Matrix Service Company — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2017, with fourth-quarter results for the three months ended that date. Although the request metadata says “2016 Q4,” the filing covers fiscal 2017.
Business context
Matrix provides engineering, construction, fabrication, infrastructure and maintenance services across electrical infrastructure, oil, gas and chemical, storage solutions, and industrial markets. It also sells aboveground storage tank products. Results are project-based and exposed to customer capital spending, commodity markets and project execution.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1,197.5 million | $1,311.9 million |
| Gross profit / margin | $81.0 million / 6.8% | $126.0 million / 9.6% |
| Operating income / margin | $4.9 million / 0.4% | $40.9 million / 3.1% |
| Net income attributable to Matrix | Loss of $0.2 million | $28.9 million |
| Diluted EPS | Loss of $0.01 | $1.07 |
| Adjusted EBITDA (non-GAAP) | $25.9 million | $65.3 million |
| Cash from operations | Use of $18.7 million | Provided $33.6 million |
| Capital expenditures | $11.9 million | $13.9 million |
FY2017 revenue declined 8.7%. Gross margin deterioration reflected lower work volumes and overhead under-recovery, as well as a significant Electrical Infrastructure project charge. Interest expense rose to $2.2 million from $0.9 million, principally due to acquisition and project-related borrowings. The reported effective tax rate was 94.4%, affected by the geographic mix of earnings and the Canadian project loss.
Segments and material changes
- Electrical Infrastructure: Revenue increased to $373.4 million from $349.0 million, but gross margin fell to 1.9% from 8.4%; the segment recorded an $8.3 million operating loss. A troubled power-generation project drove a significant FY2017 cost estimate increase.
- Oil, Gas & Chemical: Revenue was $240.5 million versus $249.8 million; gross margin declined to 5.3% from 7.4%, reflecting lower volumes and overhead under-recovery. Houston Interests contributed from its December 2016 acquisition.
- Storage Solutions: Revenue declined to $481.7 million from $563.5 million, largely due to reduced activity on Dakota Access-related terminal work and lower domestic volumes. It remained the largest and most profitable segment, with 11.6% gross margin and $22.9 million operating income.
- Industrial: Revenue fell to $101.9 million from $149.6 million amid weaker steel and mining activity and lower revenue on a fertilizer project; gross margin was 5.4% versus 6.9%.
Backlog ended at $682.3 million, down from $868.7 million a year earlier; the total book-to-bill ratio was 0.9. Management expected approximately 92% of year-end backlog to be recognized as revenue within the next 12 months. Segment book-to-bill was 0.7 for Electrical Infrastructure, 1.7 for Oil, Gas & Chemical, 0.5 for Storage Solutions and 1.4 for Industrial.
Cash, debt and liquidity
At June 30, 2017, cash was $43.8 million, working capital was $139.7 million, and total liquidity was reported at $122.2 million, including $78.4 million of revolving-credit availability. Revolver borrowings were $44.7 million; covenant-defined funded debt was $52.5 million. The $300 million secured revolving facility matures in February 2022. Leverage limits constrained available capacity, although the company reported compliance with its covenants at year-end.
Operating cash use reflected working-capital outflows, including a $37.0 million decrease in accounts payable. Investing cash use was $51.4 million, including $40.8 million for Houston Interests and $11.9 million in capital expenditures. Financing provided $42.7 million, mainly through net revolver borrowings.
Outlook, risks and unusual items
- Management described early signs of improvement in energy and industrial markets, including increased bidding activity, but cautioned that customer spending and project awards may lag commodity-price improvements. No specific revenue or earnings guidance was provided. Expected FY2018 capital expenditures were approximately $8.2 million.
- In July 2017, Matrix settled claims on the troubled Electrical Infrastructure project, enabling recovery of costs and overhead for remaining work; a significant portion of future scope was removed from Matrix. The final scope estimate could change as execution plans develop.
- On August 31, 2017, the credit agreement was amended after year-end: the leverage ceiling rose temporarily to 4.00x for the September and December 2017 quarters, and fixed-charge coverage testing was suspended for those quarters. A $15 million minimum covenant EBITDA requirement applies for the four quarters ending December 31, 2017. The amendment also restricted dividends and repurchases and could raise borrowing costs if leverage exceeded 3.00x.
- Houston Interests was acquired for a net purchase price of approximately $42.5 million. It contributed $33.4 million of revenue and $1.3 million of operating income during the period included in FY2017. Acquisition integration and the preliminary purchase-price allocation remain relevant considerations.
- Goodwill was $113.5 million, or 19.4% of assets. Annual testing found no impairment, but management disclosed limited headroom at certain reporting units; failure to win an assumed significant project could trigger an interim impairment review and potentially a material charge.
- Other principal risks include fixed-price contract overruns and disputed change orders, customer concentration and credit risk, cyclical markets and delayed awards, safety and environmental exposures, multiemployer pension-plan liabilities, and foreign currency and interest-rate exposure. Two customers represented 19.5% and 15.3% of FY2017 revenue, respectively.
The independent auditor issued an unqualified opinion on the financial statements and internal controls. Management considered internal control over financial reporting effective, but excluded Houston Interests from its control assessment; that business represented about 3% of FY2017 revenue and 13% of year-end assets.
Investor verification priorities
- Review the Electrical Infrastructure project’s settlement, remaining scope, cost recovery and cash-collection progress.
- Track covenant EBITDA, leverage, borrowing availability and compliance with the amended credit agreement’s December 2017 requirements.
- Assess whether backlog conversion and new awards, especially in Storage Solutions, improve from the 0.9 total book-to-bill ratio.
- Examine goodwill headroom, including the assumed project award supporting one reporting unit, and monitor potential impairment indicators.
- Evaluate working-capital and cash-flow trends, customer concentration, and collectability of receivables, retainages and unapproved claims.