Matrix Service Company — Form 10-Q Summary
Period clarification: The filing covers the quarter and nine months ended March 31, 2018 (fiscal 2018 Q3), not 2017 Q3. Amounts are in U.S. dollars; financial statement amounts below are in millions except per-share data.
Business context and reporting period
Matrix provides engineering, construction, maintenance and related services through Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial segments. The unaudited filing compares fiscal 2018 results with the periods ended March 31, 2017.
Key financial metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue, 2018 / 2017 | $245.6 / $251.2 | $798.5 / $905.7 |
| Gross profit (loss), 2018 / 2017 | $14.9 / $(2.6) | $70.5 / $57.9 |
| Gross margin, 2018 / 2017 | 6.1% / (1.0)% | 8.8% / 6.4% |
| Operating income (loss), 2018 / 2017 | $(5.9) / $(21.2) | $6.6 / $1.3 |
| Net income (loss) attributable to Matrix, 2018 / 2017 | $(5.2) / $(13.8) | $3.2 / $0.8 |
| Diluted EPS, 2018 / 2017 | $(0.19) / $(0.52) | $0.12 / $0.03 |
| Adjusted EBITDA, 2018 / 2017 | $(0.7) / $(15.7) | $22.8 / $17.0 |
Nine-month operating cash flow was $45.9 million, versus cash used of $25.6 million in the prior-year period. Investing activities used $7.0 million and financing activities used $36.3 million. Cash increased $3.1 million from June 30, 2017, to $46.9 million at March 31, 2018.
At March 31, 2018, revolving-credit borrowings were $9.3 million, letters of credit were $25.0 million, and facility availability was $86.8 million. Total available liquidity, including cash, was $133.7 million. The company reported $331.9 million of stockholders’ equity and $207.3 million of total liabilities.
Material changes versus the prior comparable period
- Quarterly revenue declined 2.2%, while gross profit improved by $17.5 million, principally because the prior-year quarter included a substantial loss on an Electrical Infrastructure project.
- Nine-month revenue declined 11.8%, but gross profit rose $12.6 million and operating income rose $5.3 million. Improvement reflected the absence of the prior-year project loss and better overhead recovery.
- Nine-month revenue fell sharply in Storage Solutions and Electrical Infrastructure, partly offset by higher Oil Gas & Chemical and Industrial revenue. Storage Solutions revenue was affected by delays in project awards and comparison with a large prior-year terminal project.
- Backlog increased to $914.2 million at March 31, 2018, from $682.3 million at June 30, 2017. Nine-month book-to-bill was 1.3 overall; it was 1.9 in Storage Solutions and 2.4 in Industrial.
- Credit-facility borrowings declined to $9.3 million from $44.7 million at June 30, 2017. The company said it was in compliance with all credit-agreement covenants.
Outlook, management commentary, risks and unusual items
- No specific revenue or earnings forecast was provided. Management said backlog had grown during the fiscal year, expected near-term Storage Solutions backlog growth given market conditions and bidding opportunities, and expected iron-and-steel customer spending to remain strong in the near term.
- Management cited competitive pricing, lower-margin maintenance work, weaker-than-expected capital-project volumes, execution performance and overhead under-recovery as pressures on margins. Commodity-price uncertainty and project-award timing may affect customer spending and results.
- The company expects an effective tax rate of approximately 32% for the remainder of fiscal 2018 following U.S. tax-law changes. It had not completed its accounting for all effects of the Tax Cuts and Jobs Act.
- The company expects to adopt the new revenue-recognition standard on July 1, 2018, using the modified retrospective method; preliminary analysis indicated no material impact was expected. The company was still evaluating the impact of the lease-accounting standard.
- Unapproved change orders and claims included $13.5 million in contract assets at March 31, 2018; ultimate realization could differ materially. Management also warned that deterioration in market opportunities or expected gross margins could trigger a material goodwill impairment.
- A previously loss-making Electrical Infrastructure project was nearly complete, with demobilization expected to be materially complete in fiscal Q4; management expected its future impact to be insignificant. Legal proceedings were not expected by management to have a material effect.
Important facts for investors to verify
- Whether the $914.2 million backlog converts to revenue on the expected schedule and at acceptable margins, especially in Storage Solutions and Industrial.
- Whether operating margins and cash generation remain resilient as project mix, awards, customer collections and working-capital balances change.
- Whether unapproved claims and change orders are collected, and whether goodwill valuations remain supportable if forecasts or market conditions weaken.
- Available borrowing capacity and covenant compliance, including the effect of letters of credit and the credit agreement’s borrowing constraints.
- The eventual financial-statement effects of adopting revenue, lease and tax-accounting changes.