Matrix Service Company — Form 10-Q Summary
Business context and period: The filing covers the three months ended September 30, 2011, the first quarter of fiscal 2012. Matrix Service provides construction, repair, and maintenance services, principally for aboveground storage tanks, downstream petroleum, and electrical and instrumentation markets. Results are project-driven and can vary between interim periods.
Financial results and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $169.3 million | $151.8 million |
| Gross profit / margin | $18.1 million / 10.7% | $15.7 million / 10.3% |
| Operating income | $6.6 million | $5.1 million |
| Net income | $3.5 million | $3.1 million |
| Diluted EPS | $0.13 | $0.12 |
| EBITDA (non-GAAP) | $8.8 million | $8.0 million |
| Cash used by operations | $12.1 million | $5.3 million |
- Revenue increased 11.5% year over year; gross profit rose 15.2%, operating income 29.3%, and net income 13.6%. The filing reports a 38.0% effective tax rate in both periods.
- Repair and Maintenance Services revenue grew to $69.7 million from $54.3 million, with segment operating income of $2.7 million versus $0.3 million. Construction Services revenue was $99.6 million versus $97.5 million; segment operating income declined to $3.9 million from $4.8 million.
- Cash and cash equivalents were $38.7 million at September 30, down from $59.4 million at June 30. The company reported $67.4 million of availability under its then-current revolving facility and total liquidity of $106.1 million.
- Operating cash outflow reflected working-capital needs, including a $20.4 million net cash use from contract costs/billings balances and $5.9 million of lower accrued expenses, primarily from payment of prior-year employee incentives. Capital expenditures were $3.0 million.
- Current assets were $206.3 million and current liabilities $95.0 million at quarter-end. The balance sheet reported $192,000 of capital lease obligations; no revolver borrowings are shown in the supplied filing text.
- Financing activities used $5.0 million, primarily for repurchases of 517,088 shares for $4.9 million. Backlog increased to $426.6 million from $405.1 million at June 30.
Material changes and notable items
- Higher Repair and Maintenance Services revenue, particularly downstream petroleum turnaround work, drove most of the consolidated revenue increase. Construction Services benefited from tank work but had lower electrical and instrumentation revenue due to completion of prior-year projects.
- Consolidated gross margin improved to 10.7%; Construction Services margin fell to 10.9% from 11.6%, while Repair and Maintenance Services margin rose to 10.4% from 8.0%.
- SG&A rose to $11.5 million from $10.6 million, which management attributed mainly to non-routine stock compensation and relocation costs and strategic realignment expenses. Other expense was $0.7 million, primarily foreign-currency transaction losses.
- On November 7, 2011, after quarter-end, the company replaced its $75 million revolver with a five-year, $125 million senior secured revolving facility. It eliminated certain prior financial covenants and revised pricing and borrowing terms. The new agreement retains leverage and fixed-charge coverage requirements.
- The company received $1.5 million in September to settle part of acquired S.M. Electric claims receivable, approximately at book value. A further $0.7 million remained recorded; recovery may require mediation or litigation and could differ materially from the estimate.
Outlook, risks, and contingencies
- Management described core-market prospects as positive, citing high demand for aboveground storage tank construction, expected strong tank performance for the rest of fiscal 2012, and a favorable near-term environment for refinery maintenance and turnarounds. It also identified Northeastern U.S. electrical and instrumentation work and new bulk-materials engineering capabilities as opportunities. No quantified earnings or revenue guidance was provided.
- Management noted limited construction opportunities in portions of the downstream petroleum market. Outlook depends on project awards and timing, customer billing and collection terms, working capital, and the performance of major contracts.
- Unapproved change orders included $5.1 million in recorded contract-related revenue; collection timing and ultimate recovery are uncertain. The company warns that actual recoveries on claims and insurance reserves may differ from estimates.
- Insurance reserves were $8.0 million at September 30. Management stated known legal proceedings were not expected to have a material adverse effect; the filing also cautions that litigation outcomes and contingency reserves are uncertain.
- The company reported compliance with the prior credit agreement’s covenants at September 30. Its business is cyclical, and management cited economic and industry conditions, contract disputes, liquidity, and credit-covenant compliance among relevant risks. No material change in risk factors was reported.
Important facts for investors to verify
- Whether backlog converts to revenue and cash on expected schedules, particularly given the quarter’s operating cash outflow and contract working-capital build.
- Performance and margins in both segments, including whether Repair and Maintenance Services’ turnaround-driven growth continues and Construction Services’ margins recover.
- Utilization, terms, pricing, and covenant headroom under the new $125 million credit facility.
- Collection of the $5.1 million of unapproved change orders and the remaining $0.7 million acquired claims receivable.
- Cash requirements and authorization headroom for further share repurchases; the company bought 166,507 additional shares in early October and had no stated intent to pay cash dividends.