MTRX

Business Context and Reporting Period

Company: Matrix Service Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and six months ended November 30, 2008 (Fiscal Year 2009)
Business Overview: Matrix Service provides construction and repair/maintenance services, primarily for the oil, gas, and power industries. Operations are divided into two segments: Construction Services and Repair and Maintenance Services.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Trends:
  • Three Months: Revenues decreased 9.1% to $176.9 million compared to $194.7 million in the prior year, driven by declines in Construction Services (-13.9%) and Repair & Maintenance (-2.1%).
  • Six Months: Revenues increased 2.1% to $363.6 million compared to $356.1 million in the prior year, driven by growth in Repair & Maintenance (+5.5%) offsetting a slight decline in Construction Services.
• Profitability Improvement: Gross margins improved significantly due to the absence of large cost overrun charges recorded in the prior year (specifically a $16.0 million charge related to a Gulf Coast LNG project in the prior quarter).
  • Three-month gross margin rose from 5.8% to 14.9%.
  • Six-month gross margin rose from 8.5% to 14.6%.
• Net Income: Net income for the three months ended Nov 30, 2008, surged to $10.1 million from $0.2 million in the prior year. For the six months, net income grew to $19.6 million from $6.5 million.
• Cash Flow: Operating cash flow turned negative, using $0.9 million for the six months ended Nov 30, 2008, compared to providing $2.2 million in the prior year. This was due to unfavorable working capital changes, specifically decreases in accounts payable and billings in excess of costs.

Guidance, Outlook, and Risks

• Outlook: Management notes a slowdown in capital awards and maintenance projects toward the end of the fiscal year due to the challenging economic environment. Customers are delaying decisions as they assess the impact of economic turmoil. Management expects fiscal 2009 revenues to be below levels assumed in the 2009 operating budget.
• Cost Management: To mitigate cash flow impacts from decreased revenue projections, the company is reducing capital spending and operating overhead.
• Backlog: Total backlog as of November 30, 2008, was $454.0 million ($282.9 million Construction; $171.2 million Repair & Maintenance). This represents a decrease from the prior year-end but an increase from the previous quarter for the Repair segment.
• Acquisition: On December 20, 2008, the company acquired engineering and construction resources and technology from CB&I, Inc., including approximately 70 personnel and up to $20.0 million of backlog.
• Risks:
  • High dependence on capital expenditures by oil, gas, and power companies.
  • Potential for project delays or cancellations due to the credit crisis and economic downturn.
  • Goodwill impairment risk if economic conditions worsen, though management believes long-term projections remain achievable.

Investor Verification Checklist

• Working Capital Dynamics: Verify the sustainability of the negative operating cash flow given the significant drawdown in accounts payable and billings.
• Backlog Quality: Assess the firmness of the $454 million backlog in light of customer delays and the economic slowdown mentioned in the outlook.
• Margin Sustainability: Confirm that the improved gross margins are not solely due to the absence of one-time prior-year charges but reflect operational efficiency.
• Debt Covenants: Review compliance with the $75 million credit facility covenants (Senior Leverage Ratio, Asset Coverage, etc.) as revenue projections are lowered.
• Acquisition Integration: Monitor the integration and revenue realization of the CB&I acquisition announced post-period end.