Business Context and Reporting Period
Company: Matrix Service Company (Matrix Service)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Third quarter of Fiscal 2010 ended March 31, 2010. The Company changed its fiscal year-end from May 31 to June 30, resulting in a one-month transition period ended June 30, 2009.
Business Overview: Matrix Service provides construction and repair/maintenance services primarily to the downstream petroleum, bulk storage/terminal, and electrical/instrumentation industries. Operations are divided into two segments: Construction Services and Repair and Maintenance Services.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Mar 31, 2010 |
Three Months Ended Feb 28, 2009 |
Nine Months Ended Mar 31, 2010 |
Nine Months Ended Feb 28, 2009 |
|---|---|---|---|---|
| Revenues | $122,013 | $146,262 | $410,088 | $509,849 |
| Gross Profit | $13,293 | $17,961 | $49,153 | $71,001 |
| Gross Margin % | 10.9% | 12.3% | 12.0% | 13.9% |
| Operating Income | $45 | $7,045 | $14,442 | $36,247 |
| Net Income | $63 | $4,212 | $9,105 | $23,844 |
| Diluted EPS | $0.00 | $0.16 | $0.34 | $0.90 |
| Cash and Equivalents | $53,298 (as of Mar 31, 2010) | |||
| Operating Cash Flow (9mo) | $5,034 | |||
| Total Debt / Credit Facility | $75.0M Facility; $9.5M Letters of Credit outstanding; $65.5M Available |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 16.6% ($24.3M) for the quarter and 19.6% ($99.7M) for the nine-month period compared to the prior year. This was driven by reduced capital spending in the downstream petroleum market and lower volumes in the Repair and Maintenance segment.
- Profitability Compression: Net income dropped significantly due to lower revenues, reduced gross margins, and increased SG&A expenses. Gross margins declined due to lower business volume affecting overhead recovery and non-routine legal charges.
- SG&A Increase: Selling, general, and administrative expenses increased in the quarter primarily due to $2.9 million in write-offs of acquired claim receivables and $0.6 million in collection costs, partially offset by cost reduction efforts.
- Segment Performance:
- Construction Services: Revenues declined 4.5% for the quarter, but gross margins improved to 13.2% from 11.7% due to lower costs and better overhead recovery.
- Repair and Maintenance: Revenues declined 31.2% for the quarter. The segment reported an operating loss of $0.8 million compared to $4.4 million income in the prior year, with gross margins falling to 7.0% from 13.0%.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Acquired Claim Receivables: The Company recorded a pretax charge of $2.5 million in Q3 due to an arbitration award ($0.5M) being less than the recorded value of a claim. Additional charges of $0.4 million for recoverability assessment and $0.6 million for collection costs were also recorded.
- Legal Matters: A non-routine charge of $0.7 million related to a legal matter impacted Q3 margins. The Company is also involved in a Delaware refinery accident lawsuit (mistrial declared, retrial scheduled for July 2010) and an EPA penalty assessment of $0.3 million regarding reporting violations.
- Outlook: Management notes that markets continue to feel recession effects but expects long-term growth. Bid activity for Aboveground Storage Tanks (AST) is increasing. The Downstream Petroleum market remains uncertain due to cautious refiner spending, though turnaround business looks favorable for Fiscal 2011. The Electrical and Instrumentation segment shows strong growth and backlog expansion.
- Liquidity: Total liquidity is $118.8 million ($53.3M cash + $65.5M credit facility availability). The Company is in compliance with all credit facility covenants.
- Risks: Key risks include the uncertain outcome of litigation regarding acquired claims, economic conditions in the oil and gas industry, and the timing of project awards.
Investor Verification Checklist
- Claim Receivables Recovery: Verify the ultimate collectability of the remaining acquired claim receivables, as the Company has already taken significant write-downs ($3.9M total pretax charges in recent quarters) and future adjustments could impact earnings.
- Backlog Trends: Monitor the backlog, which decreased to $302.4 million as of March 31, 2010, from $392.1 million at the end of the transition period. Specifically, watch for cancellations in the Construction Services segment.
- Repair Segment Margins: Assess the sustainability of the Repair and Maintenance segment's margins, which dropped to 7.0% due to volume issues and overhead absorption.
- Legal Contingencies: Track the status of the Delaware refinery accident retrial and the resolution of the EPA penalty to determine potential future liabilities.
- Capital Spending: Confirm the timing of customer capital spending in the downstream petroleum sector, which is a primary driver of the Company's revenue volatility.