Matrix Service Company — Form 10-Q Summary
Reporting period: Three months ended September 30, 2014 (fiscal 2015 first quarter), compared primarily with the three months ended September 30, 2013. The filing is unaudited. Matrix provides construction, maintenance, turnaround, and related services across Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial markets.
Financial performance
| Metric | Quarter ended Sep. 30, 2014 | Quarter ended Sep. 30, 2013 |
|---|---|---|
| Revenue | $321.7 million | $226.2 million |
| Gross profit / margin | $28.4 million / 8.8% | $25.5 million / 11.3% |
| Operating income | $8.5 million | $10.8 million |
| Net income attributable to Matrix | $5.9 million | $6.6 million |
| Diluted EPS | $0.22 | $0.25 |
| Operating cash flow | $5.1 million | $18.5 million |
| Capital expenditures | $3.7 million | $5.8 million |
SG&A was $19.8 million, or 6.2% of revenue, versus $14.7 million, or 6.5%. Interest expense was $0.4 million. The income-tax provision was $3.6 million; the effective rate was 43.7%, compared with 37.3%. Company-defined EBITDA, a non-GAAP measure, was $15.7 million versus $14.4 million.
At September 30, cash was $72.8 million and revolving-credit borrowings were $11.3 million. The company reported $164.0 million of unused facility availability and total available liquidity of $236.8 million. Total assets were $548.3 million and stockholders’ equity was $286.6 million. The $200 million secured revolving facility expires March 13, 2019; the company reported compliance with its covenants. Letters of credit outstanding were $24.6 million.
Material changes and operating trends
- Revenue rose 42.2%, largely reflecting Matrix NAC, acquired in December 2013, which contributed $84.6 million of current-quarter revenue and was not included in the year-ago quarter. Accordingly, the headline comparison is not fully like-for-like. Pro forma figures treating Matrix NAC as acquired before the prior-year quarter show revenue of $275.7 million and Matrix-attributable net income of $7.4 million, versus actual current-quarter figures of $321.7 million and $5.9 million.
- Gross margin declined to 8.8% from 11.3%, which management attributed primarily to under-recovered construction overhead caused by lower-than-expected revenue and project-start delays. Operating income and attributable net income fell despite higher revenue.
- Segment revenue and operating income (loss) were: Electrical Infrastructure $55.7 million and $(3.7) million; Oil Gas & Chemical $53.4 million and $0.6 million; Storage Solutions $133.3 million and $7.1 million; Industrial $79.4 million and $4.5 million. Electrical Infrastructure revenue included Matrix NAC activity but its results were burdened by a project charge and overhead under-recovery. Oil Gas & Chemical revenue fell 14.7%, mainly from less turnaround work. Storage Solutions revenue increased 23.3%; Industrial growth primarily reflected Matrix NAC.
- Backlog increased to $984.7 million at September 30 from $915.8 million at June 30. Quarterly project awards were $390.5 million against $321.7 million of revenue recognized.
- Operating cash flow fell to $5.1 million from $18.5 million. Accounts-receivable timing provided $30.4 million of cash, while contract assets and liabilities together used $21.5 million; lower accounts payable used $17.5 million, and accrued-liability payments used $6.6 million. Cash declined by $4.4 million during the quarter.
Acquisitions, unusual items, outlook and risks
- On August 22, 2014, Matrix acquired substantially all assets of HDB Ltd. for $5.25 million in cash, expanding its upstream energy presence in California. The purchase-price allocation was preliminary; a working-capital true-up was expected in the second fiscal quarter. HDB’s operating contribution was not material in this quarter.
- A $3.3 million charge related to a power-generation project in a consolidated joint venture reduced operating income; the reported reduction to Matrix-attributable net income was $1.3 million. Matrix owns a 65% interest in the venture. Management’s estimate reflected expected total contract revenue and cost at completion.
- Management expected higher Oil Gas & Chemical margins for the remainder of fiscal 2015 as volumes increased and overhead was utilized more efficiently. No quantified company-wide revenue, earnings, or margin guidance is provided in the filing.
- Management said cash, facility availability, and operating cash generation should provide sufficient liquidity for business objectives. Risks include project execution and cost estimates, customer payment and billing timing, contract disputes, collection uncertainty, seasonal and weather-related activity, and conditions in the energy, power, mining, and industrial markets.
- Unapproved change orders and claims included $10.8 million in contract assets; ultimate collection could differ materially. Legacy S.M. Electric receivables included $0.7 million of claim receivables and $2.9 million due under a contract; recovery may require mediation or litigation and could affect future earnings. Management considered known legal proceedings not material and reported no material change in risk factors.
- The board approved a replacement share repurchase program on November 4, 2014, authorizing purchases of up to $25 million annually through December 31, 2016, subject to liquidity and management’s valuation assessment. The company reported no current intent to pay cash dividends.
Important facts for investors to verify
- Whether Matrix NAC’s acquisition contribution and the pro forma comparison clarify underlying organic revenue and earnings trends.
- Progress on the joint-venture power project, including updated cost-to-complete estimates and any further charges.
- Whether backlog converts to revenue and cash on schedule, and whether construction overhead under-recovery and segment margins improve as management expects.
- Collections of contract assets, unapproved claims, retentions, and the S.M. Electric receivables, alongside working-capital and operating-cash-flow trends.
- HDB’s final purchase-price true-up, acquisition integration, and ongoing credit-facility availability and covenant compliance.