Business Context and Reporting Period
Company: Matrix Service Company (MTRX)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended June 30, 2010 (12 months).
Business Overview: Matrix Service provides construction and repair/maintenance services to the energy, petrochemical, and power industries. Operations are divided into two segments: Construction Services and Repair and Maintenance Services. The company serves major integrated oil companies, refiners, and power utilities primarily in the U.S. and Canada.
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Revenues | $550.8 million | $689.7 million |
| Gross Profit | $52.9 million | $94.3 million |
| Gross Margin | 9.6% | 13.7% |
| Operating Income | $7.8 million | $47.3 million |
| Net Income | $4.9 million | $30.6 million |
| Diluted EPS | $0.18 | $1.16 |
| Cash Flow from Operations | $4.4 million | $38.6 million |
| Total Debt | $1.0 million | $1.9 million |
| Working Capital | $95.7 million | $82.5 million |
| Backlog (Total) | $353.2 million | $392.1 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 20.1% ($138.9 million) due to reduced customer capital spending, project delays, and lower maintenance volumes driven by the economic recession.
- Margin Compression: Gross margins fell from 13.7% to 9.6%. This was driven by lower business volume (reducing overhead recovery) and significant non-routine charges.
- Profitability Drop: Net income plummeted 84% ($25.7 million) primarily due to the revenue decline and specific charges detailed below.
- Backlog Reduction: Total backlog decreased $38.9 million to $353.2 million, reflecting project cancellations and lower new awards in the Construction Services segment.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items and Non-Routine Charges
Fiscal 2010 results were significantly impacted by the following pretax charges:
- California Pay Practices Lawsuits: $5.1 million charge related to a class action settlement regarding overtime wages.
- Gulf Coast Project Losses: $5.4 million charge due to cost overruns on a complex project caused by weather delays and scope inefficiencies.
- Claims Receivable Write-downs: $2.9 million charge related to the write-down of claim receivables acquired in the S.M. Electric Company (SME) acquisition.
- Claims Collection Costs: $1.9 million charge for costs incurred to collect acquired claims exceeding estimates.
Outlook and Management Commentary
Management anticipates improvements in the Aboveground Storage Tank and Electrical/Instrumentation markets, driven by Canadian oil sands development and U.S. high-voltage overhauls. However, the Repair and Maintenance segment remains soft with downward pressure on margins. Turnaround activity for fiscal 2011 is expected to be similar to fiscal 2010, with many shutdowns delayed into calendar 2011.
Risks and Contingencies
- Credit Facility Covenant Violation: The company violated the Fixed Charge Coverage Ratio covenant at June 30, 2010 (0.83 vs. 1.25 required). A waiver was obtained on September 24, 2010, and the credit agreement was amended to add back the $5.1 million legal charge to EBITDA calculations to improve compliance.
- Liquidity Constraints: Due to operating results, the company's capacity under its $75 million revolving credit facility was reduced to $62.9 million, with $51.3 million available after letters of credit. Access may remain limited in the first half of fiscal 2011.
- Internal Investigation: An investigation into employee/subcontractor collusion resulted in a $1.7 million improper invoice. The company expects to refund $1.3 million to customers and has recorded a liability. Out-of-pocket costs are estimated between $300,000 and $600,000.
- EPA Penalty: Settled an EPA allegation regarding reporting violations for $150,000.
Investor Verification Checklist
- Credit Facility Status: Verify the impact of the September 2010 amendment on future borrowing capacity and covenant compliance.
- Legal Settlements: Confirm the final court approval of the $4.0 million California wage and hour settlement and the total cash outflow.
- Project Recovery: Assess the timeline for recovering the $5.4 million loss on the Gulf Coast project and the status of the specific contracts involved.
- Backlog Quality: Review the composition of the $353.2 million backlog, specifically the percentage expected to be completed in fiscal 2011 (96%) and the risk of further cancellations.
- Internal Controls: Monitor the outcome of the internal investigation regarding employee misconduct and any subsequent changes to internal controls or management.