Matrix Service Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2015 (fiscal 2015 Q3). The request metadata says “2014 Q3,” but the filing itself reports fiscal 2015 Q3.
Business context and financial results
Matrix provides construction, maintenance, and related services through Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial segments. Unless noted otherwise, amounts below are in millions of dollars.
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Nine months ended March 31, 2015 | Nine months ended March 31, 2014 |
|---|---|---|---|---|
| Revenue | $314.2 | $381.5 | $978.7 | $918.7 |
| Gross profit | $2.6 | $39.9 | $47.0 | $99.6 |
| Gross margin | 0.8% | 10.5% | 4.8% | 10.8% |
| Operating income (loss) | $(14.4) | $18.8 | $(9.6) | $44.4 |
| Net income (loss) attributable to Matrix | $(3.0) | $11.4 | $6.2 | $28.3 |
| Diluted EPS | $(0.11) | $0.42 | $0.23 | $1.05 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $37.0 | $20.2 |
Quarterly revenue fell 17.7% year over year, while nine-month revenue rose 6.5%, primarily reflecting a longer contribution from the Matrix NAC acquisition. Nine-month net income attributable to Matrix declined despite higher revenue, mainly because of the acquired EPC joint venture project losses.
Balance sheet, cash flow, and liquidity
- At March 31, 2015, cash was $103.2 million, current assets $392.8 million, and current liabilities $287.9 million.
- Total assets were $579.0 million; total liabilities $303.3 million; and total stockholders’ equity $275.7 million.
- Borrowings under the senior credit facility were $9.9 million. The $200 million facility had $89.9 million available, after a leverage-based borrowing-capacity constraint and $32.7 million of letters of credit. The company reported compliance with all credit covenants.
- Management reported total available liquidity of $193.1 million, including cash and credit-facility availability.
- For the first nine months, operating cash flow was $37.0 million; investing activities used $16.0 million, including $11.1 million of capital expenditures and $5.6 million for the HDB acquisition; financing activities provided $6.1 million. Cash increased $26.1 million from fiscal year-end.
- Working-capital contract balances shifted toward billings ahead of costs: billings in excess of costs were $139.4 million, versus $108.4 million at June 30, 2014. Costs and estimated earnings in excess of billings were $77.3 million.
Material changes and segment performance
- Electrical Infrastructure: Nine-month revenue increased to $162.4 million from $132.2 million, but the segment recorded a $46.5 million operating loss. The acquired EPC joint venture project was the principal cause.
- Oil Gas & Chemical: Nine-month revenue increased to $224.6 million from $187.6 million, while operating income declined to $5.8 million from $8.9 million. Lower-than-expected profitability on a significant turnaround and under-recovered overhead weighed on margins.
- Storage Solutions: Nine-month revenue declined to $370.3 million from $470.5 million, largely because the prior-year period included significant balance-of-plant work and a large Canadian customer project was delayed. Operating income was $18.8 million versus $26.7 million.
- Industrial: Nine-month revenue increased to $221.5 million from $128.4 million, principally due to Matrix NAC. Operating income rose to $12.3 million from $4.1 million, supported by favorable project completions and a customer settlement.
- Backlog reached $1.239 billion at March 31, 2015, up from $915.8 million at June 30, 2014. The quarter included an approximately $450 million combined-cycle power station award. Currency translation, including a weaker Canadian dollar, reduced backlog by approximately $30 million.
Outlook, risks, and unusual items
- The acquired EPC joint venture project generated charges reducing operating income by $28.5 million in the quarter and $54.7 million year to date; the corresponding after-tax reductions to Matrix-attributable net income were $9.7 million and $18.7 million. Causes included labor compression, productivity losses, technical issues, rework, and installation and commissioning complexity. Management expected substantial completion by fiscal year-end; associated future revenue was expected to carry zero margin until completion.
- Management described the project charges as a significant short-term constraint on credit-facility capacity, but believed cash, remaining facility availability, and operating cash generation would be sufficient for business objectives.
- Management said crude-price declines had not materially affected results or caused significant backlog cancellations through the period. Further weakness could reduce customer spending, particularly in Storage Solutions and some refining and upstream markets; Matrix characterized upstream exposure as limited.
- Management noted normal seasonality, customer-driven project timing, permitting delays, contract mix, and weather can cause interim results to fluctuate. The filing provides no numerical earnings or revenue guidance.
- Unapproved change orders and claims included in contract assets were $12.8 million. Collection timing and ultimate realization could differ materially from recorded amounts. The company also cited insurance deductibles, self-insured retentions, coverage limits, and ordinary-course legal proceedings; management did not expect known legal matters to materially affect the company.
- Management reported no material change in risk factors or market-risk exposure from the prior annual report. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Progress, final cost estimates, completion timing, and remaining cash or credit impact of the EPC joint venture project.
- Whether the company maintains credit-covenant compliance and how the leverage-based capacity constraint and letters of credit affect liquidity.
- Conversion of the $1.239 billion backlog into revenue and margin, including the large power-station award, Canadian-dollar exposure, and project delays or cancellations.
- Collection and resolution of unapproved claims and change orders, retentions, and contract working-capital balances.
- Whether turnaround profitability, Storage Solutions demand, and customer spending change as market and crude-price conditions evolve.