Business Context and Reporting Period
Company: Matrix Service Company (Matrix Service)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended March 31, 2011
Business Overview: Matrix Service provides construction and repair/maintenance services, primarily for the downstream petroleum, power, and bulk storage industries. Operations are divided into two segments: Construction Services and Repair and Maintenance Services.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Mar 31, 2011 | 9 Months Ended Mar 31, 2011 |
|---|---|---|
| Revenues | $136,333 | $463,423 |
| Gross Profit | $18,570 | $54,040 |
| Gross Margin | 13.6% | 11.7% |
| Operating Income | $7,640 | $21,385 |
| Net Income | $4,923 | $13,299 |
| Diluted EPS | $0.18 | $0.50 |
| Cash and Equivalents | $63,375 | $63,375 (Ending Balance) |
| Operating Cash Flow | N/A | $20,065 |
| Total Debt (Funded Indebtedness) | $7,484 (Letters of Credit) | $7,484 (Letters of Credit) |
| Credit Facility Availability | $67,516 | $67,516 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 11.7% ($14.3 million) for the quarter and 13.0% ($53.3 million) for the nine months compared to the prior year periods. This was driven by a $14.9 million increase in Repair and Maintenance Services revenues for the quarter and a $44.2 million increase in Construction Services revenues for the nine months.
- Profitability: Net income surged from $63,000 in the prior year quarter to $4.9 million. Operating income improved significantly from $45,000 to $7.6 million for the quarter. This improvement is largely attributed to higher revenues and improved gross margins (13.6% vs. 10.9% for the quarter), driven by better recovery of construction overhead costs.
- Expense Management: Selling, general, and administrative (SG&A) expenses decreased to $10.9 million for the quarter (8.0% of revenue) from $13.2 million (10.9% of revenue) in the prior year. The prior year included $3.5 million in non-routine charges related to acquired claim receivables.
- Backlog: Total backlog increased to $383.9 million as of March 31, 2011, up from $366.0 million at the end of the prior quarter and $353.2 million at the beginning of the fiscal year.
Outlook, Risks, and Contingencies
- Outlook: Management maintains a positive outlook, citing improving market conditions and strong bid volume. Key drivers include the aboveground storage tank (AST) market (driven by Canadian oil sands and Cushing, Oklahoma capacity issues) and the electrical/instrumentation business (targeting power delivery and renewable energy). Turnaround activity in the downstream petroleum market is expected to be strong in the fourth fiscal quarter.
- Legal Contingencies: The company settled California Pay Practice Class Action Lawsuits for $4.0 million (plus $1.9 million previously paid). Final payments of $4.1 million were made in early 2011. The company continues to pursue collection of acquired claims receivables from the S.M. Electric Company purchase, valued at $2.4 million, though collection is uncertain.
- Debt Covenants: The company has a $75.0 million senior revolving credit facility. It is currently in compliance with all covenants. A previous capacity reduction due to the Senior Leverage Ratio covenant was reversed as of March 31, 2011, restoring full availability.
- Market Risks: The company noted potential supply disruptions or price increases in steel due to the earthquake and tsunami in Japan, though it currently purchases from domestic sources and passes price risks to customers.
Investor Verification Checklist
- Revenue Quality: Verify the sustainability of the 13.6% gross margin improvement, specifically the "recovery of construction overhead costs" cited by management.
- Working Capital: Monitor the $4.3 million increase in accounts receivable and the $16.0 million decrease in accounts payable to ensure cash flow stability.
- Legal Exposure: Track the collection status of the $2.4 million acquired claims receivable and the $4.8 million in unapproved change orders included in backlog.
- Debt Capacity: Confirm continued compliance with the Senior Leverage Ratio covenant to maintain the full $75.0 million credit facility availability.
- Segment Mix: Assess the shift in revenue mix between Construction Services and Repair and Maintenance Services to understand margin volatility.