Matrix Service Company — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014. The filing also presents unaudited fourth-quarter results. Although the request metadata says “2013 Q4,” this is an annual report for FY2014, with FY2013 as the primary comparison.
Business context
Matrix provides engineering, fabrication, construction, infrastructure and maintenance services in the United States and Canada across Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions, and Industrial. On December 21, 2013, it acquired Kvaerner North American Construction (Matrix NAC), expanding its power, steel and industrial businesses. Matrix reports the acquisition purchase price as $88.3 million before acquired cash and $51.6 million net of $36.7 million cash acquired.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $1,263.1 million | $892.6 million | +41.5% |
| Gross profit / margin | $136.5 million / 10.8% | $94.7 million / 10.6% | Margin +0.2 percentage points |
| Operating income | $58.6 million | $36.7 million | +59.6% |
| Net income attributable to Matrix | $35.8 million | $24.0 million | +49.2% |
| Diluted EPS | $1.33 | $0.91 | +$0.42 |
| Operating cash flow | $77.0 million | $57.1 million | +$19.9 million |
| Capital expenditures | $23.6 million | $23.2 million | +$0.4 million |
| Backlog at year-end | $915.8 million | $626.7 million | +46.1% |
Segment revenue and operating income were: Storage Solutions $610.9 million and $34.3 million; Oil Gas & Chemical $239.7 million and $9.9 million; Industrial $206.9 million and $6.7 million; Electrical Infrastructure $205.6 million and $7.7 million. Storage Solutions revenue rose 55.4%, while Oil Gas & Chemical revenue fell 12.5%. Industrial revenue growth chiefly reflected Matrix NAC and higher mining and material-handling work.
FY2014 fourth-quarter revenue was $344.4 million, gross profit $36.9 million, operating income $14.2 million, net income $7.6 million, and diluted EPS $0.28. FY2013 fourth-quarter figures were $235.6 million, $27.0 million, $11.6 million, $7.4 million and $0.28, respectively.
Financial position, liquidity and material changes
- Cash and cash equivalents were $77.1 million; working capital was $105.7 million, down from $131.9 million a year earlier.
- Borrowings under the revolving credit facility were $11.6 million at year-end. Facility availability was $165.4 million after $23.0 million of letters of credit. The company reported total liquidity of $242.5 million, including cash.
- Operating cash flow of $77.0 million was offset by $74.6 million of investing cash outflows, principally the $51.6 million net Matrix NAC purchase price and $23.6 million of capital spending. Cash increased by $13.4 million during the year.
- Total assets increased to $568.9 million from $410.0 million, reflecting the acquisition. Goodwill was $69.8 million and other intangible assets were $28.7 million at year-end.
- Backlog growth included $242.0 million of acquired backlog and $1.31 billion of project awards, partly offset by $1.26 billion of revenue recognized.
Outlook, commentary and risks
- Management said it expected to fund the next twelve months from operating cash flow, existing cash and, if needed, the credit facility, and believed available liquidity was sufficient for its objectives. The filing provides no specific revenue or earnings guidance.
- A September 2, 2014 waiver addressed a non-financial technical credit-agreement covenant violation tied to a terminated trade-receivables monetization program. The company said it complied with the other affirmative, negative and financial covenants.
- A changed estimate on one aboveground storage tank project reduced FY2014 operating income by $8.4 million; the full projected loss was recorded. FY2013 included a $3.7 million charge on a separate tank project. Storage Solutions margins also reflected the FY2014 loss project.
- Revenue is project-based and can fluctuate with customer capital and maintenance spending, award timing, seasonality, commodity and economic conditions, weather, labor availability, safety, contract execution and collection timing. Fixed-price work, change-order disputes and percentage-of-completion estimates can create cost and earnings volatility.
- Two Storage Solutions customers, TransCanada and Enbridge, represented 17.3% and 12.7% of consolidated FY2014 revenue, respectively. Losing a major customer or project could materially affect results.
- Multiemployer pension obligations may create additional contributions or withdrawal liabilities; the company said its potential obligation was not currently ascertainable. It also retains exposure through insurance deductibles, limits and self-insured claims. Management considered known legal proceedings not material, while noting litigation outcomes are uncertain.
- Management and Deloitte reported effective internal control over financial reporting, but Matrix NAC—representing approximately 12% of revenue and 25% of assets—was excluded from the assessment while integration and control evaluation continued.
Important facts for investors to verify
- Whether Matrix NAC integration delivers the expected growth, margins and operating benefits, and how its results compare with the acquisition’s pro forma presentation.
- Progress, remaining costs and cash collection on the $8.4 million loss project, along with the status of unapproved change orders and claims ($13.1 million included in contract assets at year-end).
- Backlog conversion, cancellations and profitability, especially given customer concentration and the large Storage Solutions contribution.
- Liquidity and covenant compliance after the technical waiver, including future borrowings, letters of credit and working-capital demands.
- Potential exposures from multiemployer pension plans, insurance claims and the $3.6 million of acquired S.M. Electric receivables whose recovery may require mediation or litigation.
- The effect of the August 2014 HDB asset acquisition, purchased for $5.25 million; its accounting was incomplete and management did not expect a material financial-statement impact.