credits considered unlikely to be used before expiration. Adoption of the new lease standard was expected to materially affect the balance sheet; the impact was not yet quantified.
Important facts for investors to verify
- Whether revenue growth converts into operating cash, particularly as receivables and long-dated retentions increase.
- Execution and margins on large Storage Solutions and Industrial projects, and the outcome of the thermal-vacuum-chamber project nearing completion.
- Backlog conversion, award timing and the difference between backlog and remaining performance obligations.
- Resolution and collection of unpriced change orders and claims, and changes in project cost estimates.
- Credit-facility availability and covenant headroom as operating conditions and working-capital needs change.