Matrix Service Company — Form 10-Q Summary
Business context and period: The filing covers the three months ended September 30, 2013, Matrix Service’s first quarter of fiscal 2014. The company provides construction, maintenance and related services through Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions and Industrial segments. Results are unaudited; the company notes that project timing and seasonal factors can make quarterly results variable.
Financial performance
Amounts below are in millions except per-share data and percentages.
| Metric | Quarter ended Sep. 30, 2013 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $226.2 | $209.6 | +7.9% |
| Gross profit / margin | $25.5 / 11.3% | $22.2 / 10.6% | +14.9% gross profit |
| Operating income | $10.8 | $7.9 | +35.8% |
| Net income | $6.6 | $4.7 | +39.9% |
| Basic and diluted EPS | $0.25 | $0.18 | +38.9% |
| Operating cash flow | $18.5 | $(21.0) | Turned positive |
| Capital expenditures | $5.8 | $5.1 | — |
| EBITDA, company-defined non-GAAP | $14.4 | $10.8 | — |
SG&A was $14.7 million, or 6.5% of revenue, versus $14.3 million, or 6.8%, a year earlier. The effective tax rate was 37.3%, down from 40.0%. Net interest expense was approximately $0.2 million.
Segment results
- Storage Solutions: Revenue rose 3.7% to $108.2 million; gross margin improved to 11.9% from 9.6%, with stronger domestic tank work and project execution.
- Industrial: Revenue increased to $22.7 million from $5.0 million, reflecting mining, material-handling and fertilizer-complex work. Gross margin turned positive at 7.8%, versus negative 6.0%.
- Oil Gas & Chemical: Revenue declined 6.9% to $62.5 million, mainly from lower capital construction activity; gross margin edged up to 12.1% from 11.7%.
- Electrical Infrastructure: Revenue declined to $32.9 million from $33.3 million. Gross margin fell to 10.1% from 14.1%, reflecting work mix, lower storm-restoration activity and unrecovered overhead.
Financial position and liquidity
- Cash and cash equivalents were $79.8 million at September 30, up from $63.8 million at June 30, 2013. Total assets were $429.0 million and stockholders’ equity was $246.5 million.
- Current assets were $312.8 million and current liabilities were $172.2 million, implying a current ratio of approximately 1.82. Working-capital contract balances included $66.7 million of costs and estimated earnings exceeding billings and $75.8 million of billings exceeding costs and estimated earnings.
- The balance sheet reported $2.4 million of long-term debt. Separately, the company reported $9.2 million of covenant-defined consolidated funded indebtedness. Revolver borrowings were $2.4 million, with $13.6 million of letters of credit and $108.9 million of facility availability under its $125 million revolving credit facility.
- Cash, plus reported revolver availability, provided $188.7 million of available liquidity. The company stated it expected to fund the next 12 months with operating cash flow, cash balances and facility borrowings.
- Operating cash flow benefited from a $20.0 million cash inflow from the combined movement in contract assets and liabilities, including advanced billings. Receivables increased $9.6 million, which management described as a normal short-term timing fluctuation. Investing activities used $5.5 million; financing activities provided $2.8 million.
- Backlog was $672.8 million at September 30, compared with $626.7 million at June 30. Net awards during the quarter were $272.3 million.
Changes, outlook and risks
- Revenue growth and improved consolidated margins drove higher operating income and earnings. Industrial and Storage Solutions were the main growth contributors; Electrical Infrastructure and Oil Gas & Chemical revenue declined.
- Management provided no specific revenue or earnings guidance. It expected to fund operations for the coming 12 months from operating cash, existing cash and potential revolver borrowings. Management said it did not anticipate a goodwill impairment based on its latest test and the absence of impairment indicators at quarter-end.
- The company reported compliance with all credit-facility covenants. Key limits include a maximum senior leverage ratio of 2.50 to 1.00 and a minimum fixed-charge coverage ratio of 1.25 to 1.00.
- Contract estimates and collection are notable uncertainties: costs and estimated earnings included $10.3 million of unapproved change orders and claims. The company also carried $0.7 million in claim receivables and $2.9 million due under a contract from the S.M. Electric acquisition; recovery of remaining receivables may require mediation or litigation, and realized amounts could differ materially.
- Other risks include project timing, customer billing and retention practices, contract disputes, insurance exposures and the cyclicality of served industries. Management considered known legal proceedings not material and reported no material change in risk factors or market risks from its prior annual report.
Important facts for investors to verify
- Whether the large year-over-year Industrial revenue increase and current backlog convert into profitable future work.
- Whether Electrical Infrastructure margins recover and the recent improvement in Storage Solutions and Industrial margins is sustained.
- Collection timing and ultimate recoverability of unapproved claims, change orders and the S.M. Electric receivables.
- Cash conversion and working-capital movements, particularly the role of advanced billings and receivables timing in quarterly operating cash flow.
- Revolver availability, covenant compliance and the distinction between balance-sheet debt and covenant-defined funded indebtedness.